On eve of G20 summit: Economic danger signs

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On eve of G20 summit: Economic danger signs
23 September 2009

One year after the onset of the financial crisis and on the eve of the
G20 summit this weekend, the political establishment is proclaiming
imminent recovery from the greatest economic crisis since the Second
World War.

“From a technical perspective, the recession is very likely over,” Ben
Bernanke, US Federal Reserve Chairman, said last week. He argued that
the collapse of the financial system has stabilized, bringing with it
a rally in equity prices and a slowing of the rate of increase of
unemployment.

Bernanke added, “It’s still going to feel like a very weak economy for
some time,” thereby acknowledging that even under his optimistic
scenario, high unemployment will persist for the foreseeable future.
Nevertheless, an official consensus has emerged that the worst is over
and that a return to the catastrophic conditions of late 2008 is
improbable.

Feeding the speculation of economic recovery has been the
extraordinary rise in global stock markets. Every major world index is
up by at least 20 percent over the past six months, with the Russian
RTS up by 63.38 percent, the Chinese Hang Seng by 57.63 percent, and
the Indian S&P/CNX 500 up by nearly 75.84 percent. In the US, the S&P
500 is up by 30.81 percent, and the NASDAQ by 39.84 percent. Gold
prices have followed suit, rising by 38.5 percent in the past six months.

The rapid rise in asset prices has been vastly disproportionate to any
real growth of the “real economy.” While the rate of economic
contraction has slowed worldwide in the last six months, unemployment
continues to soar. Growth is extremely anemic, and there are many
signs that it could resume its downward course in the fourth quarter
of this year.

William White, former chief economist at the Bank of International
Settlements, has ruled out the possibility of any sustained return to
growth along the lines described by Bernanke. “The only thing that
would really surprise me is a rapid and sustainable recovery from the
position we’re in,” he noted.

Moreover, the current bout of recovery in the real economy is heavily
dependent on government programs. US sales increased by 2.7 percent
last month, driven largely by the government’s “cash for clunkers”
program.

The rise in stock markets is largely a product of the nearly free
credit and multitrillion-dollar bank bailouts organized by the world’s
governments, particularly in the United States. This money has
produced an upsurge in speculative investment, particularly to riskier
assets paying higher returns. As a result, several commentators have
begun raising concerns about a new bubble.

As the Financial Times wrote on Monday, “Record low interest rates and
vast amounts of money pumped into economies by the central banks has
translated into surging asset values across financial markets, raising
the prospect of a new speculative bubble.”

The Times quotes Steven Ricchiuto, chief economist at Mizuho
Securities: “Something will break the current trend and I’m worried
about the risk of a 1987-style one-day correction,” referring to
“Black Monday,” on which the US stock market fell by 20 percent.

“Rarely has the stock market seen a six-month rally like the one it
just turned in,” The Wall Street Journal commented on Monday. “The Dow
Jones Industrial Average’s 46% surge was one of just six of that
magnitude in the last 100 years.” The Journal notes that every
recovery of such magnitude, with the exception of one, has ended in
dramatic retrenchments later on. In fact, markets are currently
witnessing their most dramatic rise since 1930, in the midst of the
Great Depression.

Whatever the mania on Wall Street and other financial centers, none of
the essential contradictions that precipitated the present crisis have
been resolved. On the contrary, they have intensified.

In order to prop up the banks, states throughout the world—in
particular, the United States—have assumed the gambling debts of the
financial elite. On the one hand, this raises the very real specter of
state bankruptcy, particularly in the event of another sharp downturn.

On the other hand, it encourages the resumption of the very practices
that led to the crisis in the first place. The largest banks have
strengthened their stranglehold over the financial system, including
through a new wave of consolidations. At the same time, they are
confident that if they get into trouble again, they will be bailed out.

The resumption of speculative bubbles is taking place in the absence
of any real foundation. Far from there being a resurgence of economic
production, the crisis has been the occasion for the destruction of
millions of jobs and wide swaths of industry. The more perceptive
commentators now recognize that the growth of unemployment is
structural—the jobs simply are not coming back.

Among the other factors that point to a renewed crisis:

• There has been no serious regulation of the financial system in the
United States or internationally, and there have been no limits placed
on executive bonuses. Both the means and the incentive to perpetrate
fraud and engage in speculative activities remain.
• The financial and currency imbalances in the world economy have only
deepened, and the position of the US dollar is even more questionable
now than it was a year ago. • • The US government has taken on, in the
estimate of the TARP’s inspector-general, potentially $23 trillion in
bailout obligations. There is a real concern, amid a continuing
devaluation of the dollar, of a rapid decline in the creditworthiness
of the US government.
• World powers have not been able to come to any consensus on their
response to the crisis. On the contrary, there are many signs that
global tensions are increasing.
• European powers have already reacted negatively to the proposals
submitted by the United States for the upcoming G20 meeting, and
earlier this month the US and China took initial steps in what
threatens to become a major trade conflict.

The deepening of the contradictions plaguing world capitalism has been
accompanied by a sharp intensification of class tensions. Underlying
all these policies has been the systematic transfer of wealth. The
massive bank bailouts have been coupled with the driving down of wages
and the destruction of jobs. Now, there are calls, being actively put
into practice by the Obama Administration, to cut the federal budget
deficit by further eliminating social services.

These different factors set the stage for the inevitable eruption of
open social conflict.

Andre Damon

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http://www.wsws.org/articles/2009/sep2009/pers-s23.shtml

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