Capitalism in Dire Straits

The IMF, famed for its imposition of fierce Structural Adjustment Programmes on countries unfortunate enough to require its assistance to support their economies devastated by the imperialist tribute extracted from them by various ‘international’ financial institutions, has done a 180 degree turn.  Now that it is the imperialist countries themselves that are in trouble, the IMF has suddenly discovered that austerity can cause permanent damage to an ailing economy.

In its annual publication, World Economic Outlook, published in October 2012, it for the first time in its history urged caution in the application of austerity measures.  In justifying itself it uses the quasi-mathematical (QM) language of bourgeois economics which believes that economics is all a question of statistical measurement on which reliable predictions can always be made.  Here is how Martin Wolf of the Financial Times puts the question:

The IMF argues, boldly and controversially, that fiscal multipliers have been far greater than normal in the Great Recession…Its conclusion is that multipliers have been in the range of 0.9 to 1.7, instead of the standard assumption of 0.5. This means that a tightening of, say, 5 per cent of GDP, roughly the cyclically-adjusted tightening expected of Spain between 2009 and 2013, would lower GDP by between 5 and 9 per cent, other things being equal. If anything close to this were true, even the fiscal deficit would fail to improve, as revenue fell and spending rose.” (‘The Fund warns and encourages’, 17 October 2012).

A “fiscal multiplier” is QM-speak to describe the inevitable shrinking of the economy that is caused by any slashing of government spending.  Because the economy shrinks, tax returns also shrink (not to speak of the rising cost of unemployment and other social benefits), leaving the government with less money to pay the creditors who had insisted on a higher proportion of government income being used to pay them rather than to provide services for the population. 

Raising taxes on the working people has exactly the same effect.  A recent example to illustrate this point is provided by Portugal:

As consumer spending is declining, so too are tax revenues. As part of its 2012 budget, the government anticipated that sales taxes would produce revenues 11.6 percent higher than in 2011. Instead, revenues were down 2.2 percent in the first eight months of this year, as the tax increases suffocate the economy” (see Raphael Minder, ‘Austerity protests are a rude awakening in Portugal’, New York Times, 15 October 2012)The result is that, despite months of severe austerity (or because of months of severe austerity?), Portugal’s public debt is now a scary 124% of GDP, up from 107% as recently as last April.  Of course, the efforts to impose austerity on the masses do give rise to resistance, even in Portugal:

“The turning point came in September when Mr. Passos Coelho offered a plan to redistribute social security funds by cutting employers’ social security taxes while significantly raising those of employees. Although the measure was meant to lower labor costs, the outcry from workers was so ferocious that he was soon forced to withdraw it.

“But the damage was already done. The misstep is now credited with having rattled the social and political cohesion that had underpinned Portugal’s painful but steady progress” (ibid.).

In fact, the IMF has realised, with deep austerity the shrinkage of tax returns may be so bad that the government in question becomes even less able than it had been originally to service its debts, while being in ever greater need to borrow more in order to maintain essential services.  Even the IMF cannot fail to realise that this is a hiding to nothing for the imperialist creditors whose interests it unfailingly represents.  It therefore advises its constituency: look, it’s better to collect smaller amounts than your entitlement from your debtors rather than to drive them into bankruptcy and get nothing at all.

It seems, however, that the IMF’s reluctantly-discovered common sense is unlikely to influence the creditors’ behaviour in practice. It has, after all, to be remembered that many of the creditors, if they do not receive their entitlements on the due date, are themselves likely to fall behind in meeting their own payments, and facing higher interest payments on their own debts as a result.  For them, to collect their money is a matter of life or death.

This is what explains the explosion of anger expressed by Germany’s finance minister, Wolfgang Schäuble, against Christine Lagarde, the managing director of the IMF, who is clearly convinced by the arguments of the austerity softeners and would like to see the IMF’s recommended policies implemented.  She came under attack at a meeting of finance ministers and central bankers in Tokyo:

Wolfgang Schäuble said Christine Lagarde had appeared to contradict the IMF’s own stance in advocating an easing of austerity, noting that the fund had ‘time and again’ warned that high debt levels threatened economic growth.

 “‘When there is a certain medium-term goal, it doesn’t build confidence when one starts by going in a different direction,’ Mr Schäuble said. ‘When you want to climb a big mountain and you start climbing down the mountain, then the mountain will get even higher’.” (Claire Jones and Peter Spiegel, ‘Schäuble and Lagarde clash over austerity’, Financial Times, 12 October 2012).

Furthermore, while calling for easing their demands on debtors, the IMF apparently sees no contradiction in simultaneously calling on the imperialist countries to “act decisively” to reduce their indebtedness.  How they are supposed to do this without reducing expenditure or increasing taxation (either of which takes demand out of the economy) is not explained:

In a communiqué at the end of a three-day meeting here in Tokyo, the members of the International Monetary Fund warned that global growth was slowing as the persistent debt crises in developed countries dragged down growth in emerging markets. The statement said quick action was needed to ‘break negative feedback loops and restore the global economy to a path of strong, sustainable and balanced growth’.”

Moreover, “The I.M.F. warned that economic stagnation in richer countries hurt poorer ones, which rely on exports to the developed world to lift themselves out of poverty.” (Martin Fackler, ‘IMF urges leaders to act decisively on debt’, New York Times, 14 October 2012).

With even the IMF emitting self-contradictory advice, the general opinion is that the IMF’s suggestions of going easy on austerity are unlikely to be followed:

“…as far as its involvement in rescue programmes for Greece – and potentially Spain and Italy – is concerned, the fund will find it easier to change its mind than its policies. Its junior role in the rescue “troika”, alongside the European Commission and the European Central Bank, means it will have to convince its more sceptical fellow lenders that slower fiscal consolidation would be helpful.

“The WEO section on fiscal multipliers is a very important finding … says Jacob Funk Kierkegaard at the Peterson Institute think-tank in Washington. ‘But it is likely to make only a marginal difference in forward-looking changes to [rescue lending] programmes’ “. (Alan Beattie, ‘Troika a barrier to IMF new fiscal faith’, Financial Times, 12 October 2012).

Since it is Germany which is providing the lion’s share of the rescue money for the ailing banks and governments of the peripheral European countries, if Germany demands tough austerity as a condition of dishing out its rescue funds, then tough austerity it shall be, however disastrous that might be according to ‘fiscal multipliers’ for the debtor nations in question.

Of course, the German economy too is very adversely affected by the reduced budgets of its customers.  Austerity in Greece, Spain, Ireland, Portugal and Italy, etc., hurts Germany too. Those operating in capitalist economic crisis are damned whatever they do – but it’s good to blame ‘the irresponsible’, rather than the true culprit – capitalism itself – and to make the scapegoats suffer!  Those capitalists who do survive the crisis will emerge bigger and stronger than ever, so all of them are trying to make sure that they are the ones to survive.

Crisis deepens

The World Economic Outlook had nothing but bad news for capitalism.  It was a question of bad news, more bad news, and yet more bad news.  Here are some of its findings:

(a) For the UK

“The world’s economic watchdog also slashed its forecast for UK growth, in its sharpest downwards revision for any advanced economy. It now expects the UK economy to shrink by 0.4pc this year, instead of growth of 0.2pc as it expected in July.” (see Rebecca Clancy, ‘Austerity has hurt UK growth, says OBR’, Telegraph, 17 October 2012).

In fact, the Office for Budget Responsibility (OBR), applying the concept of fiscal multipliers, has concluded that the effect of the government’s austerity programme is so severe that there can be no hope of reaching debt reduction targets by the time originally envisaged (2015). Indeed, the calculations indicate that the government has under-estimated the cuts needed to reduce public indebtedness (always assuming that this is even possible) to a manageable level by £15bn, i.e., by nearly 20%. This £15bn hole could apparently be plugged by immediately raising VAT to 23%, estimates Chris Giles of the Financial Times ‘UK austerity squeeze set to run until 2018’, 9 October 2012).  But has he taken into account the ‘fiscal multiplier’?

Somewhat unexpectedly the UK avoided a double-dip recession in the third quarter of 2012 by showing 1% growth for the period.  However, most financial analysts are attributing this to a one-off Olympics boost, and are warning of continued weakness in the British economy that is likely to lead to a triple-dip if not a quadruple-dip recession in months ahead.

(b) For the Eurozone

Growth is forecast at -0.4% in 2012 and 0.2% in 2013 (although 0.7% had been predicted last July).  In Germany growth is predicted at 0.9% both for 2012 and 2013, whereas Spain is predicted to shrink by 1.5% this year and 1.3% next.

Of course, if things are bad in general for the eurozone, the so-called peripheral countries, Greece, Spain, Italy, Ireland and Portugal, who have to date been worst hit by the crisis and have had to apply for financial support of different kinds from the various international financial institutions, are by far in the worst straits.  When Angela Merkel, the German Chancellor, visited Athens in October, the New York Times commented:

Three years of spending cuts imposed largely at her insistence have reduced Greece’s gross domestic product by a staggering 25 percent and wrecked its mainstream political parties” (Editorial, ‘Mrs Merkel goes to Athens’, 11 October 2012). Unemployment in Greece is now 24% and 50% for young people!

As for Spain, not only has unemployment just officially hit 25% (51% among the young) but “The indicators are grim: Cement production has reached its lowest level since the 1960s. Car sales are down 37 percent from last year. And on weekdays the public squares of Madrid are filled with the unemployed — young and old — whiling away the hours.

“Even the wealthy are feeling the strain. In the boat slips of Barcelona, ‘For Sale’ signs hang on nearly every moored yacht.” (Landon Thomas Jr, ‘Spain waits, and Europe frets’, New York Times, 16 October 2012).

Spain’s one consolation, if such a thing can be a consolation is that:

In terms of national debt, Spain is nowhere near as badly off as nearly bankrupt Greece, whose debt burden is nearly 200 percent of the size of its economy. In Spain’s case, the number is 90 percent — the same as France’s.

As it turns out, this is not much consolation: “The main worry is not the size of the debt, though, but how quickly it has been amassed. By next year, when it is expected to rise to 96 percent, Spain’s debt burden will have grown by nearly one-third since 2011 [and it has been implementing severe austerity measures throughout that period], according to the International Monetary Fund. That rate of debt expansion outpaces every other country in the world and is the result of a plummeting economy, high interest rates and the burden of rescuing Spain’s collapsing banks.” (ibid.)

It is not, however, only the peripheral countries in the eurozone which have problems:

The IMF has warned that unless the eurozone resolves its capital crisis, European banks’ balance sheets will contract severely, further damaging growth and pushing unemployment beyond already record highs in the region.

“In its global financial stability report, the IMF concluded that capital flight from the eurozone’s periphery to the bloc’s core, driven by fears of a break-up of the currency union, had sparked ‘extreme fragmentation’ of the euro area’s funding markets. The fund said this was causing renewed pressure for banks to shrink their balance sheets, particularly those in countries with fiscal woes.

“Delays in resolving the crisis meant that unless eurozone officials beefed up their policy response, European banks would dump $2.8tn worth of assets – more than 7 per cent of their balance sheets – by the end of next year. Banks in the periphery would shed just short of 10 per cent of their assets.

“The deleveraging would weigh on growth and add to increasingly high unemployment levels in the region. Businesses would suffer as bond markets proved unable to plug the gap left by banks.

“‘The expected amount of bank deleveraging is now higher [than forecast in April] because of lower expected earnings, higher losses linked to worsening economic conditions and greater funding pressures on banks’, the fund said. “ (Claire Jones and Michael Steen, ‘IMF warns Eurozone on capital flight’, Financial Times, 10 October 2012).

France is also under pressure, although one hears relatively little about this. On 25 October, one of its big banks, Banque Nationale Paribas had its credit rating downgraded by Standard & Poor’s from double A minus (with a negative outlook) to A plus. The credit rating agencies expect BNP Paribas to be adversely affected by a fall in house prices in France, itself a reflection of economic turbulence.

(c) For ‘advanced’ economies in general

The IMF has revised its forecast for 2013 growth from 2% forecast in April to 1.5%.

(d) For the United States

The scale of America’s fiscal problems was underscored just hours before the meeting in Tokyo, when the Obama administration announced that the budget deficit this year would reach $1.1 trillion, exceeding $1 trillion for a fourth straight year. While that is down from last year, United States deficits had never topped half a trillion dollars before the 2008 financial crisis.” (Martin Fackler, op.cit.)

The result of the crisis of capitalism in the home territory of the richest and most powerful imperialist country in the world is that “For the first time since the Great Depression, median family income has fallen substantially over an entire decade … By last year, family income was 8 percent lower than it had been 11 years earlier, at its peak in 2000 …” (David Leonhardt, ‘Standard of living is in the shadows as an election issue’, New York Times, 24 October 2012).

(e) For ‘emerging’ economies

Taking Brazil as an example, Brazil’s growth is expected to fall to 1.5% for 2012 (as opposed to an estimate made by the IMF only last July of 2.5%), while for 2013 the estimate for growth has been revised downwards from 4.7% to 4%. The story for China and India was similar. China is expected by the World Bank to attain a growth of 7.7% for 2012.  This may sound fantastic, but the figure is seriously down from last year’s 9.3%, and it is the first time this century that China’s annual growth rate has fallen below 8%.

Brazil is particularly angry at US policies of quantitative easing that are pushing up the exchange rate of the Brazilian rial:

Opponents contend that the Fed’s third round of quantitative easing – nicknamed QE3 – has triggered volatile capital inflows into emerging markets, leading to an appreciation of their exchange rates, weighing on trade, and creating threats to financial stability.

“Guido Mantegna, Brazil’s finance minister and one of the Fed’s most vociferous critics … labelled the Fed’s ultra-loose monetary policy as ‘selfish’.” (Claire Jones and Ben McLannahan, ‘Fed chief rounds on stimulus critics’, Financial Times, 15 October 2012). 

It is, however, obvious that the US too needs to find ways of boosting its exports, finding ways of reducing unemployment (or at least preventing it from rising any further) if it is to avoid unmanageable social unrest – it has already been under some pressure from the ‘Occupy’ movement.  Its quantitative easing policy is specifically designed to improve the competitivity of its exports on the world market through devaluation of its currency.  This of course does not prevent it from hysterical accusations that China is manipulating its currency – apparently only the US is entitled to do that.  But in actual fact, China does not need to manipulate its currency to be competitive, since the massive inflows of capital into China in recent years have equipped it with most modern and productive machinery.  Combined with lower labour costs, this makes China very competitive in the world markets.

(f) For the world in general

The IMF “foresees global growth of 3.3 percent in 2012 and 3.6 percent in 2013, down from 3.5 percent this year and 3.9 percent next year when it made its last report in July. New estimates suggest a 15 percent chance of recession in the United States next year, 25 percent in Japan and above 80 percent in the euro area.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to dampen growth in high-income countries, the fund said. At the same time, the emerging-market countries that fuelled much of the recovery from the global recession, like China and India, have continued to cool off, with global trade slowing.

“‘The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook,’ the fund said, warning that its forecasts might be overly optimistic if policy makers in Europe and the United States fail to carry out pro-growth policies. ‘Downside risks have increased and are considerable’.”

Furthermore, “The report found that more than half a billion young people are neither working nor studying, and estimated that the world would need to create about 600 million new jobs in the next 15 years just to keep the unemployment rate constant.”  (Annie Lowrey, ‘IMF lowers its forecast for global growth’, New York Times, 9 October 2012).


We leave it to Chris Giles of the Financial Times (‘Pessimistic prognosis points to more pain’, 9 October 2012) to sum up the conclusions to be drawn from the above:

The International Monetary Fund has raised a question that should strike fear into any finance minister’s heart: will the current global slowdown persist beyond the next couple of years?

“If the answer to the question posed in the World Economic Outlook is Yes, it suggests the potential for growth, in both advanced and emerging economies, has been permanently damaged. People will be poorer than hoped and deficits more difficult to close.”

All the advances of modern science, all the massive increases in productivity, and where do we end up – under capitalism ? In the soup kitchen!