The economic growth paradigm has as its central tenet that poverty can be eradicated everywhere if growth continues exponentially. “A rising tide will lift all boats”. The trickle-down effect has been used maliciously by right wing think tanks, modern politicians
of all beliefs, and of course the wealthy who have been unerringly welded to economic rationalism theory since the Great Depression. More “modern” economic rationalism prolonged the myth by stating it could also fix global warming.
In light of current economic experience, and judging what “the science” tells us of rising sea levels that theory is o.k. ONLY if you’ve got a boat, literally !
What the global financial crisis told us, nay shouted to the world, was that for 30 years bubbles had been the only thing that had been keeping the world’s economy afloat, bubbles caused by drawing down 400 years-worth of fossil fuel accumulation every year. In exact parallel to exhortations to increase GDP, energy consumption has increased causing ever increasing levels of greenhouse gas emissions.
This link, that growth does not occur without energy expenditure, has cemented the belief of man-made global warming. The data is scientific and peer reviewed and the root cause of global warming is now accepted by the scientific community as anthropogenic. Eventually, as oil prices have settled at historic highs over $100 per barrel, growth has stalled. Reaching a “peak price” in 2008 of $147 per barrel equated to 25% of global GDP – the biggest bubble of them all burst, and in 2008 we discovered someone forgot the boat had no lifejackets.
When Alan Greenspan and Bill Clinton had the Glass Steagall Act repealed in 1999 this allowed banks to become trading institutions, the biggest bubble of all began to inflate. Supported in the U.K. by Blair and Brown who introduced a “light touch” regulatory approach to investment institutions, the stage was set. We could sail past Enron and World Com, loose a few overboard but the “markets” always rebounded, Clinton could make himself look great and “ordinary” people look dumb by pontificating, “it’s the economy stupid’. It beggars belief that the man has more standing than George Bush; Bush was after all, only following Clinton’s lead.
I digress, but “credit” has to be paid where due, these are the political leaders who should be banished from public life and a beginning to the end must be found, because we are here, at this point in time, in 2011 A.D. looking at the collapse of “modern” society.
We know what the Gordon Browns, Barak Obamas, Bush’s, Blair’s, Sarkozy’s and Merkel’s have been doing, we know what the Strauss-Kahn’s & Lagarde’s are doing, they are protecting the have’s. After all, in the modern economy there are 3 types of people, the have’s, the have not’s, and the have-not-paid-for-what-they-have’s.
The Occupy movement has articulated this as the 1% and the 99%.- if you can’t afford to pay for what you have you’re going to lose it. It is to be hoped they can capture a majority of imaginations as they are our last hope.
Although this is applicable to all western societies, there is a quantum leap when considering the fate of the “global south”. The Millennium Development Goals were set in force out of Agenda 21, ostensibly to bring to the world’s poor a decent standard of living. This was only based on the provision of basic necessities such as clean drinking water, electricity, education and health services, which would be provided as was commonly believed, by the ”trickle down/rising tide” theory.
The fact that the goal of finalising this direction by 2015 is nowhere near achieved, points an accusatory finger at the affluence which the 1% has apportioned itself over the last decade. In America 40% of assets are owned by the top 1%, 25% of ALL new income over the last decade has gone to the top 1%
At the same time, the climate crisis has exposed another failed exercise in global co-operation, at best, emissions, which have risen exponentially along with GDP, are now projected to provide a world that is a minimum of 4 degrees Celsius warmer by 2100. More and more economic theorists, having despaired at the “experts” to find a solution to the current economic meltdown, with the dark shadows cast by derivatives blocking out the sun, are turning once more to see what Karl Marx has to say, and belatedly
agreeing with his conclusions.
It is no coincidence that with the advent of the financial market “boom”, none of the increase in GDP has been fuelled by increased pay for the working classes, whilst wages have been stagnant at best and fallen in most cases.
This now leads to a 3 sided problem.
1/ Gross income inequality in western industrialised society, from a trickle up economic
structure and the socialisation of massive debt.
2/ Gross poverty in undeveloped countries because of high energy prices and the recurring burden of debt.
3. Exponential increases in greenhouse gas emissions (now) caused mainly by developing countries and BRICS nations increasing their GDP based on the accumulation of debt.
The New Underclass in America, the richest country in the world.
The Centre on Budget and Policy Priorities has documented decades-long erosion in welfare programs as more and more states abandon or can no longer afford it.
Just three-fifths of the states and the District of Columbia still offer general assistance. For those still lucky enough to qualify, the benefits are extremely modest. In 29 of the 30 states with general assistance programs, the maximum benefit falls 50% or more below the poverty line for individuals.
Some of the lowest benefit levels serve individuals who are mentally or physically unable to work and are therefore incapable of earning money to supplement their handout. The median benefit level is $215 a month for those people, yet the median benefit level for employable individuals – who presumably could earn some extra money – is $381.
Delaware, Illinois, Kansas, and Ohio provide a benefit only for unemployable individuals, yet they set the maximum benefit level at or below $115 a month, or barely subsistence.
According to latest figures, the number of American families living in poverty rose 2.6 million to 46.2 million, the largest increase since Census began keeping records 52 years ago. Income falls were particularly large for the less well off. — some 15% of the population — living below the federal poverty line, defined as annual income of $22,314 for a family of four.
In 2010, the bottom fifth of households that make $20,000 or less, saw their incomes decline 3.8% after inflation. Poor people and minorities were hit hardest. The poverty
levels have reached the highest levels in over 15 years.
In the four years since the recession began, the US civilian working-age population has grown by about 3% but the economy has 5% fewer jobs — 6.8 million jobs. The real unemployment rate – people without work, people involuntarily working part time, people not looking for work because there is none to be found – is around 15-20% in the US. Long-term unemployment has left millions of people out of work with poor prospects of finding jobs.
U.S. economic activity is not generating the 200,000 to 250,000 jobs per month that would allow unemployment levels to fall. In addition, newly created jobs are part-time, casual or at lower income levels
The United Kingdom’s ballooning personal debt is obscene, it stands at £1.5 trillion, a little more than the country’s annual GDP. This figure is neither the budget deficit (forecast to be £122 billion in 2011-12] nor the national debt, which, despite so-called “savage” public-spending cuts, is on course to hit £1 trillion by the end of the financial year. (The Daily Telegraph)
According to the Office for Budget Responsibility, UK personal debt will grow by nearly 50 per cent between now and the end of this parliament. Come 2015, it is forecast to reach £2.12 trillion pounds. The OBR’s website states: “We forecast that income growth will be constrained by a relatively weak wage response to higher-than-expected inflation. But we expect households to seek to protect their standard of living … this requires households to borrow throughout the forecast period [2011-2015]”.
British consumers’ heavy dependence on debt is not a product of the banking crash and subsequent recession. It took root during the Great Delusion, 1997-2007, a time when Gordon Brown was busy abolishing boom and bust. As the borrowing binge went on, Britain’s savings ratio fell below zero in the final quarter of 2007, at which point consumers were spending more than they were earning. They had become spellbound by Mr Brown’s voodoo economics – a weird belief in the magic of profligacy. Saving was for mugs.
The Consumer Credit Counselling Service identifies 6.2 million households as “financially vulnerable”, including 3.2 million that are already either three months behind with a debt payment or subject to some form of debt action.
On 22 September 1985, Japan, the U.S., the U. K., Germany and France signed the Plaza Accord agreeing to depreciate the dollar in relation to the Japanese Yen and German Deutsche Mark by intervention in currency markets. The Accord had limited success in reducing the U.S. trade deficit or helping the American economy out of recession.
The Plaza Accord signalled Japan’s emergence as an important participant in the international monetary system and global economy. The effects on the Japanese economy were disastrous.
The stronger Yen triggered a recession in Japan’s export-dependent economy. In an effort to restart the economy, Japan pursued expansionary monetary policies that led to the Japanese asset price bubble that collapsed in 1989. Economic growth fell sharply and Japan entered an extended period of lower growth and recession, generally referred to as ‘The Lost Decade’.
In the 1990s, Japan ran massive budget deficits to finance large public works programs in a largely unsuccessful attempt to stimulate growth to end the economy’s stagnation. Japan’s public debt is now approaching 200% of Japan’s GDP. Only structural reforms in the late 1990’s and early 2000’s restored modest rates of growth. In recent times, Japan’s growth has faltered again.
Don’t cry for me Argentina
After a long drawn out struggle between 1999 and 2001, Argentina defaulted on its international debts the IMF had forced onto it. It should be noted that the amount in question was $132 billion, less than half of the Greek debt now. Argentina was forced to reschedule its debt and has still not quite made its way back to normality. Many of the vulnerable countries in Europe are in a much worse position than Argentina in 1999.
Europe, the biggest economy in the world.
The same is now true in Europe where the average official unemployment is above 10 per cent. In many countries like Greece, Ireland, Portugal and Spain, unemployment is around 20 per cent, youth unemployment is around 40-50 per cent, as the economies have shrunk by 10-20 per cent. Understandably, consumer spending is weak.
The disorderly insolvency of the world’s third largest debtor Italy, with €1.9 trillion in public debt and nearer €3.5 trillion in total debt, would be a much greater event than the fall of Credit Anstalt in 1931, thought to be the “trigger” for the Great Depression.
Ireland, Greece and Spain provide an insight into the actions taken to restore fiscal stability, the Irish government introduced a special 7 per cent pension levy and implemented the toughest budget in the country’s history. Public sector salaries were cut between 5-15 per cent. Unemployment and welfare benefits were also cut. More recently Greece and Spain proposed a program of similar budgetary austerity.
A crucial element of the plan is the ability of Spain and Italy to take action to improve growth, however the strict regime of austerity forced by the IMF reduces employment and therefore cuts out the possibility of investment being “worthwhile”. There is
considerable doubt as to whether growth can now occur.
Spain’s economy is weak, with low growth, extremely high unemployment, low productivity and high reliance on debt. As the country has sought to bring its finances under control, Spain’s growth has slowed with an increase in the unemployment rate to 21 per cent and youth unemployment above 40 per cent.
Spain is seeking to reduce its budget deficit, enacting a balanced budget amendment to the constitution. But Spanish debt levels are still rising. Regional finances are even worse.
Spain’s banking sector is heavily exposed to construction, which was affected when the real estate bubble burst. The building sector alone owes Spanish banks around 300 billion euro. The banks own more than 1.5 million dwellings, which are probably worth less than the price paid, and empty.
There are substantial levels of uncompleted building. The Bank of Spain asked lenders to write down the value of their property related assets by 20 per cent but further write-offs may be necessary. Spanish banks are also exposed to European sovereign debt, especially neighbouring Portugal. Given the high unemployment rates, the risk of further mortgage-related losses are present.
Banks could have to write down property-related loans by around 100 billion euro. The need for Spain to provide capital for the banks would place a strain on public finances. Any recapitalisation is also difficult because of the structure of Spanish banking. Around 50 per cent of mortgages are owned by local savings institutions called Cajas, essentially semi-public institutions with no shareholders which reinvest around half of their annual profits in local social projects. Local politicians control how these funds are
used as mechanism for political influence making reform difficult.
Spanish bank outstanding debt is around 45 per cent of the country’s GDP. In addition, Spain’s total private debt stands at 178 per cent of GDP.
Implementation of structural reforms of product and labour markets has been slow. Unions and the population at large are highly resistant to the austerity measures planned.
The EU’s emphasis seems to be on the rarely-adhered-to rules for membership of the Euro, the Stability and Growth Pact requires a deficit no larger than 3 per cent in any one year and a Debt to GDP ratio no larger than 60 per cent. Based on 2010 figures, Austria, Belgium, Cyprus, France, Ireland, Italy, Portugal, Spain and Greece do not meet one or both of these tests on current measures. Only Germany, Finland and the Netherlands are in compliance and would pass in 2013 on current projections.
Australia on China’s back.
During 2008 in China, the GFC job losses in export-intensive Guangdong province were in excess of 20 million migrant workers. Workers and students entering the workforce were unable to find work. Fearful of social instability, the Beijing government moved quickly to restore rapid growth.
Panicked government spending and loose monetary policies increasing available credit is currently driving China’s recovery, contributing around 75% of China’s growth in 2009. In the June 2009 quarter, Chinese exports (around 35-40% of the economy) decreased by around 20% implying that the non-export part of the economy grew strongly.
In the first half of 2009, new loans totalled over $1 trillion. This compares to total loans for the full 2008 year of around $600 billion. Current lending is running at around three times 2008 levels and at a staggering 25% of China’s GDP.
The availability of credit is fuelling, in part, speculation in stocks, property and commodities. Estimates suggest that around 20-30% of new bank lending is finding its way into the stock and property market, driving up values.
Reserve Bank of Australia Assistant Governor Philip Lowe highlighted the extent to which Australia, a major trading partner of China, was reliant on Chinese demand. Lowe noted that 23% of Australia’s total exports went to China in the most recent quarter, up from 4% 10 years ago. China now also takes 80% of Australia’s iron ore exports and 20% of coal exports.
Stories about serviceable roads and other infrastructure being torn down and rebuilt have emerged. There are suggestions that State Owned Enterprises have been instructed to purchase vehicles in excess of their business requirements which are then stored in car parks. Houses, purchased with borrowed money, stand empty.
In China, there are indications that approximately $6 to $8 of credit is currently needed to generate $1 of growth. This is an increase from a ratio of around $1 to $2 of credit for every $1 of growth that prevailed in China until recently.
Policies are increasingly ineffective or prone to unintended consequences. Australia escaped the worst effects of the Great Recession, in part due to population growth. Australian Gross Domestic Product (GDP) grew but GDP per capita fell. But population growth exacerbates environmental problems as well as increasing the pressure on natural resources, such as water supplies. Australia’s economic performance depended on the strong growth of the Chinese economy. Yet China’s poor environmental record and Australia’s emphasis on commodity exports, including fossil fuels, is inconsistent with desirable environmental outcomes.
Ultimately, governments will have to balance the books. With projected public debt as of 2014 at or around 80-100 per cent of GDP (with the dishonourable exception of Japan), the IMF estimates that just to maintain public debt levels, major developed economies will have to run budget surpluses of around 3-4 per cent of GDP.
Governments and central banks have dealt with symptoms but not addressed the underlying causes of the GFC.
The need to reduce the overall level of debt in certain economies has not been fully addressed. Public debt has been substituted for private debt. As his friend Dink tells author Joe Bageant in “Deer Hunting with Jesus: Despatches from America’s Class War”:
“Sounds like a piss-poor solution to me, cause they’re just throwing money we ain’t got at the big dogs who already got plenty. But hell what do I know?”
The last few decades have seen an economic experiment where increasing levels of debt have been used to promote high growth and see the environment further degraded.
This experiment is now coming to an end. Economic growth has been the slowest in the post war era. There has been no net job creation over the decade. Median income
and in particular income levels for middle income earners declined in real terms. Household net worth, representing the value of their house, pensions and other savings, also declined.
A huge amount of assets and risk now is held by central banks and governments, which are not designed for such long-term ownership. There are now no more balance sheets that can be leveraged to support the current levels of debt.
There is no political will to tackle deep-seated problems. The electorate is unwilling to accept the adjustments and lower living standards that will be necessary. As the credit crisis enters its third year, the scale of sovereign debts means that governments now have limited room to counter a new economic downturn and any new problems or crises.
Liquidity and government-driven spending rallies have also caused “bubbles” in emerging markets. There is a risk that the GFC and GSC may morph into an EMC (Emerging Market Crisis).
The global financial crisis may mark the end of an unprecedented period of growth and expansion. It was Ponzi Prosperity where wealth was based on borrowing from or pushing problems further into the future.
The global economy’s dirty secret is that in recent years economic growth and the wealth created relied on falsehoods. It was based on borrowed money and speculation. It relied on allowing unsustainable degradation of the environment in the form of climate change. It also relied upon the uneconomic, profligate use of mispriced non-renewable natural resources, such as oil.
Debt allows society to borrow from the future. It accelerates consumption, as debt is used to purchase something today against the promise of paying back the borrowing in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap borrowing. Business over invests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant
There is a similarity between the problems confronting mankind – the financial system, irreversible climate change and shortages of vital resources like oil, food and water. Toxic debt and toxic emissions increasingly clamour simultaneously for attention. In every area, society borrowed from and pushed problems into the future.
Despite the concentration on returning to growth from a lower base level of output (the U.S. economy shrank by 8.9% in 2008) greenhouse gas emissions which were at historical highs in 2007 have continued their surge to a 4 degree warmer world. Under this veil of economic concern lies the truth of the future. We have no option but to increase greenhouse gas emissions if growth is desired, even the provision of a “Green Economy” must send the world into ecological and/or economic collapse.
The “Degrowth” movement in Europe has evolved and is “philosophising” around “the way forward”. How to lift developing countries standard of living whilst reducing emissions in the developed world leads to one conclusion.
A pathway of contraction in the developed world which aligns with emissions reduction targets (i.e. less growth), increased growth based on an energy efficient future in the southern hemisphere with convergence into a Steady State Economy.
Credit ofr most of the statistics in this piece must go to Satyajit Das and his extremely prophetic mind. His works can be found at http://www.abc.net.au/unleashed/satyajit-das-28168.html