The Economic Recovery Myth

The Wall Street Journal reported today that Citigroup and Bank of America have both been told that they must raise billions of dollars of extra capital. The stress tests conducted by the US government on 19 banks found that Citi and Bank of America both need more funds to cover future losses caused by the economic downturn. 

 

 This report therefore suggests the financial crisis is far from over.

 For the last month various politicians have attempted to talk up the prospects of a recovery as both nationalization and continued stimulus packages have done little to stem the ‘great recession.’ 

 Capitalist nations are finding that lying to the public about the debt and unemployment scenario is really the best way to deal with the little faith that is left after a decade of excess.

 The problem fundamentally is down to the fact that Capitalist economies are not built upon anything real but contracts that are either derivatives of real assets or based upon future income streams. The boom of the last decade was built upon the real estate bubble, which was driven by debt – i.e. money that is built upon the prospect of future re-payments. The boom was also driven by a $500 trillion derivatives market built upon the illusion that the global economy will continue to grow. 

 Once such an illusion reached astronomical proportions and the financial industry realized that their future revenue streams were being defaulted upon on mass, the pack of cards came crumbling down. 

 Unless Western nations ditch such an approach to wealth creation, the global economy should expect another crisis – that’s if the global economy gets out of the current predicament. However the fact every thing can be commoditized, and that all participants of the ‘market’ can own whatever comes of the production line, whether real or not, means the current crisis is a result of idea’s that go right to the heart of Capitalism. 

 The way forward is not to lie to the public, but the discussion about alternatives based upon real wealth.

This is in response to the following article

Citigroup and Bank of America ‘must raise billions in extra capital’

The cost of bailing out capitalism

The International Monetary Fund’s latest Global Financial Stability Report has provided some conservative estimates of the potential global losses from bailing out the flawed capitalist financial system. According to the IMF, governments around the world will lose an estimated $4,400 billion on the loans and guarantees made to the financial sector over the last 18 months or so. 

$4,400 billion is the total value of all the good and services produced in 2007 in Japan, the second largest economy in the world. Yet this is a conservative estimate as it only covers banks’ losses on loans and securities and does not include the flawed an inactive derivatives market. 

Still this is an astonishing amount of expected loss that will need to be paid by ordinary taxpayers over decades. This is the price for bailing out capitalism. Despite governments’ committing nearly $9,000 billion in loans, asset purchase schemes and guarantees, with the justification of rescuing the real economy, the world economy is in the midst of a major global recession.

Driven by the venerated incentives of capitalism bankers took out huge loans to make colossal gambles which they lost. Rather than punishing this failure as capitalism espouses the bankers have been rescued with the world economy ending in deep recession. Private debt has been nationalised with the new debtors, taxpayers, unable to affect or influence the outcome of such a major catastrophe. 

Proponents of democracy champion the role played taxpayers in accounting democratic governments. It is argued democracy needs taxpayers. Yet we see taxpayers and their democratic representatives utterly powerless in influencing the course of events in the last 18 months when the tax burden has risen exponentially. 

The reality is political leaders are influenced more by rich bankers who can finance billion dollar election campaigns than ordinary citizens. This is demonstrated by the increasing role of bankers in government as detailed in “bankers own the congress.”

Thus this is not only a failure of capitalism but of democracy.

The absurdity of fiat currency

Martin Wolf, FT commentator, derides as absurd  gold replacing the fiat currency standard. We certainly live in strange times when the pick of so-called intellectual thinkers in the west considers gold, a currency with stable intrinsic value that has stood the test of time over centuries, unsound in favour of valueless fiat currencies, which are propped up by little more than the confidence one has in the governments that print and issue them.

Indeed, to appreciate the absurdity of fiat currencies need look no further then Zimbabwe today: Zimbabwe inflation hits 231 million per cent 

What’s more Zimbabwe is not an isolated example – there have been plenty of other fiat currency crashes: the Thai Bhat together with many other fiat currencies in the 1997/98 South East Asian crisis; the collapse of the Russian Ruble in 1998; Argentine Peso in 2001; Pound Sterling in 1992 etc.

What’s even more absurd is the idea that in the age of global finance with hundreds of millions in flight capital moving between financial centres with the ‘click of a mouse’ there will not be future fiat currency collapses or that such collapses may be averted by policymakers adjusting interest rates however loosely defined.

It their attempts to prolong the life of a fundamentally flawed capitalist financial model commentators like Martin Wolf have either lost sight of the obvious or are just deluded.

UK inequality proves bankruptcy of free market

Today’s data from the UK’s Department of Works and Pensions confirmed what many have known since Capitalism’s foundation. The income and wealth gap in the UK has got worse in the post war era and poverty has increased, especially amongst children in spite of annual real GDP growth of near 3% per annum. Whilst various critics have blamed the Labour party for the latest figures, wealth inequality is a problem all capitalist free market economies face. 

It should be remembered that until the downturn in the global economy politicians made many promises to eradicate and reduce poverty, however despite the supposed prosperity of the last decade a significant number of British society was not so fortunate.Statistics from HM Revenue and Customs show that the top 1% own over 21% of total wealth in the UK with the next 4% owning a further 18% of total wealth. The next 5% own a further 13% of the wealth generated in the UK. Thus 10% of the UK’s population own over 50% of total UK wealth! It is for this reason consumer debt in the UK is 1.4 trillion; the British economy itself is valued at £1.5 trillion.

Creating a level playing field where all of society can partake in wealth creation and circulation is the capitalism’s number one failure. This will always be the case since capitalism is only concerned with wealth creation; it pays little attention to the circulation of such wealth. Freedom of ownership, a revered principle underpinning capitalism, has only allowed the rich to get richer at the expense of the poor and no amount of tinkering with the free market will change this.

Stress testing banks will not address the credibility crisis facing capitalism

News that 10 US banks have failed the US Treasury’s ‘stress tests’ should not be surprising.

The capitalist baking model is flawed. Most intelligent commentators recognise that no bank is too big to fail. Banks create credit in multiples of actual Tier 1 capital such as cash and equity. By definition there will always be insufficient funds in banks if all depositors and borrowers came calling irrespective of the size of equity in a bank or how deep its pockets were. Indeed, attempting to rescue really big banks could potentially bring down national economies.

Why stress test banks then?

Capitalism faces not only a financial but a credibility crisis. The stress tests are aimed at persuading investors that these banks are viable businesses worth investing in in order to kick start flagging financial activity. The stress tests also suggest a kind of scientific approach to addressing the failure of banks as viable businesses. In actual fact the tests are half-baked attempts at concealing the systemic failure of the capitalist banking model.

The blame game

Did the financial crisis stem from market failure or government failure? Anti-capitalists argue the market spectacularly failed while conversely capitalists contend that the regulatory framework was responsible for the collapse in financial markets.

Both opinions falsely assumes the so called regulatory framework exists to control the market. In reality this could not be further from the truth.

Increasingly the ‘regulatory framework’ has been about promoting deregulation: the ‘big bang’ in the UK that liberalised financial markets in the mid 1980s; removal of exchange rate controls in the 1990; privatisations of the 1980s and 1990s; and the Basel banking accords encouraging riskier banking models and the promotion lose controls or ‘market discipline’.

There is little doubt the market failed – banks stopped lending even though that’s their primary purpose or raison detre. To deny this is just dogmatic – no matter how elaborate the reasoning. This market failure was not due to government regulation but because of an absence of government regulation. The poachers became the gamekeepers.

This has wider implications for western democratic societies and their ability to look after the interests of all thier citizens over an above those of the capitalist elites who dominate business, government and policymaking.

Japanese economy crashes as western economies tumble

BBC reported that the Japanese economy shrank by its quickest pace for the first three years for 2009 since records began due to a slump in exports caused by the downturn in the global economy.

 

“Output in the world’s second largest economy contracted by 4% during the period, or by 15.2% on an annual basis.” 

The current downturn has in fact exposed the very weak nature of Japans economy as it highlights the vulnerability of having an export led economy which depends on exports as a primary source of growth.

 We have come to realise that during the boom period the Western world consumed much of what come of the production lines of South East Asia, now that spending is being cut back – as many spent beyond their means during the bubble, Japan is finding that a problem that started on the other side of the world has dragged it down too.  

 Whilst Japan continues to be cited as a model to imitate, the fact that will never change is Japan will always be reliant upon the greed and consumption of the West to drive its economy.