Category Archives: global economic crisis

U.N. study savages U.S., European economic policy

Reuters reports:

The pursuit of austerity measures and deficit cuts is pushing the world economy toward disaster in a misguided attempt to please global financial markets, the annual report of the United Nations economic thinktank UNCTAD said on Tuesday.

The report, entitled “Post-crisis policy challenges in the world economy,” savaged U.S. and European economic policies and called for wage increases, stricter regulation of financial markets, including a return to a system of managed exchange rates, and a conscious break with market-led thinking.

“The message here is very pragmatic: we need to reverse our course quickly,” said UNCTAD Secretary General Supachai Panitchpakdi.

Supachai, a former head of the World Trade Organization, said the policy response to the crisis, with an emphasis on fiscal tightening, was misconceived and inept.

The report’s lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario.

The current policies were a disaster, said Flassbeck, head of the globalization and development strategies division at the U.N. Conference on Trade and Development, and a former deputy finance minister in Germany.

“If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession,” he said.

Facebooktwittermail

The dead end of globalisation looms before our youth

Pankaj Mishra writes:

In India, tens of thousands of middle-class people respond to a quasi-Gandhian activist’s call for a second freedom struggle – this time, against the country’s venal “brown masters”, as one protester told the Wall Street Journal. Middle-class Israelis demanding “social justice” turn out for their country’s first major demonstrations in years. In China, the state broadcaster CCTV unprecedentedly joins millions of cyber-critics in blaming a government that placed wealth creation above social welfare for the fatal high-speed train crash in Wenzhou last month.

Add to this the uprisings against kleptocracies in Egypt and Tunisia, the street protests in Greece and Spain earlier this year, and you are looking at a fresh political awakening. The specific contexts may seem very different, ranging from authoritarian China to democratic America (where Warren Buffett, the world’s richest man, publicly denounced a “billionaire-friendly Congress” last fortnight). And the grievances may be diversely phrased. But public anger derives from the same source: extreme and seemingly insurmountable inequality.

As Forbes magazine, that well-known socialist tool, describes it, protesters everywhere are driven by “the conviction that the power structure, corporate and government, work together to screw the broad middle class” (and the working class too, whose distress is not usually examined in Forbes).

Certainly, the strident promoters of globalisation – politicians, big businessmen, and journalists – will have to work much harder now to bamboozle their audiences.

For years now, the mantra of “economic growth” justified government interventions on behalf of big business and investors with generous tax breaks (and, in the west, the rescue of criminally reckless investors and speculators with massive bailouts at the taxpayer’s expense). The fact that a few people get very rich while a majority remains poor seemed of little importance as long as the GDP figures looked impressive.

In heavily populated countries like India, even a small number of people moving into the middle class made for an awe-inspiring spectacle. Helped by an entertainment-obsessed and “patriotic” corporate media, you could easily ignore the bad news – the suicides, for instance, of hundreds of thousands of farmers in the last decade. However, the carefully maintained illusions of globalisation shattered when even its putative beneficiaries – the educated and aspiring classes – began to hurt from high inflation, decreasing access to education and other opportunities for upward mobility.

Facebooktwittermail

Is capitalism doomed?

Nouriel Roubini writes:

The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging.

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits.

Facebooktwittermail

We’ve been warned: the system is ready to blow

From Britain, Larry Elliott writes:

For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.

There were glimmers of hope amid last week’s despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

From Washington, Steven Pearlstein writes:

Another great week for Corporate America!

The economy is flatlining. Global financial markets are in turmoil. Your stock price is down about 15 percent in three weeks. Your customers have lost all confidence in the economy. Your employees, at least the American ones, are cynical and demoralized. Your government is paralyzed.

Want to know who is to blame, Mr. Big Shot Chief Executive? Just look in the mirror because the culprit is staring you in the face.

J’accuse, dude. J’accuse.

You helped create the monsters that are rampaging through the political and economic countryside, wreaking havoc and sucking the lifeblood out of the global economy.

Did you see this week’s cartoon cover of the New Yorker? That’s you in top hat and tails sipping champagne in the lifeboat as the Titanic is sinking. Problem is, nobody thinks it’s a joke anymore.

Did you presume we wouldn’t notice that you’ve been missing in action? I can’t say I was surprised. If you’d insisted on trotting out those old canards again, blaming everything on high taxes, unions, regulatory uncertainty and the lack of free-trade treaties, you would have lost whatever shred of credibility you have left.

My own bill of particulars begins right here in Washington, where over the past decade you financed and supported the growth of a radical right-wing cabal that has now taken over the Republican Party and repeatedly made a hostage of the U.S. government.

When it started out all you really wanted was to push back against a few meddlesome regulators or shave a point or two off your tax rate, but you were concerned it would look like special-interest rent-seeking. So when the Washington lobbyists came up with the clever idea of launching a campaign against over-regulation and over-taxation, you threw in some money, backed some candidates and financed a few lawsuits.

The more successful it was, however, the more you put in — hundreds of millions of the shareholders’ dollars, laundered through once-respected organizations such as the Chamber of Commerce and the National Association of Manufacturers, phoney front organizations with innocent-sounding names such as Americans for a Sound Economy, and a burgeoning network of Republican PACs and financing vehicles. And thanks to your clever lawyers and a Supreme Court majority that is intent on removing all checks to corporate power, it’s perfectly legal.

And from Omaha, Nebraska, Warren Buffett writes:

Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Facebooktwittermail

Roubini: ‘Karl Marx had it right’

Joseph Lazzaro writes:

There’s an old axiom that goes “wise is the person who appreciates candor almost as much as good news” and with that as a guide, place the forthcoming decidedly in the category of candor.

Economist Nouriel “Dr. Doom” Roubini, the New York University professor who four years ago accurately predicted the global financial crisis, said one of economist Karl Marx’s critiques of capitalism is playing itself out in the current global financial crisis.

Marx, among other theories, argued that capitalism had an internal contradiction that would cyclically lead to crises, and that, at minimum, would place pressure on the economic system.

Companies, Roubini said, are motivated to minimize costs, to save and stockpile cash, but this leads to less money in the hands of employees, which means they have less money to spend and flow back to companies.

Now, in current financial crisis, consumers, in addition to having less money to spend due to the above, are also motivated to minimize costs, to save and stockpile cash, magnifying the effect of less money flowing back to companies.

“Karl Marx had it right,” Roubini said in an interview with wsj.com. “At some point capitalism can self-destroy itself. That’s because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What’s individually rational…is a self-destructive process.”

Facebooktwittermail

It’s the inequality, stupid!

Branko Milanovic writes:

As income inequality increased in the past quarter century in most parts of the world, it was strangely absent from mainstream economic discussions and publications. One would be hard-pressed, for example, to find many macroeconomic models that incorporated income or wealth inequality. Even in the run-up to and immediate aftermath of the 2007–2008 financial crisis, when income inequality returned to levels not seen since the Great Depression, it did not elicit much attention. Since then, however, the growing disparity in incomes between the rich and poor has taken a place at the top of the public agenda. From Tunisia to Egypt, from the United States to Great Britain, inequality is cited as a chief cause of revolution, economic disintegration, and unrest.

This feeling that the incomes of the rich and the poor have diverged in part reflects reality: between the 1980s and mid-2000s, income inequality rose significantly in countries as diverse as China, India, Russia, Sweden, and the United States. The Gini coefficient, a measure of economic inequality that runs from zero (everyone has the same income) to 100 (one person has the entire income of a country), has risen from around 35 to the low 40s in the United States, from 32 to 35 in India, from 30 to 37 in the United Kingdom, from less than 30 to 45 in both Russia and China, and from 22 to 29 in famously egalitarian Sweden. According to the OECD, during the same time frame, the Gini coefficient increased in 16 out of 20 rich countries. The situation was no different in the emerging market economies: in addition to in India and China, it rose in Indonesia, South Africa, and all the post-Communist countries.

For the poor, the gap has been palpable. In much of the world, the size of the economic pie has been shrinking, and the poor’s relative slice has been getting smaller. The poor’s actual income thus declined on two accounts. Despite large increase in global mean income between 1980 and 2005, excluding China, the number of people who live — or, rather, barely subsist — on an income below the absolute poverty line (1 dollar per day) remained constant, at 1.2 billion.

Facebooktwittermail

Record levels of unemployment for Europe’s youth

Stefan Steinberg writes:

According to the latest figures from the German Statistical Office and Eurostat, youth unemployment across Europe has increased by a staggering 25 percent in the course of the past two and a half years. The current levels of youth unemployment are the highest in Europe since the regular collection of statistics began.

In the spring of 2008, prior to the collapse of Lehman Brothers and the financial crash of that year, the official unemployment rate for youth in Europe averaged 15 percent. The latest figures from the German Statistical Office reveal that this figure has now risen to over 20 percent.

In total, 20.5 percent of young people between 15 and 24 are seeking work in the 27 states of the European Union. At the same time, these numbers conceal large differences in unemployment levels for individual European nations.

In Spain, where the social-democratc government led by Jose Luis Zapatero has introduced a series of punitive austerity programmes at the behest of the banks and the IMF, youth unemployment has doubled since 2008 and now stands at 46 percent. In second place in the European rankings is Greece, the first country to be bailed out by the European Union and to install austerity measures, with a rate of 40 percent. In third place is Italy (28 percent), followed by Portugal and Ireland (27 percent) and France (23 percent).

In Britain, where youth have taken to the streets in a wave of riots and protests in a number of the country’s main cities, unemployment hovers around 20 percent. A recent report from Britain’s Office of National Statistics reported that joblessness among people between the ages of 16 and 24 has been rising steadily, from 14.0 percent in the first quarter of 2008 to 20 percent in the first quarter of 2011—an enormous 40 percent spike in just three years.

Facebooktwittermail

Quantitative easing ‘is good for the rich, bad for the poor’

The Observer reports:

Quantitative easing (QE) – the Bank of England’s recession-busting policy of buying up billions of pounds of bonds – may have contributed to social unrest by exacerbating inequality, according to one City economist.

As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages.

“The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it,” Joshi says in a new report.

He points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been a key tool for boosting growth. In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.

As the Bank waded into the financial markets to spend its £200bn of newly created money, mostly on government bonds, the price of many assets, including shares and commodities such as oil, was driven up.

That helped to boost companies’ revenues, but Joshi argues that with the labour market remaining weak, employees have had little hope of bidding up their wages. “The shocking thing is, two years into an ostensible recovery, [UK] workers are actually earning less than at the depth of the recession. Real wages and salaries have fallen by £4bn. Profits are up by £11bn. The spoils of the recovery have been shared in the most unequal of ways.”

Facebooktwittermail

After historic downgrade, U.S. must address its chronic debt problems

A commentary in China’s official Xinhua News Agency says:

The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday.

Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addition and the short-sighted political wrangling in Washington.

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

Facebooktwittermail

Greek police face investigation after protest violence

The Guardian reports:

A public prosecutor has ordered an investigation into alleged police brutality against Greeks protesting against austerity measures amid an outcry over the excessive use of force and teargas to control crowds in Athens this week.

As municipal employees worked furiously to clean up the capital in the wake of street battles that left its central square resembling a war zone, the socialist government faced growing criticism of the controversial methods employed by riot police to disperse demonstrators.

“What took place in the centre of Athens these past few days is a complete violation of democratic law,” said Alexis Tsipras, leader of the leftist Syriza party, emerging from the supreme court where he filed a suit against the Greek police.

Fierce fighting erupted outside the Greek parliament on Wednesday as MPs inside voted on the hard-hitting policies demanded by the EU and IMF in exchange for the debt-choked country receiving further aid.

The release of video footage depicting police beating protesters, and in one instance seemingly colluding with rock-throwing extremists before firing off rounds of tear gas, has shocked Greeks.

Facebooktwittermail

The global debt? Give the big boys the bill

Too Much, an online weekly publication of the Institute for Policy Studies, says:

Sober central bankers the world over — and their political pals — have been hyperventilating the last few months about the debts of the world’s most notorious deadbeat nations.

Over in Old Europe, we have Greece with a standing debt of some $485 billion. Over here in the New World, meanwhile, the United States owes some $9.4 trillion to the outside investing public.

“Crushing” debts like these, the debt hawks squawk, have only one remedy. The average people of deadbeat nations must swallow hard and accept austerity. They must shut down their libraries and overcrowd their classrooms — and start selling off their public assets as well. Anybody want to buy the Parthenon?

Amid all this debt hysteria, we might want to slow down a bit, unless we relish the possibility of having Donald Trump ending up the owner of the Acropolis. We need a little perspective, the sort we can get from the 15th annual World Wealth Report, a joint effort from Merrill Lynch Global Wealth Management and Capgemini, a Paris-based corporate and financial consultancy.

This latest World Wealth Report, released just last week, calculates — among other fascinating numbers — the total investible wealth of everyone in the world who now has at least $30 million available to invest.

Remember, we’re not talking total wealth here, only investible assets. The Capgemini-Merrill Lynch tallies don’t include the residences wealthy people call home, their diamonds, their luxury cars and yachts, or any other personal luxury goods and collectibles that sit in wealthy households.

The world now hosts, reckon Capgemini and Merrill Lynch, 103,000 individuals with $30 million or more sloshing in their investment accounts. Together, these “ultra-high net worth individuals” hold $15 trillion in investible wealth.

Cogitate on that total a moment. If the world’s ultra-high net worth folks had a hankering, they could totally pay off the Greek and U.S. debts, and still have almost $50 million each, on average, left to invest, on top of their mansions, Bentleys, and jewels. And the Greeks would get to keep the Acropolis!

The folks over at Capgemini and Merrill Lynch would never, of course, want to suggest for even a moment that the world’s “ultra-highs” — about 40 percent of whom, incidentally, live in the United States — either ought to have this hankering or be taxed into it. They’ve put together this World Wealth Report to impress the wealthy into becoming their clients, not to scare them.

But the rest of us remain free to suggest whatever we want — after we thank Capgemini and Merrill for providing all this wonderfully suggestive inspiration.

Facebooktwittermail

The Greek protests are not just about the economic crisis

Aditya Chakraborrty writes:

A sunny Saturday afternoon in central Athens, and Christos Roubanis is sitting outside having a beer, while telling me about the death threats he’s received. We’re in Victoria Square, one of the most racially mixed areas in the capital. The nearby payphones have queues of Bangladeshis waiting outside, and after every few shops comes that telltale feature of immigrant-ville: a Western Union money transfer booth. Locals reckon that more than a third of residents are non-Greek subjects.

And that’s made the neighbourhood the target of fascist activity, especially since Greece plunged into severe recession in 2009. A few minutes down the road is a playground, complete with seesaws, slides and climbing frames. It was where Afghans and others used to take their kids – until the Nazis marched in and declared it a no-go zone a couple of years ago. Although most of the equipment inside looks like it’s working, the entire rec is still locked up.

Just outside, on the stones in front of the handsomely domed church, is daubed various graffiti. “I love my country” reads one in the national colours of blue and white. Another is more direct: “Immigrants go home.” Sprayed on the shutters of nearby shops are swastikas. They look particularly incongruous in a country that tried so heroically to fend off Hitler’s invasion.

Christos lives here, but can’t walk me to the playground for fear of getting beaten up. Bald, with a small greying moustache, he’s previously stepped in to prevent immigrants being hassled – so the Nazis have turned their attention on him. They ring his mobile “and call me a bloody communist and say they will kill me”. Once, he was trapped by a fascist gang brandishing wooden poles. “They brought them this close,” he says, his hand stopping just in front of his thick glasses.

Under the awning of this bar, Christos and his friends Afrodite and Olga can debate how waves of badly-managed immigration have put pressure on this working-class neighbourhood. But one thing they agree on is that the fascists are managing to exploit the tension in the area. In elections at the end of last year, the extremist Golden Dawn party won 10% of the municipal vote.

Numbers like that flatly contradict the cosy view of the popular Greek reaction to the spending cuts as being articulate, engaged, left-wing. And it is – in parts. But as Christos and his neighbours will tell you, the politics of austerity can boost the thuggish right as well as the post-enlightenment left. Indeed, the defining feature of the Greek protests is not ideology – it’s visceral hostility to anything that smacks of the mainstream, whether in politics, or business or the media.

Facebooktwittermail