Despite missing the 2007 global crisis completely and despite dismal policy failures, economists’ predictions for 2011 were uniformly optimistic.
“The recovery is expected to proceed at a reasonably modest pace”
This was what the CBI predicted in December, 2010, while as always, warning firmly about the one threat they obsess over:
“We now forecast higher inflation in 2011.”
As 2011 fades away, recovery appears remote, and inflation is expected to fall like a stone in January when George Osborne’s misguided VAT rise drops out.
I am no professor of economics; nor do I have a post at the London School of Economics, but in 2009, at a time when everyone was talking up the recovery, I warned, in an interview with The Times, that ‘ the worst of the slump was still to come’.
I was confident of this prediction because New Labour, Liberal and Conservative politicians were building a consensus around austerity – and had not yet tackled the root causes of the crisis.
So, smart Alec (I hear you say) what lies ahead in 2012?
My humble and not very cheering view is that because of the vast unpayable debts of the global private banking sector; because policy makers will not address the private banking crisis; and finally, because politicians wrongheadedly persist with austerity – we can expect things to get a lot worse.
In fact I believe we are spiralling into a prolonged and ghastly depression. This will lead, in time, to dramatically higher levels of unemployment, the loss of savings, home foreclosures, bankruptcies, emigration, suicides, divorce, social unrest and political upheaval – to name but a few of the consequences.
Why do I, and many others, expect a prolonged depression?
Because the world’s globalised private banks, unable to obtain funding, are now in the process of liquidating the vast expansions of debt generated during the boom, money frequently borrowed for purely speculative purposes.
And let us remind ourselves: these debts were generated because politicians and regulators had removed all meaningful constraints on the creation and pricing of debt, and on the global mobility of capital.
Between 1945 and 1971, when politicians imposed restraints on bankers, on credit creation and on capital mobility, the world enjoyed high levels of employment and stability and virtually no financial crises at all. This is why the Bank of England’s recent paper on reform of the international financial system is welcome.
In Britain, private debts make up about 400 per cent of UK GDP – and public debt only about 65 per cent of GDP. (I am guessing that politicians’ blind spot for Britain’s huge private debts is not accidental, but then I may just be a touch cynical.)
It’s the disorderly de-leveraging (‘liquidation’) of those private debts that is the cause of Britain’s double dip, and of global financial instability. The failure of the global investment bank/brokerage MFGlobal and the downgrading of various banks, is the canary in the global financial gold mine.
The problem is not the UK’s or Eurozone’s public debts or budget deficits. They are both simply a consequence of private sector failure. Because of this wrong-headed analysis, politicians in all three political parties have been driven down the dead-end of austerity.
Of course, some would prefer not to drive so fast, but they’re all heading in the same direction: towards unnecessary cuts in public spending at a time when private spending is collapsing.
This growing political consensus fills me with foreboding.
Are our politicians planning a government of national unity? A government dominated by ‘technocrats’? Those very architects and defenders of the ‘light touch’ regulatory system that now threatens systemic economic failure? Will these technocrats impose austerity on Britain’s restless and angry population – regardless?
As the year draws to an end, I simply speculate, and may be wrong. After all, George Osborne’s autumn statement represented a small, but significant u-turn: a belated recognition of the scale of the crisis and an attempt at fiscal stimulus to finance infrastructure investment.
But while his mini u-turn is welcome, we need to remind ourselves that fiscal policy can take malevolent as well as benevolent forms. Hitler embarked on an ambitious ‘corporate’ fiscal policy in the 1930s, aimed at enriching big business, especially the military industrial complex.
(For more, read Guerin’s classic “Fascism and Big Business” first published in 1936.) By contrast, Roosevelt’s fiscal policies were aimed at creating full employment; at funding the arts and literature; at protecting the environment.
So we should remain on our guard when it comes to assessing Treasury ‘u-turns’. Whatever the true nature of the coalition government’s fiscal stimulus, at least it recognises that something must be done. The Labour Party will look pretty foolish if it too does not change tack, and instead keeps on backing public spending cuts – but at a slower pace.
The situation is currently most acute in the Eurozone, where the consequences of private economic failure are reflected in rising sovereign debt. These debts cannot be managed in an orderly way, because of the monetary framework and statutes of the Eurozone.
This system prevents a publicly owned, taxpayer-backed institution, the European Central Bank (ECB) from supporting and lending to sovereign governments. Instead that bank is mandated to lend and support – at almost any cost – the private banking system.
The obverse of that policy is that sovereign governments, like Italy and Greece, are obliged by statute to turn to private banks or the private capital markets for financing.
Unlike Britain, they cannot turn to the central bank for ‘quantitative easing’ and other helpful funding injections. (I leave readers to guess which lobbies may have been behind the drafting of these statutes, enshrined now in the Lisbon Treaty.)
However, while the Eurozone is a depressing mess, we must be careful not to wrongly analyse the crisis. European politicians, like those in the UK, are wrongheaded about causes, and therefore solutions. But they are not the root of the problem, of that we must be clear.
The crisis that will come to a head in 2012 is not a European crisis. It is a global financial crisis.
In that sense the eurozone is a side-show.
We, and many others, expect the banks of all the major OECD economies to collapse over the next few months. This will drag the UK, eurozone and US down. In other words, and to be absolutely clear: the eurozone and the world will be dragged down by the banks, not vice versa.
Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.
So prospects are bleak. Unless and until, that is, politicians in the UK and eurozone get real, and face reality. It is time now to stop blaming the victims - public sector workers, pensioners, single mothers, the frail and vulnerable - for a global financial crisis designed by bankers, technocrats, economists and politicians.
It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment,” said Keynes, “and the budget will look after itself.”
So if our politicians want to sleep at night, and reduce the budget deficit, they should do so by investing in the jobs needed to restore prosperity and stability - because the private sector cannot. Only then will we be able to look forward, hopefully.
• A word for 2012: Liquidation – Cormac Hollingsworth, January 4th 2012
• Manufacturers still fear a double-dip recession in 2012 – Tony Burke, December 23rd 2011
• More grim news: Economists predict UK will be back in recession in 2012 – Alex Hern, December 12th 2011
• Osborne proved the doommongers wrong – the economy is even worse than we predicted – George Irvin, November 30th 2011
• OECD: The economic indications are not good for Gideon – Alex Hern, November 15th 2011