t should hardly need stating that the UK, along with most of the other north Atlantic economic zone, is in very serious difficulty. Growth has almost stopped, unemployment and inflation are on the rise, house prices continue to fall or stagnate, investment has all but terminated, and there is no visible end in sight. The UK's total debt – private and public - is now almost five times its annual GDP. In this respect we are second only to Japan, but unlike Japan we do not have world class export industries, substantial foreign exchange reserves, a high level of domestic savings and a low rate of inflation. In spite of this - and amazingly - we are regarded as being a safe haven for footloose investors looking for shelter in the storm. Of course Cameron and Osborne make great play of this, but the reason that our bond yields (long- term interest rates) are so low is that the Bank of England is purchasing government gilts (bonds) – this is called Quantitative Easing (QE) - and since bond prices and yields move in opposite directions this means that yields fall as prices rise.
QE has failed to deliver the goods, however, since this injection of electronic money has, perversely, found its way overseas to more salubrious investment climes, with the banks acting as intermediaries, or as excess reserves in the banks' vaults. The basic problem is that we have massive private and public debt levels and this means that consumers and investors are deleveraging (paying down their debts) rather than consuming or investing. This accounts for the stalling of growth. In economics jargon we are in a 'liquidity trap' where monetary policy no longer works. This is not just the case in the UK but globally. Coalition policy is to tighten fiscal policy (the cuts) whilst easing monetary policy – lowering interest rates to zero and QE. Unfortunately this has given us the worst of both worlds: stagnation and inflation – or as it is known, stagflation. So where do we go from here?
Traditional Keynesian policies have been put forward as a possible solution. These may be well intended but are totally inadequate for the present situation. Boosting aggregate demand may result in a short-term spurt of growth, but the old familiar problems arise, and, in the current context, in a more acute form. Firstly, whenever the UK has tried to grow at a rate which would increase growth to the level where unemployment would fall, it has always run into balance of payments problems as demand tended to leak out into imports. When this happened the brakes had to be slammed on to reverse the growth policies. This old 'stop- go' cycle is still with us. Moreover, from the 1980s onwards the policy of de-industrialisation has left us with a much weaker manufacturing export base so that this tendency is now even more acute.
Secondly, devaluation is routinely touted as the cure-all for nations which wish to export their way out of the crisis. The Bank of England (BoE) lowered interest rates from 5.5% by stages to 0.25%, now the present base rate. This had a knock-on downward effect upon the exchange rate. Sterling fell precipitously against the euro from £1=euro1.55 to the present level of £1=euro1.15. Against the Singapore, Australian and Canadian dollar the £ has depreciated by 40% and against the Japanese Yen by 50%. This was supposed to boost exports, which it did, but the cost of imports also rose since devaluation, whilst making export prices lower, made import prices higher. The result of all of this was that the balance of payments got worse instead of improving. Devaluation is a beggar-thy- neighbour 'solution'. Not only has it widened the trade gap, but it feeds domestic inflation. Interest rates cannot be lowered any further and so QE is now being added to the armoury of monetary 'non-solutions'. All that loose monetary policy has succeeded in doing is giving us inflation. But this may be the policy. After all was it not Keynes himself who argued that if there was to be a choice between inflation and deflation then deflation would probably be worse. This is a matter of opinion.
Then of course there are the bond and currency markets to consider. It is likely we will anyhow get a going over by the speculators in due course, since we are in a particularly weak position—it is just a matter of time. At present they are preoccupied with the euro- zone's travails. How would they react to a borrow and spend policy as advocated by Ed Balls? I think we know the answer to that one already. But in any event there isn't the remotest possibility that the present Labour party would carry out such a policy. Social democracy throughout Europe has been dragooned into a cuts policy and Labour would be no different in this respect.
Keynesians make two important errors: One, that we live in a world of discrete national economies with effective control over currency, interest and exchange rates as well as general macro-economic policies. Two, that the one-size-fits-all policy of devaluation and government spending will be sufficient to overcome our present difficulties. With all due respect they still seem to be fighting the battles of yesterday against Herbert Hoover and Montagu Norman of the 1930s. Globalization however has changed all of that. National economies have been drawn into a global network of interdependencies, and national political institutions have also been subsumed under a framework of consensus and policy imperatives making them subordinate to the requirements of this new global order. In short, transnational corporations, bond, currency markets, and hot money flows now call the shots. The political elites merely serve these interests. It has been observed that: “...with ever-tighter global inter-dependence, it is no longer possible to pretend that the tensions between economy and society, between capitalism and democracy, can be handled inside national political communities. No government today can govern without paying close attention to international constraints and obligations, including those of the financial markets forcing the state to impose sacrifices on its population. The crises and contradictions of democratic capitalism have finally become internationalized, playing themselves out not just within states but also between them, in combinations and permutations as yet unexplored.
As we now read almost every day in the papers, 'the markets' have begun to dictate in unprecedented ways what presumably sovereign and democratic states may still do for their citizens and what they must refuse them. The same Manhattan-based ratings agencies that were instrumental in bringing about the disaster of the global money industry are now threatening to downgrade the bonds of states that accepted a previously unimaginable level of new debt to rescue that industry and the capitalist economy as a whole. Politics still contains and distorts markets, but only, it seems, at a level far remote from the daily experience and organizational capacities of normal people: the US, armed to the teeth not just with aircraft carriers but also with an unlimited supply of credit cards, still gets China to buy its mounting debt. All others have to listen to what 'the markets' tell them. As a result citizens increasingly perceive their governments, not as their agents, but as those of other states or of international organizations, such as the IMF or the European Union, immeasurably more insulated from electoral pressure than was the traditional nation-state. In countries like Greece and Ireland, anything resembling democracy will be effectively suspended for many years; in order to behave 'responsibly', as defined by international markets institutions, national governments will have to impose strict austerity, at the price of becoming increasingly unresponsive to their citizens.'' (Wolfgang Streeck – New Left Review No 71 Sept/Oct 2011)
This leaves us with two options: If policies are to be national in character this means a partial withdrawal from the global economy into a system of economic autarky, (like North Korea) or upping the ante to, if not a global level, then to a regional level by taking the struggle into the EU. A single nation with an open economy – the UK - taking on the predatory forces of globalized capital would be in a position similar to a non-league football team taking on Manchester City or Barcelona. Need I say more! What to do?
Here I will be lazy and quote from Harry Shutt's excellent book:
- Restrictions of cross border capital flows. A ... reintroduction of exchange controls thus limiting the convertibility of currencies ... the essential prerequisite to undoing the most harmful consequences of globalization and restoring the ability of national and/or regional communities to exercise a degree of genuine autonomy.
- Transfer to public ownership or (re-mutualisation) of all deposit taking institutions with public guarantees of all retail deposits.
- The same new non-profit institutions would assume responsibility for administering commercial loans according to normal prudential criteria ... however, speculative or bad loans would need to be written off, in the first instance at the expense of shareholders and bondholders.
- Official intervention to stabilise and regulate international trade flows and commodity markets and with a view to minimise the impact of global recession ... This would entail suspension of WTO rules so as to enable existing bi lateral trade flows to be maintained without undue disruption by sudden influxes of low cost products from third countries ... and moves to limit fluctuations of prices of key commodities, e.g. food and energy.
- Increases in direct taxation on wealth and income.
- Rapid phasing out of tax havens.
Beyond The Profits System – Harry Shutt (Zed Books, 2010)
Shutt also argues for a flat rate system of basic income for all citizens. Personally I would prefer the policy of work or full maintenance as advocated in the 1930s by the Workers' Unity League of Canada. But this is a minor point. These are the types of policies which are needed at the present conjuncture.
They may be considered hopeless ly utopian or unrealistic by the assorted opinion formers and mainstream commentators. But the obvious rebuttal is that present policies to deal with the crisis have failed, are failing and will continue to fail. More and more the solutions being touted will succeed only at the expense of the mass of the population. We know that capitalism solves its intrinsic anomalies and problems by restructuring through economic crises. Such has always been the case. The bust is the corrective to the excesses of the boom. We can either adopt the above (or a similar) programme, or we can negotiate the terms of surrender with the monied powers that be. Sometimes the only realistic solutions are the utopian ones. In the final analysis it is a matter of political will.
Frank Lee is a member of the Chartist Editorial Board and regular contributor on economics
Chartist 254 January/February 2012