Why Are The Tories Pushing Canada Into Recession?

Remember how the Tories are the party you want to vote for in tough economic times because they're great managers and willing to make the tough decisions? Remember all that stuff?

Yeah, well, the Tories are poking holes in the Canadian economy faster than the rest of us can bail.

Two figures tell the tale. The first relates to the government's quiet austerity. At a time when, if anything, the economy faces contraction and deflation, the last thing you want to do is add momentum to that contraction and deflation. In fact the Tories promised a stimulus budget in the last election - they fought the election on that basis. But as soon as they were elected, it now turns out, the Tories scrapped the budget and started slashing. Is it any surprise that unemployment remains stuck at 7.4% and that the economy shrank in August?

Really, the only thing that has kept the economy on life support has been China's continued demand for resources and cheap money, that made it possible for workers with otherwise stagnant income (at best) to borrow & buy. But the Tories & Bank of Canada governor Mark Carney have put the kibosh on that strategy of ad hoc Keynesianism by making mortgages harder to get. There's still cheap money for the corporate sector - but they aren't buying and are, instead, simply banking hordes of cash. There's no stimulus to the economy from here.

The result: the housing sector, particularly the condo market are headed towards freefall with a 30 percent contraction in Toronto's condo market in the third quarter. Home sales nationally are off by 15 percent. With the industrial sector contracting, this is like solving the sickness of the economy by killing the patient. According to a CIBC report:

"A 5-per-cent per year drop in house prices, for example, would shed roughly a half-point off GDP growth through its wealth effect on consumer spending, given historical sensitivities," he added in his report. "The shift in the volume of construction will be even more consequential. If, as we expect, homebuilding returns to levels aligned with the longer-term trend in household formation, taking [housing] starts from the 220,000 per year range today to 180,000 by 2014, there will be a near 1-per-cent adverse swing in the contribution of homebuilding to GDP growth ... before allowing for any multiplier effects.

The same report forecasts growth of perhaps one percent, but given that August saw a .1 percent contraction, even that seems optimistic. If the housing market continues to contract, with house prices declining, that 1 percent prediction could easily be wiped out. The real question that arises is: why do the Tories want to push the country back into recession?

Harper-nomics Is Recipe For Global Depression & Trade Wars

I feel like I'm repeating myself, having just written that the global crisis is not a crisis of debt but, rather, that the debt is a symptom of the long term decline in the rate of profit. Now, I read Stephen Harper and British Tory Prime Minister David Cameron blathering on about how "This is not a traditional, cyclical recession, it’s a debt crisis," as Cameron put it. The only logical conclusion, if that is the case, is to attack the deficit. And, sure enough, the prescription that they're offering is precisely that.

[Cameron[ urged action on three fronts: • Tackle debt and restore credibility and confidence; • Make it easier to do business and create jobs by freeing up economies; • Work together to boost world trade, starting with the Doha Round.

The translation of those innocuous words is rather more disastrous than they seem at first glance - austerity, de-regulation and more de-regulation. But, as the saying goes, doing the same thing over and over and expecting different results is a sign of mental health problems. The present expression of the crisis was precisely the result of relying on debt to solve underlying structural problems - many of them the result of declining living standards that arose as either a direct result or side effect of past austerity that saw the chipping away at public services. When public services are cut, working people have to pick up the slack with stagnating or declining wages. They can only do so by going deeper into debt or, following the lead of the banks, by trying to boost income by taking advantage of speculative bubbles, either through various types of investment plans disguised as pensions or by cashing in an illusory increase in equity on their homes. In both cases, the chickens ultimately come home to roost - home prices stop rising as they reach the limits of what people can afford and, ultimately leading to a bursting of the price bubble, which causes more foreclosures, leading to a further price collapse and so on. And their pension plans - both private, corporate and, increasingly even public plans - go into crisis, having bet the farm on speculative bubbles and phoney investment "opportunities" sold by investment banks as collateralized debt obligations and other exotic and impenetrable "financial products" that were really just bags of shit painted with a smiley face on them. As far as deregulation is concerned, this is precisely what led to the financial crisis in the first place - as banks were able to package and sell garbage as well as themselves investing heavily in this toxic junk. Deregulation of the financial sector led (combined in many districts with previous cuts to taxes on the wealthy) directly to the present high levels of government (aka sovereign) debt. In other areas, deregulation means more Enrons - which combined with other electricity companies to jack up utility prices in California by illegally choking supply - or more Walkertons, where people died as a result of a water treatment system that was privatized to unqualified companies whose only interest was making money. With that kind of record, do you think that we'll be better off if we remove regulations from pharmaceuticals - which already buy positive research results - or nuclear energy (cough, cough, Japan), or the auto industry, or the food processing industry or... No, at best we'll end up with an economic recovery that is built on more danger and misery for ordinary people as companies produce what they want how they want with no reference to the quality, or safety of their goods. But, more likely the result will be that the Herbert Hoover Re-enactment Society will drive the global economy into a Great Depression Redux. You don't have to be a Marxist to know that smashing consumption at a time when business investment is contracting is about the most stupid thing that you can do. The great lesson of the Great Depression was exactly this: Hoover responded to the onset of the Depression with austerity, making it worse than it had to be. Roosevelt prematurely tried to rein in the deficit in 1937, leading to a steep decline in the economy until the approach of war led the US - and almost everyone other country - to pour resources into re-tooling entire economies towards war production, thus re-inflating consumption. Ultimately, the lesson from the Great Depression is that the real goal of idiots like Harper was to massively devalue the cost of commodities as a way to restore profits. Unfortunately for the mass of the population the main target of depreciation was wages and working conditions. The elephant in the room is China, with its decades long growth rates approaching (or surpassing) ten percent. Manufacturing is drawn to China like a moth to a backyard bug zapper because of the cheap price of labour, making it the envy of every corporation on the planet. And, for governments in developed countries, unwilling to invest in new infrastructure by raising taxes as an alternative way to compete, the idea of out-sweat-shopping China is appealing. Certainly China's living standards are rising at rates that would make western workers, with their stagnant living standards, drool. But they are rising from such a low rate that even after more than two decades of constant growth - at rates lower than the overall rate of growth, it's worth saying - they are still a fraction of living standards in the west. And that presents a problem not only for western workers who can't compete with such low wage rates. It also presents a problem for western capitalists. If the rise in China's living standards aren't enough to meet those of western societies in time to save their economies, then the living standards of western economies must be depreciated rapidly in order to compete with Chinese labour. This is the real meaning of calls to "boost world trade." They will boost world trade by making goods from the west cheaper and they will be made cheaper by reducing labour costs. While that seems horrific if you happen to be a member of the working class - i.e. of the majority - it would seem to a blinkered pro-capitalist politician to make a lot of sense. The trouble is, it won't work. It's an unbendable rule in physics that every action creates an equal and opposite reaction. China has a ruling class perhaps more cognizant than most about its long term interests. It is their intention to allow a slow and controlled rise in living standards as their economy approaches "development", rather than being a "developing economy". Their recent acceptance of a rise in their currency is an expression of this goal. But not only will the immediate effect of Harper's & Cameron's austerity recipe increase the possibility of a series of profound financial and economic collapses, they will be met be a reaction from China that will attempt to neuter the effect of a rapid decline of living standards in the west. History never repeats itself exactly but, in this case, austerity must be understood as a trade war by other means. AFTERWORD: As a side note, another option to which ruling classes have traditionally turned has been protectionism. At present the dominant thrust - with memories of World War Two, which emanated from protectionist responses to the Great Depression - has been towards austerity and deregulation as an alternative to protectionism; a sort of race to the bottom model. But the protectionist model is also a dangerous game to play and so it is deeply disheartening that the Ontario NDP in the present provincial election has made "Ontario first" a central plank of its job creation platform. First of all, on its own this will have negligible effect. But secondly, it's not the case that a government gets to impose protectionist measures and there is no reaction. Of course the WTO would step in but Ontario gets significant inputs and products from countries around the world and a trade war with a minor economy like Ontario's would be economically and politically devastating. It also suggests that the problem is a regional and not a class one, as though Quebec train manufacturing workers are less deserving of work than Ontario train manufacturing workers. It is fundamentally a politic built upon a passive acceptance of the status quo. It is not left wing at all and has no role for working people - across provincial, let alone national boundaries - struggling together to defend their living standards from the corporate predators and their representatives like Stephen Harper. That is, of course, the perspective of union bureaucrats who would rather the NDP pass meaningless legislation than mobilize their members but it is a disaster for working people.

Could Ontario NDP Pull A Layton?

This is interesting:

The Forum Research survey found Hudak’s Tories at 38 per cent — down from 41 per cent in June — to McGuinty’s Liberals at 28 per cent, up from 26 per cent. NDP Leader Andrea Horwath jumped to 24 per cent from 22 per cent and Green Party Leader Mike Schreiner was down to seven per cent from eight per cent.

The article goes on to note that the NDP leader - Andrea Horvath - has the highest rating of all the leaders. I have to admit that while I read the papers regularly I have seen almost nothing about Andrea Horvath in the news. That's not at all a criticism of her. The NDP are not the Official Opposition in the Ontario Legislature and tend to not get covered, plus not much has been happening, except for the early stages of campaigning - mostly statements from the Tory leader about what scumbags they'll be if we're dumb enough to elect them. What this suggests to me is that there is a continuing impact from the federal election, which gave the NDP massive national momentum, particularly in Quebec though they began to pick up steam in Ontario in the dying days of the campaign. The second thing that this suggests is that the population is shifting to the left.

It has helped that Hudak made the mistake of announcing that he's anti-choice on abortion in a province where a whopping +90% describe themselves at least nominally as pro-choice. Only about 8% are against abortion under any circumstances. But, the economy continues to be a source of concern for working people with manufacturing having not recovered from the recession of 2008-2010 and not likely to return to pre-recession levels for several years.

Manufacturing shipments slipped over the past three months from a post-recession high in January, largely reflecting a slowdown in export sales to the United States. Sales in April remain 13.6 per cent below the prerecession high in July 2008.
In the first four months of 2011, sales totalled $84.6 billion, up $5.7 billion (7.2 per cent) from the same period last year. Year-to-date, year-over-year growth has been led by transportation equipment, primary metal, machinery, fabricated metal and petroleum/coal products.
Looking ahead, Ontario’s manufacturing industries are forecast to post relatively small GDP growth rates through to 2013. Total manufacturing GDP growth in 2002 prices (i.e. net of price inflation) is forecast at 1.8 per cent in 2011, 1.8 per cent in 2012 and 2.1 per cent in 2013, down from 8.2 per cent in 2010. Ontario’s export-oriented manufacturers will struggle over the next two years with a currency around par and below normal demand in the U.S.

Employment remains unstable and isn't looking to improve. In fact, the debt ceiling fiasco in the USA makes it likely that we'll suffer negative economic consequences, particularly in the manufacturing (and thus export) heartland of Ontario. It's likely that there is a receding appetite for deeper neo-liberal assaults on living standards at a time of difficult economic conditions - not dissimilar to opinions in the US where only 7% of people think cutting services is a good idea, rather than dealing with jobs. The Tories are, of course, most associated with Republican style cuts to services and taxes for the rich. The NDP are associated with spending on services and investment. The Liberals are seen as being the party that holds the line, "finds a balance" and all those other cliches that cover for the fact that they use compassionate rhetoric while implementing Tory policies (not so very different from the NDP when it comes to economic issues actually). It probably doesn't help that our mayor is both a Tory and a moron and is doing a tag team routine with his brother (and their trained monkey, Giorgio Mammoliti) to lose the respect of as many people as possible in the GTA in record time.

Ontario and Quebec between them have well over half of Canada's total population and a solid majority of the country's manufacturing. Let's hope that opinion continues to swing leftwards towards the NDP. A big uptick in NDP support - and seats in the legislature - will help continue the Orange Wave that is transforming Quebec politics and mark a real Achilles heel for the federal Tories.

US Debt War Will Lead To Recession

Hate to say it folks but there's about a snowball's chance in hell that the world won't have returned to recession by the end of this year. There are many factors involved that make this likely - the necessary slowing of China's growth, the defaults and austerity packages rolling around the south of Europe and the UK, the lack of any life in the North American economy. But it's also certain that the US debt situation has cemented that inevitability.

The irony of the hullaballoo between Obama and the Democrats on one side and those zany Republicans on the other is that it has focused the attention of everyone in the USA - not to mention the planet - on the fact that America is choking on debt. Being America, which recoils from government spending, other than enormous and wasteful military budgets, like Dracula recoils from garlic, the obsession is with government debt, rather than total debt. But that is another story. It is unlikely that anyone in the USA, by the end of this Gong Show, will think that the US economic or political system is stable.

The fear of instability is a self-feeding depressant when it comes to consumer spending and investment, especially when the vast majority of the population already feel that their incomes and investments in things like houses are unstable. Of course, the Republican demand that the Debt Ceiling Cage Match do a quick lap before returning early next year for a second round will only exacerbate the instability effect. But, then, from the point of view of the reality-challenged Tea Party, it will be an excellent opportunity to have an issue that they love - government taxation and expenditure – with which to beat Obama as he heads for re-election.

But instability fears aside, there are less ephemeral reasons to expect that the economy is going to take the off ramp to Downersville no matter what the ultimate solution to the debt ceiling crisis is.

First is the possibility that the split in America's two corporate parties is so profound that neither is willing to blink prior to the default date. They may both be so certain that the other party will be blamed for the fiasco - and so confident that the default will just be a minor bump - that they take the chance. So, let's take a look at what a default will mean.

At the most obvious level, no one will want to buy American bonds. Or, rather, they will want to be paid a premium interest rate before they will buy bonds to make up for the obviously heightened risk that the US won't make a payment. But, as economist Paul Krugman points out, this is already taking place in the context of what's called a liquidity trap. Basically, even with interest rates that approach zero, people would still rather not borrow or spend money, which they feel has more value and stability than debt. In other words liquidity is trapped because people hang on to it. If people are already not willing to borrow money when it is practically free, they are certainly not going to do so if interest rates rise significantly to make up for instability. And that's the trillion dollar question - would an increase in interest rates on short term government debt feed through to private interest rates. Again, according to Krugman:

What gets tricky here is the question of whether private borrowing costs rise in tandem. For corporate bonds, maybe not. But the GSEs (public enterprises - like the recently nationalized Fannie Mae and Freddie Mac - sw) pay rates that are tied to the cost of government borrowing, and they are the main sources of housing finance, so mortgage rates would probably rise.

The upshot of it all is that an increase in interest rates at present will definitely choke off the borrowing necessary to give the US economy any lift at all. It will mean an increase in foreclosures, already at record highs, and bankruptcies as debt servicing costs rise.

And that is only the most obvious effect. What is the great unknown is what the effect will be upon global stocks and the world financial system. After all, the US dollar is widely held as the international currency reserve and trillions of dollars in US debt are held by banks, countries and corporations around the world. The dollar will likely drop as Treasury Bills can only be sold at high interest rates and there is a "flight to stability" - we already have seen this with the appreciation in the value of the Canadian dollar or, rather, the depreciation of the US dollar. Will the global financial system lock up, as it did in 2008, as no bank can trust any nation, bank or corporation not to be over-exposed to devalued US debt, which must be written off against assets?

Of course, there will be a very immediate and obvious effect for a large section of the US population if a default happens - their cheques won't come. Social Security cheques won't get mailed, nor Medicare or other programs. People who do business with the federal government won't get paid and so, likely, their employees won't get paid either. With government spending there is something called a "multiplier effect" - basically, every one dollar that the government spends on things like infrastructure or services, is multiplied by the impact it has on the broader economy; the dollar pays a wage that is spent on consumer goods that helps to hire more workers, etc. Default will be like the multiplier effect running in reverse.

AUSTERITY

But even if Tweedle Dee and Tweedle Dum do manage to agree a compromise, which still seems most likely, there will be seriously negative economic effects. We saw with the Greek economy last year that when they implemented austerity measures as a condition for the first bailout, the result was to send the country into a recession that led to higher unemployment and lower tax revenues - which led to the need for a second tranche of bailout money this year (leading to strikes, riots, etc). That's because, according even to the IMF, every one percent cut in the deficit leads to a half a percentage decline in growth rates over two years. At present the US deficit - the annual revenue shortfall - is running at about $1.2 trillion with an accumulated debt of over $14 trillion. Both the Democrats and Republicans are agreed on plans to cut government spending by close to $3 trillion over ten years. It's not at all clear how they come to that number and for certain it is being boosted for public effect but using simplistic math it works out to something like $300 billion per year. That's 30 percent of the budget deficit, which can't be right or it's completely insane. But, for certain, what both Republicans and Democrats are talking about is austerity and austerity in the midst of an already weak economy will push its head back under water in what Krugman has called "the great mistake of 1937" when President Roosevelt and Congress decided to rein in spending, sending the US into a deep spiral that only ended with the massive arms build-up - and thus public spending - of the Second World War.

It's all so unnecessary. First off, the public debt is nothing compare to the private sector debt in the US economy. The US government - other than by idiocy - is nowhere near foreclosure, bankruptcy or risk-generated high interest rates. It is probably the most solvent part of the US economic system. Secondly, much more, if not all of they money could be generated by restoring tax rates on the wealthiest Americans that have been cut in the last thirty years. According to Tea Partiers - and agreed in practice by Obama and the Democrats. The "alternative plan" by Harry Reid, Democratic Senate Majority Leader, contains no tax increases on the wealthy. His plan is backed by Obama. But here's the thing - tax cuts have less negative effect on the economy than do cuts to "entitlements" and public services. The reason is simple: the rich have a surplus of income, which they put in the bank. Workers have little more than enough to get by and so spend their money buying goods and services rather than saving it. The utter failure of tax cuts, which were the mantra of the Bush years, ought to be obvious from the fact that the US economy is in the tank and debt levels have never been higher. Well, debt levels have never been higher for some. As Joseph Stiglitz, a Nobel winning economist wrote in an article in Vanity Fair in May:

The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top....

That is the real reason why the Democrats and Republicans can contemplate the pain of the cutbacks versus either stimulus spending to help the economy or tax increases on the top one percent to reduce the deficit. Because they are closer to the top one percent than they are to the bottom 99. As Stiglitz goes on to say:

Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent.

So, don't lose any sleep for the politicians who are bickering over which of them gets to drive the high speed train into the depths of hell. They aren't losing sleep. After all, it's us who will be on the train. They'll be watching it on Fox News and CNN and congratulating themselves on what a great job they've done.

Today's U.S. Economic News: This Parrot Is Dead

The jobs report is out and like all of the other economic indicators, it shows that the US economy is going nowhere fast. The whole of this year has been about watching the optimism that started the year turn sour bit by bit as the remaining effects from the stimulus spending have evaporated. The reality is, the Anglo-American model of market driven growth, deregulation and the repression of trade unions, has not done what it claimed - create a virtuous cycle of endless growth that superceded the stagnation in productivity and innovation that supposedly plagues economies that have greater state intervention.

The present "soft patch" - known in the jargon of regular folks as a recession - is one more stake through the heart of the neo-liberal consensus that has haunted us since the end of the 1970s. It's worth noting that this has never been about state vs market capitalism. Every capitalist state uses elements of both. Every American boom has, particularly since the 1980s, been about increasing the levels of debt in the economy as a means to reinflate it in the face of weak growth. This is, in economic effects absolutely not a whit different than Greek (or any other) state debt - as I've discussed elsewhere. In terms of an economy having room to maneuver - through state or corporate or consumer or combined purchasing - the level of total debt is the key number. Attacking state spending is just the latest way of attacking working class living standards, full stop. Now, I'm no fan of the capitalist state but to think that it was more rational to simply print money and drop interests to the floor so that uncontrolled investment and speculation could ensue - rather than focusing investment on things that the national economy needs - was always absolutely barmy.

American political and economic leaders (and Canadians and Brits) have been strutting around since the "Japanese model" went bust about 15 years ago, bragging about how effectively their model was generating wealth. In fact a significant portion of the "new" wealth was made up of phoney speculative wealth, exotic debt instruments, sub-prime mortgages and the like - the Chinese and others were directing investment into needed infrastructure. For example, China now has 13,000 km of high speed rail - more than the rest of the world combined - which will climb to 25,000 km by 2015. The USA (and Canada) have 0 km of high speed rail. Shall I repeat that: there are zero kilometres of high speed rail in North America. And when Obama suggested a role for the US state in spurring investment in high speed rail, the mouth-breathers in the Republican party and Fox News went apoplectic. The only welfare program they support is $1 trillion for the military, tax cuts for the rich and bailouts for the banks. Meanwhile, America has also fallen behind in renewable energy technology in relation to Asia in general and China in particular. Seven of the world's 10 largest solar manufacturers are Asian, with the number two company being China's Suntech Power. And China invests four times the amount in clean technology as the USA.

Don't get me wrong, I'm not at all suggesting that China is a utopian model - neither in terms of long term economic stability, nor in terms of basic freedoms - but if a crash comes in China, at least they can ride the trains. In the US all they'll have is guns and empty, foreclosed houses. Though, come to think of it, having the former could solve the problem of the latter. Who's going to evict a heavily armed squatters' movement?

U.S. jobs growth brakes sharply in May - The Globe and Mail

The Tories' Bankrupt Brains

"I see, said the blind man to the deaf dog, who wasn't listening anyway" is a phrase that comes to mind reading reports of federal Finance Minister Jim Flaherty's press conference on the economy. Generally speaking we expect governments to do more to solve looming crises than beg somebody else to do it for them. It is a sign of just how ideologically blinded are the Tories that they will ride the HMS Neo-Liberal to the bottom of the economic ocean before they will take any initiative to plug a leak using the instruments of state.

Capacity Utilization

Flaherty's response to flagging consumer demand has absolutely no hope of staving off a looming second dip in the as-yet-unfinished recession of 2008. The decline in consumer spending as we regular folk are saddled with historically high debt - there was a brief dip in debt as a percentage of income before returning to a generally upward trend toward 150% - means that 60% of what normally makes up economic expansion has been taken offline.

And while industrial investment and new machinery is up - in part because the rise in the Canadian dollar has made imported capital goods cheaper - has a number of inbuilt limits in terms of saving the economy. The first is the dead consumer demand to purchase goods of any new production capacity. The second is the fact that capacity utilization - the measure of how much new machinery is being used; is it running flat out or sitting idle part of the time? - is still at the lowest levels in a decade, sitting at 76% and levelling off.

And while manufacturing saw growth in 2010, it is still 15% below where it was at its peak in 2006. And even corporate debt levels, which declined during the recession, only declined by about 4% in relation to income from their peak and are rising once again. With the slowdown in the US and a slowdown looming in China, plus the disaster in Japan, along with inflation of raw materials running at a whopping 22%, this is hardly the moment when corporations are likely to find the dosh to ratchet up capital purchases to anywhere near what is necessary. In fact, when Flaherty says that the corporate sector is "relatively flush" with cash, they could easily reply that, in fact, total corporate debt to equity ratios - at 166% - is considerably higher than total government debt (i.e. federal, provincial, municipal, etc) to GDP, which is running at just over 107%. In other words an economic bailout from the fragmented corporate sector, each trying to gain competitive advantage over the other, just isn't in the cards.

And, as I discussed in my previous post, there is every chance that, in addition to weak economic figures, the government could face pressure to raise interests rates to deal with inflation, originating with the high cost of raw materials. And nothing kills an anemic recovery more effectively than high interest rates. The net result could easily be that the Stephen Harper's hope and dream of forming a majority government may come back to bite him in the ass. They don't have the Liberals to kick around anymore as a hindrance to doing what needs to be done. They will get all the blame if things start to really go south. Unfortunately, for the rest of us, we don't risk unpopularity - it's our livelihoods and ability to pay the bills that are at risk.

Time for business to take the lead: Flaherty - The Globe and Mail

The Return Of Stagflation?

Those of us around in the 1970s will remember the term stagflation - a combination of economic stagnation and inflation that created a conundrum for bourgeois economists: do you move to rein in inflation by tightening credit and imposing wage and price controls - or do you seek to boost economic growth by loosening credit and "priming the pump" by injecting billions into state directed projects. As it happens the first thing they did was attack workers by imposing wage controls (price controls were bullshit), either through direct legislation (Canada and the UK) and/or by encouraging open war on the collective bargaining right of unionized workers (Reagan's firing of 10,000+ striking air traffic controllers). That was combined with interest rates that went through the roof - up to 20% at their peak. Then, once the working class was defeated, there was a return to loose money - Reagan increased military spending (and thus the deficit) massively, there were big tax cuts for the rich and policies that encouraged the growth in speculative investment (and, thus, stock and property bubbles).

Well, if you liked that economic bloodbath the first time around, get ready for the next round.

First off, the damage - both social and economic - from that first battle against stagflation is still with us. The North American economy is much more "financialized" than it was before. Speculative bubbles - that roam from sector to sector; now in stocks, then in tech, later in housing followed by commodities - continue as a matter of policy in an attempt to keep the economic inflated. In fact, price and credit inflation - combined with social and wage austerity - is the economic policy of western governments to this day.

But they face a problem that is the result of the success of these policies in many ways. The Chinese miracle is, in part, a product of the fact that increasingly squeezed western workers, particularly in the USA but also in Europe, need the cheap goods produced in the sweatshops of China to sustain their standard of living along with access to easy credit. China's export led boom can't be separated from the boom in debt in the west - total US debt, private and public, is now close to 400% of US GDP. Nor can it be separated from the decline in unionization and real wages (which includes the "hidden" social wage of services previously provided by governments and now privatized - from public pools and community centres to welfare and unemployment insurance rates, pensions and healthcare).

The debt/sweatshop model could work for a while but it reaches its inevitable limits when debt simply can't grow any further; consumers and businesses can't afford to add any further to their debt servicing costs. Oh, this can be creatively skirted and hidden for a while - the exotic debt products of the first decade of this century proved that. The crisis of 2008, however, was a sign that the debt shell game was coming to an end. Massive state intervention was able to prevent total economic collapse but it can't wish away the debt loads held by everyone and that means that growth will, at best, remain sluggish after the brief episodes of state intervention end. In weaker countries, like Greece, it means the threat of default as international bankers, the lowest form of human, try to push a program of massive debt privatization - so that they can recoup state loans as though depressing consumer demand will somehow save an already depressed economy.

These recessionary pressures are bad enough but the boom in China - itself fuelled by debt, perhaps half of it bad - has had the effect of jacking up global commodity prices. This creates a conundrum for China - on the one hand capital investment (infrastructure, new manufacturing plants, etc) has led the growth in China, as opposed to a growth in consumer demand. That means that China needs a higher valued currency to lower the costs of imported raw materials. But it needs a cheaper currency in order to keep their goods - for which there isn't a sufficient internal market - cheap for export. The Chinese leadership is trying to change the balance between capital and consumer investment but faces lots of hurdles.

While there is much talk about the "efficiency" of the one-party state in terms of being able to rapidly implement policy shifts, things aren't that simple in a country - and an economy - this size. The rapid growth of China over the last thirty years has created a large, wealthy and very powerful capitalist class, primarily concentrated in the coastal cities. They have regional fiefdoms that are dependent upon cheap and plentiful credit and infrastructural and capital investments (and corrupt kickbacks therefrom). And they have a number of tools at their disposal to resist the central government's attempt to change the priorities of investment. One of them is simply to create an underground credit economy to loan money for projects as they see fit - it's estimated that close to one third of all new loans in China are through this sector. The other mechanism is to simply send money offshore to tax havens before cycling is back into China to invest as they see fit - over half of the $1.1 trillion in foreign direct investment into China is, in fact, money of this sort and not really "foreign" money at all. Foreign investment has, in fact, stagnated for over a decade.

The Chinese government also faces pressure from the ordinary people of China - workers and peasants - who see and feel the results of the "Chinese model" of development first hand. Peasants are expropriated by regional governments for their pet projects - from dams and wind farms to chemical plants and other manufacturing facilities. Workers see the investment boom year after year after year and haven't seen a commensurate amount of wealth "trickle" down to them. This has led to mass - though still fragmented - resistance. In March of last year, in the town of Huaxi, 20,000 people took over the town and threw out the 3,000 local cops, then burned police property and, get this, sold tickets to the rebellion. The revolts are having an effect - many companies are giving pay hikes of 20-40% in order to end strikes and rebellions by workers.

The failure of the Chinese government to effect the sort of change that the entire leadership in China - in words - recognizes is necessary, means that pressure is building that is effecting the global economy. Commodity inflation is killing the fragile economy in Europe and America (oil economies like Alberta aside) as more income and profit goes to just covering the basics. Back in China this translates into a slowing of the export-oriented manufacturing sector - still accounting for about half of GDP (I believe). So, China and the world face the combined impact of an over-heated Chinese capital investment sector, leading to global price inflation (and to wage inflation inside China) and the potential return to recession. With even less room this time around to use the instrument of state investment to prevent the return of economic crisis - because of high debt and high inflation - it's unclear what governments will do this time around. Pray, I suppose. Or fiddle - while Athens, Rome, Madrid, et al burn.

Some links:
FT.com / Comment / Analysis - Global economy: A high price to pay

Brake in manufacturing momentum in Europe, US, Asia - The Economic Times

Dissecting the Chinese Miracle | STRATFOR

10 Global Signs That the Market Is at a 'Tipping Point' - Seeking Alpha

Why Rob Ford Could Win

The Toronto mayoral election is a pretty depressing and sordid affair. In fact, affair is the appropriate word to begin a post on the Toronto election since the candidate of the "left" - Adam Giambrone - was forced to resign after it was discovered that he was texting naughty messages to a media inclined, young actress. Apparently she thought it was a little hypocritical for Giambrone to paint himself all senatorial by suddenly appearing with his girlfriend when he was secretly schtupping her on the office couch. Fair enough.

And, sad to say, that's a fair enough symptom of why Rob Ford may well win the mayoral election.

The left on city council - the people I have voted for since I voted in elections - alternate between being as respectable as an urban lawyer who shops at Pottery Barn and drinks fair trade coffee, and dull as dishwater. The only time they do anything political of note is when they trailed behind the frothing-at-the-mouth duo of Ford and Mammolitti after the G20. Every single one of them voted to congratulate the police.

Well, here's some news to the politicians: we've been suffering through a recession, we've been losing jobs and seeing house prices go through the roof simultaneously. People are angry and feel, with good reason, that the politicians are mealy-mouthed, pocket-stuffing, opportunists with no vision, no spine and no principles. And, like it or not, Rob Ford speaks to the anger that people feel.

I mean, look at his political opponents.

George Smitherman - come on, people. The only thing "progressive" that this guy has going for him is that he's gay. He's thoroughly establishment in outlook. Pink Bourgeoisie, you could say. His politics really aren't that much different from Ford's in substance - except that he smells like a snobby, urban lawyer who shops at Pottery Barn, etc.

Joe Pantalone - who? A nice guy with a decent record (though he voted for the police after they put a choke hold on democratic rights). His only achievement in this election will be to change the famous aphorism about nice guys to "nice guys finish third".

The other candidates are "also rans" and not worth much discussion.

That leaves us with the thoroughly odious motherf****er, Rob Ford. I grew up in Downsview, which is part of North York, so have a long memory of a certain Mr Mel Lastman. Then I moved downtown to escape my childhood stomping ground only to have that bloody carpet salesman follow me like a venereal disease. However, looking at Ford as mayor makes me long for Mel. Ford lacks the charm of Mel Lastman, who was like an affable but slightly demented and criminally inclined uncle that was fun at family reunions. Sure, you wouldn't want him as the family spokesperson but he could be counted upon to make you spray food out your nose with his off-colour, slightly offensive jokes.

Ford isn't even a clown - except maybe in the Stephen King sense of the word. Ford is like one of those sociopathic teenagers who shoot cats with pellet guns for the pleasure of causing pain to another living creature. Sadly, sometimes such sociopathy appeals to people for one simple reason: if you can't fight the people above you, kick the people beneath you who are weaker.

Let's face it, the union movement did sweet-f**k-all to resist the recession. Even the once mighty Canadian Auto Workers, who split from their American kin because they were militantly opposed to concessions contracts, offered up their members' veins for a good bleeding. The NDP are a part of Joe Pantalones. 'Nuff said. In other words those organizations and movements that ought to have shown an alternative to the smash-and-grab neo-liberalism of the Harper Tories and McGuinty Liberals and corporate Canada - have done nothing. There have been some noble attempts by trade unionists closer to the ground but the official union movement - the CLC, the OFL, the national unions - have all turtled.

Rob Ford is the ghastly result of that failure.

I can already hear all my lefty friends, particularly of the NDP variety, bemoaning the victory of Rob Ford on election night. I've already heard people saying that they will move out of the city (to go where? Calgary?). It will be a drag but Ford is a buffoon and he's not the candidate of the Toronto bourgeoisie, who want Smitherman. Ford is also despised on city council, whereas Mel knew how to build alliances. I mean, this is a guy who was thrown out of a sports game for picking a fight. He's hardly got the temperament to navigate Toronto city council. I don't think that anyone should be complacent and the movements ought to start fighting him now. But I predict that he will be the best enemy money could buy. Within six months a sizable chunk of every class in this city will want to destroy him.

Amplify’d from www.thestar.com

James: Despite attacks, Rob Ford’s simple message takes hold

By Royson James City Columnist

The leading mayoral candidates have so far shown a stunning lack of understanding of the force that fuels Rob Ford’s unlikely grip on the Toronto mayor’s race.

They call him names. They mock him. They tell anyone with a microphone and a pen that the rambunctious councillor is a buffoon with foot-in-mouth disease, a one-trick pony incapable of competing in the sophisticated world Toronto must navigate.

As if the voters don’t know this already. Ford’s been a councillor for 10 years. His file of verbal indiscretions is thick and well worn.

In fact, with every effort like George Smitherrman’s launch of the FordonFord.com website, intended to showcase the celebrated gaffes of the councillor from Etobicoke North, Ford gains in popularity.

See this Amp at http://amplify.com/u/8qse

MacLeans Magazine Is Right! Lock Up The Thugs!

Democracy makes MacLeans froth like a dog

I never thought I'd say that I agreed with that bile-oozing catalogue of demagogic, Tory-fellating asininery that is meant to be our version of Time Magazine. These toads give new meaning to trollness. That's why I was surprised to find myself in total agreement with this week's front cover title - "Lock them up: Why the G20 thugs don’t deserve any leniency - Canada"

Dammit, they're right. Those G20 thugs should be locked up and the key thrown away. Why just last week the US military killed a bunch of people in Afghanistan. And Harper spent $2 billion to host these miserable cretins, including the oppressors of Tibet (China), the blood-soaked British Empire (retired), and the god-awful French who still find time to keep their claws into parts of Africa, not to mention treating their own North African population like utter shite. Never mind that France, the US and Canada played an important role in deposing Jean Bertrande Aristide, the democratically elected president of Haiti, in order to replace him with death squads backed up by Canadian and UN troops - who committed a massacre in 2005 in Cite Soleil. These thugs came out of this summit with the plan to impose austerity (read: layoffs, tax breaks for the rich and massive service cuts for the rest of us) on the majority of the world's population. I mean, what would you call any group of people who lash out uncontrollably, leaving death and destruction in their wake - sociopath, perhaps but thugs will do for me.

Oh, wait. I misunderstood the article. MacLeans meant that WE are the thugs. Shee-it, what was I thinking?

"Only the professionalism and preparedness of police prevented circumstances from being much worse. Rather than an inquiry, we need further police effort to ensure every one of those lawless thugs is brought to justice."

Ha ha ha. Are these guys serious? They must have been drunk when they wrote this. Or, embarrassingly, it was written by some boob who'd only managed to catch Christie Blatchford's trollish and dubious take on events. Somebody ought to tell this writer, after all, that the government spent $1 billion on security, had 20,000 cops on the scene, and had infiltrated the main anarchist organization for over a year, and was therefore in on all the plans. If that's preparedness, then the bar has been set pretty low. But having ensured us that no matter what fuck-up the cops engaged in we were clearly hallucinating it or missing the point, the editorial dismisses the complaints arising from the largest mass arrest in Canadian history:

"It’s possible many of those arrested for breach of the peace were not directly involved in any violence. But they were released in a matter of hours. Canadians’ constitutional rights have survived the ordeal unscathed."

Let's see, 1000+ arrested, less than 20 charged with any offences. That's a charge rate of 2% - or rather, a failure rate of 98%. And given that the cops failed to do what they received $1 billion to do, the fact that they compounded that failure by suspending the civil liberties of everybody, doesn't reflect well on their, you know, preparedness. But, again, this utter failure to achieve any aims that one could regard as reasonable goals in the present circumstances - to permit business and normal life to continue uninterrupted by the G20 circus, to permit the citizenry to exercise their constitutionally enshrined right to express a dissenting an opinion - doesn't seem to disturb MacLeans Magazine, which fulminates that "whatever steps the police took to prevent [the black bloc from disrupting the Summit] were both necessary and welcome."

That's a pretty big blank cheque when, given the 5 metre high fences and 20,000 cops on parade - along with all the toys that the boys in blue love, from helicopters to sound cannons - there wasn't a snowball's chance in hell that anyone was getting anywhere near the Summit. All the cops had to do was sit side-by-side at the fence, sipping tea, and poking through the holes with a stick every now and again and nobody would have made it over, let alone inside the Convention Centre. The truth is MacLeans has a deeper agenda at play here and it is one that ought to chill our spines if these cockroaches ever got the reins of power.

"The protection of free speech and assembly can only exist when there is proper respect for the rule of law. Legitimate protest acknowledges the existence of state authority while providing a different point of view. "

This idea that the citizenry must exist in a state of servitude to the state, accepting its authority no matter what, is frighteningly reminiscent of fascist ideology. What if the state is corrupt or serving interests other than your own? Should Nelson Mandela have "acknowledged the existence of state authority"? How about protesters during the Vietnam War? Or those who fought against the laws of the Canadian state that prohibited access to abortion - or criminalized homosexuality? Clearly, MacLeans either hasn't thought through the madness that they doth preach or someone should give them a very basic lesson in the precepts of democratic rule, in which the state exists to serve the sovereign people and not the other way around. Or perhaps they know full well what those precepts are and are just honest about their view of the role of those of us who can only access power through mass mobilizations. Our role is to shut up or face the justifiable consequences.

Crypto-fascist kookery aside, the MacLeans article is like a sad, over-told joke, proclaiming as has been done again and again that "the global protest movement appears to be losing steam." What are they talking about? The anti-capitalist movement that had it debutante ball at the Seattle protests in 1999? Somebody ought to update these guys on the history of the last ten years. It's been rather tumultuous what with multiple wars, both those that Canada has participated in and those that we have supported - like Israel's thrashing against anything and anyone who might have a problem with genocide. The cycle of mobilizations has certainly seen its ups and downs, such is always the case. But with the conflicts that mobilized people not ending. With growing anger at Israel's treatment of the Palestinians and their supporters int he wake of last year's invasion of Gaza and the more recent aid flotilla slaughter. And with the bewilderment and bitterness that the economic disaster of global capitalism is causing, it is hardly the case that the "global protest movement" is going away. With general strikes rocking Europe and with 25,000 marching in Toronto - the largest mobilization since 2003 - if anything there is a renewed vigour. In any case, none of us need worry about our civil rights or the issues of the day, the important thing is that the G20 leaders agreed a consensus on what next.

At the end of the day, debate over street violence, protest and police ought to be secondary to the summit’s practical achievements. And the G20 summit did conclude on a note worthy of some optimism: a pledge to cut government deficits in half by 2013. While this only applies to the most advanced economies within the G20, it is still a step in the right direction. Bringing the world’s major economies back to fiscal balance is crucial to closing the book on the Great Recession.

This is a fitting closure to an obtuse and delusional editorial. As Nobel Prize-winning economist Paul Krugman and others have noted, implementing austerity when the economy is still such a mess is merely a recipe for an even deeper recession, perhaps depression. The threat at the moment isn't inflation generated by too much deficit spending. It is deflation, particularly in the face of a dramatic shrinking of money supply by reining in government spending. The Japanese could teach us a few things in this department, having done the same thing back in the 90s, causing what became known as "The Lost Decade". In a recent NY Times article Krugman argued that there have been two major Depressions in the past 150 years and that we are entering into a third. And this Depression will be the result of foolish economic policy, ie. imposed austerity at a time when stimulation is necessary. Claims that the crisis in Greece or Ireland demonstrate the need to slash and burn public services, pensions and wages are not rooted in reality, but in a destructive dogma.

I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

To my way of thinking, people who deliberately inflict pain on others to demonstrate who is in charge is the very definition of thug. And yes, MacLeans, I agree: these thugs ought to be hunted down and brought to justice. Let's start with you.

Brits Whack Bankers As Study Proves They're Parasites

WHAT COULD BE MORE FUN THAN SMACKING A GREEDY BANKER with a mallet and not only getting away with it but having the chance to win a teddy bear for your kids? It seems that the idea is very popular in Britain where an arcade owner who has put in a game of "Whack A Banker" has had to replace the mallets several times over.
It's no wonder that the game is popular. There has been a simmering dispute, for instance, between the board of directors of the Royal Bank of Scotland and the government over bonuses. The board is demanding the "right" to pay out £1.5 billion in bonuses at the bank, even though there business sense is so utterly crap that the government has had to pump billions upon billions of pounds into the bank to keep it afloat. The government is set to own up 84% by the time all the pieces fall. And while millionaire bankers want to use public funds to pay themselves bonuses - for what great feat, I'm not sure - the average salary in the UK is £20,000. The board of directors is threatening to resign if they don't get their loot.
And, just to confirm the public's belief that bankers are greedy parasites, a study by the New Economic Foundation in Britain has found that for every £1 they are paid, bankers destroy £7 worth of value. This contrasts with childcare workers, for instance who create £7 worth of value for every £1 they are paid. So much for the rich being rich because of their contribution to society. As I suspected all along, it is the poorest who contribute the most with socially useful work, while the rich are a big drag. As the study notes:

It said the report challenged the notion that high pay did not matter as long as poverty was eradicated. It argues that high pay is often generated by businesses that destroy other parts of the economy or fail to pay the full costs of their activities.
The report said tax accountants were the most destructive, laying waste to £47 of value for every £1 they created. Elite City bankers (earning £1m plus bonuses) destroy £7 of value for every £1 they create and advertising executives wreck £11 of value for every £1 they are paid.
On the other hand, the report judged that waste-recycling workers generated £12 for every £1 spent on their wages. Childcare workers create between £7 and £9.50 of value for every £1 of pay and hospital cleaners create more than £10 in value for every £1 they receive in pay.

So, go on and give those rich a whack, I say. You're providing a social service to the rest of us.

Note From Dubai: Prepare For The Double-Dip Recession

WHY, YOU MAY BE ASKING YOURSELF, DID the whole world freak out that Dubai World - the state owned development company in the United Arab Emirates - was going to ask for a debt payment moratorium? The amount of debt that is unpayable - $59 billion - isn't as high as that of the Royal Bank of Scotland ($77 billion) or the behemoth insurance company AIG ($85 billion). But it's no small fish either and if it is forced into to default on that loan it will ripple through the system in several ways. The first is directly as all those banks, investment funds, etc. that sank money into Dubai are suddenly holding worthless paper. The second is the chilling effect - like the credit crunch of 2007-2008 - which frightens other banks and makes them not want to lend to each other or to their customers. The third effect is the "flight to safety" as money floods "safe havens" like the US dollar, gold, etc. and out of developing markets, the stock market, etc. In fact, the Dubai fiasco is just bringing to light what some commentators have suggested for a while - that we are at risk of a double-dip recession.
For my money, this isn't a question. In the US the infusion of massive amounts of cash - literally trillions of dollars to keep the financial sector afloat and the $787 billion stimulus package - has barely managed to stimulate a heartbeat out of the economic body of the US. In the last quarter, growth was measured at an anemic 2.8 percent, a downgrading from an earlier estimate of 3.5 percent. Meanwhile, the housing market remains a national disaster with 1 in 7 mortgages are either in default or behind by at least one payment. Because of the fall in home values, 23 percent of mortgages are now worth more than the houses they are applied against. The unemployment rate continues to rise in the US - now at 10.2 percent. US bankruptcies rose 33 percent in the third quarter. Meanwhile, even though the Federal government is offering stimulus, state governments are faced with the likelihood of massive cuts as 31 states face shortfalls worth $53 billion with ten - representing 1/3 of the US population - facing imminent bankruptcy. I'll stop before people start jumping off of buildings. But I'll just note that the big bang of the stimulus package ends this year and with Obama talking about deficits as the big danger facing the economy, I wouldn't expect much more on the table.
And, expect China to hit the wall next year - even if there's some growth in the West, which I highly doubt. China's export-oriented economy has been kept running at full tilt by a $500 billion stimulus package and the massive expansion of credit. But all that money has gone into investment - rather than consumption - to increase the number of factories to produce products for export to a world that can't afford to buy them. And as China manipulates its currency to keep it low - so that its exports are attractive - there is growing anger and the possibility of tariffs in response to Chinese export policies. China is about to find itself with a boatload of capacity and nobody willing to buy it externally and not enough people able to afford to buy it internally. The EU is pushing already for China to let the value of the yuan rise against the Euro and other currencies to begin to overcome trade imbalances (China selling more than it's buying).
Here in Canada, things don't look so hot either. As a big exporter to the US, we're very dependent upon what happens down there. We've been relatively shielded because there wasn't the same build-up of a bubble here in the housing market, which precipitated the crisis down south and locked up credit markets, which deepened the damage. But, as Murray Dobbin notes, the Canada Mortgage Housing Corporation has now effectively become a massive sub-prime mortgage lender as the Tories dramatically loosened lending rules to prop up the housing market. That and the rock bottom interest rates have created a stunning boom that has seen house prices rise by as much as 20 percent in Toronto in the past year. That can't last forever - certainly not in the face of a double-dip recession. If unemployment starts to rise and people on the edges start to default, we could be in for a replay in miniature of what happened in the US. The Tories must have been banking on the recession ending before the problems really reached maturity in the housing market - then employment would rise and all would be good (of course, so would interest rates and thus payments for many people...).
It looks increasingly likely that the "pop" of the debt bubble in Dubai is going to reveal that the entire facade of the recovery in the rest of the world was just that - all surface with nothing of substance underneath. And if it bursts this time there's not going to be the will to try and repeat stimulus spending. Governments, already talking about cutbacks, will pull a Herbert Hoover and try to balance the budget, thus deepening the recession. And then there is the danger they will try to respond by externalizing the problem through the erection of tariff barriers that will disrupt the global economy further - exactly what happened during the Great Depression, facilitating the global collapse.
Now, none of this might happen. I could be totally wrong and Marxists are notorious for predicting 6 of the last 4 recessions. But with the apparent failure of the stimulus packages, I don't see any other possibility. Sorry about that... On the brighter side, today's Friday!

The Economic Recovery, Part 1: The Myths Of China

ARE WE IN A RECOVERY? Well, there’s certainly lots of talk of “green shoots” and the head of the IMF said on Saturday that “just now we see the beginning of the end of the crisis, predicting that the world will return to growth this year and by next year global growth will be around 3 percent. Is it true?
Any talk of global recovery needs to start by looking at two key places – China and the USA. The two countries are locked together in an unwilling but interdependent dance from which neither can escape. The USA is China’s largest trading partner with 21 percent of China’s exports going to the US and almost eight percent of its imports coming from there. In the US, China is now the USA’s number 1 trading partner, representing up to 19 percent of total trade vs Canada’s 14.5 percent. Until last year Canada was the biggest trading partner.
This is significant for a few reasons. First, because exports are still key to China’s growth, with its balance of payments surplus accounting for 10 percent of China’s GDP. In real terms that means that China sells $300 billion per year more than it buys on the world market. It is a key component of China’s growth rates, which have hovered around the 10 percent mark.
Having such a high balance of payments surplus has meant that China can invest heavily in growing its economy. It’s rate of investment is a whopping 43 percent of GDP, compared to about 16.5 percent in the United States and 23.1 percent in the EU.
But it’s also meant that China can buy up American debt – it holds close to $800 billion in US debt – in a process of debt cycling that helped fund the 2003-2007 boom. It was as though the US borrowed money from China to pay for stuff that it was buying from China. And China lent money to the US that it had made by selling the US goods from its factories. Right wing historian Niall Ferguson labeled this cycle “Chimerica”. What was really happening, of course, was that by continuing to buy up US government securities they simultaneously kept US interest rates low – thus helping to fund the consumer debt boom – and also kept the US dollar high, making Chinese exports cheap.
It was a virtuous cycle until the bubble got too big. It is now in the process of becoming a negatively reinforcing cycle: the collapse in US imports is driving down China’s trade surplus, and the massive quantity of US debt is driving down the US dollar, which is making it less attractive as a reserve currency and threatens to push up US interest rates. The Chinese have stated on a number of occasions that they are concerned by US debt levels, levels that they were happy with in the past when it meant the sales of Chinese goods. In March, Premier Wen Jiabao made some very bald statements at the end of the closing of China’s legislative session:

“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried... I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

But the Chinese can do little more than express concern. They know that ending the present round of massive stimulus spending in either country would be a disaster, since it is all that is propping up the anemic growth in the US and accounts for perhaps half of the growth in China. At a joint two-day conference between China and the US in July, China made the ritual noises about getting the deficit under control but then re-emphasized that now is not the time to stop deficit spending to stimulate the economy. As Peterson Institute economist, Ted Truman, put it:

“They don't want the U.S. economy to collapse because they are highly dependent on the U.S. economy in terms of economic activity and ... because they have a lot of their financial eggs in this basket.”

The result of the present crisis and the interdependent negative effect it has had on China and the US is leading to a number of processes. China is desperately trying to avoid a slowdown in growth. Anything below about 8 percent will cause a rise in unemployment and, it is feared, a growth in unrest – already in good supply. But with China pumping cash both directly through state investment and indirectly through a rapid expansion of lending – at 34 percent, or four times the rate of GDP growth – there is a serious danger of both an asset bubble and massive over capacity as plant comes online with insufficient global markets to absorb the increase in supply. With US retail sales stagnant and GDP in the European Union expected to shrink this year by four percent, the only hope for China beyond government stimulus that is expected to end after 2010 is to develop domestic consumption. Recent statistics, for instance showing a 16.5 percent growth in retail sales and a whopping 34 percent growth in auto sales, seem to suggest that this is happening. However, these stats are largely for foreign consumption and for the central state paymasters of regional bureaucrats. In other words they are, at best, manipulated and are often outright fabrications. But even where there has been a growth in domestic demand, much of it either includes increased government expenditure or one-off incentives as part of the government stimulus package. The real problem is that rather than rising, household consumption in China is falling – from 47 percent in 2000 to around 30 percent today, a massive decline.
What this suggests is that in the medium term shifting China’s economic priorities to develop domestic demand looks like an unlikely proposition for a number of reasons laid out in an article by Michael Pettis in Nouriel Roubini’s Global Economic Monitor. As he notes there are a number of structural and policy limitations to the growth of Chinese consumption:

“• An undervalued currency, which reduces real household wages by raising the cost of imports while subsidizing producers in the tradable goods sector.

“• Excessively low interest rates, which force households, who are mostly depositors, to subsidize the borrowing costs of borrowers, who are mostly manufacturers and include very few households, service industry companies or other net consumers.

“• A large spread between the deposit rate and the lending rate, which forces households to pay for the recapitalization of banks suffering from non-performing loans made to large manufacturers and state-owned enterprises.

“• Sluggish wage growth, perhaps caused in part by restrictions on the ability of workers to organize, which directly subsidizes employers at the cost of households.

“• Unraveling social safety nets and weak environmental restrictions, which effectively allow corporations to pass on the social cost to workers and households.

“• Other direct manufacturing subsidies, including controlled land and energy prices, which are also indirectly paid for by households

“By transferring wealth from households to boost the profitability of producers, China’s ability to grow consumption in line with growth in the nation’s GDP was severely hampered.”

While Pettis hits the producerist nail on the head, he fails to mention the contradictions that prevent the Chinese state from truly shifting towards a consumerist model. As I discussed above, the Chinese state is deadly terrified of a rise in unemployment and believe that an eight percent growth rate is necessary to absorb migration from the countryside to the cities. Shifting economic priorities towards developing domestic consumption necessarily means reducing the very high rate of investment and providing an increase in wages, social services, etc. For instance it was reported at the end of October that investment accounted for nearly 88 percent of GDP growth. Cutting back investment and redirecting that money to consumption would, at least in the short term, lead to a substantial increase in unemployment.
However, the export-led model has its own drawbacks, not least of which is that the Chinese economy is vulnerable to drops in external demand. And the Chinese state can’t provide any direct stimulus to counteract such a pullback. The result of that vulnerability has been made clear in the present recession.

“Between January and September, China's exports fell by 21.3 percent compared with the same period in 2008. The country's total trade with the European Union dropped 19.4 percent while trade with the US and Japan declined 15.8 percent and 20 percent respectively, according to the General Administration of Customs.”

There is also great pressure from the Americans – and others - for China to increase domestic consumption because the USA can’t continue forever to be the repository for Chinese exports. The American ruling class is increasingly nervous about Chinese control of the US debt, which implies a vulnerability to Chinese pressure of US policy. That means that there must be reversal in US indebtedness – and thus an increase in exports and saving. Barbara Hackman Franklin, Bush Sr.’s former Director of Commerce, summarized the viewpoint recently, stating that:

"The US must increase savings and be less consumption-led and that China must become more consumption oriented and less dependent on exports”

But, if anything, China is doing the opposite. Its policy of pegging the Yuan to the US dollar means that as the dollar has declined to more normal pre-crisis levels, China’s currency has also declined. This is, in effect, a devaluation that hinders the US, desperate to overcome its trade deficits, from doing so. As Paul Krugman noted in the New York Times on October 23:

“By pursuing a weak-currency policy, China is siphoning some of… [the already deeply depressed] demand away from other nations, which is hurting growth almost everywhere.”

Yet, in the face of this policy the US administration is, if anything, becoming more conservative in confronting China on its currency. Back in January during hearings on his nomination as Treasury Secretary, Tim Geithner accused China of currency manipulation – a very big accusation that would have meant (if it was sustained after his confirmation) that the US would have to take action against China including, possibly, sanctions. But by October 15 the Treasury Dept under Geithner was singing a different tune in its report to Congress, saying that, while China’s currency was undervalued, it was not being manipulated. Krugman’s response was, “they’re kidding, right?”
But the Obama Administration is not kidding and for very good reasons. If China were to start selling it’s US dollar reserves in a big way it would lead to a much more dramatic decline in the dollar. That would put serious upward pressure on interest rates as the US government found it more difficult to raise funds in bond markets. While a lower dollar would make US exports more attractive, the combination of higher interests rates and higher import costs – particularly energy – would choke off the feeble recovery and likely lead to stagflation. It would also prick the asset-bubble that is the New York stock market, awash in bailout cash, further depressing the economy. So, expect explicit discussion of currency manipulation to remain taboo. And while the Chinese aren’t happy about all their dollar holdings being worth less every day as the US dollar slides, they aren’t unhappy about their currency devaluing along with it, making their exports cheaper.
However, doing nothing – which seems to be the better part of both countries’ present strategy – has a price. For China, it means a continuing decline in the buying power of the Chinese consumer as the cost of imports rise from everywhere but the US. This will make China further dependent upon exports to keep the economy growing, which will also make it vulnerable to factors beyond its borders and thus beyond its control. And as it buys less and sells more it not only has the effect of slowing growth elsewhere, thus undermining its market, it raises the possibility of protectionism. In its trade with the European Union, China had a trade surplus of €170 billion in 2008. The US, by contrast, had a trade deficit of €80 billion. It will be more politically palatable for recession-bound Europe to accept a decline in trade surplus than to see its deficit with China increase. One wonders if America’s weak dollar strategy isn’t, in part, to get Europe to put pressure on China to revalue its currency.
By looking at come of the contradictions faced by the Chinese economy, it begins to look less unassailable than the media is prone to represent it. And it is less the case that China is obstinately refusing to revalue the renminbi than that China has grown itself into a corner, so to speak. With asset-prices rising and the risk of a housing bubble on one side, along with a major crisis of overproduction looming on the other, China must navigate between the rocks of multiple economic dangers and the charybdis of urban and rural revolt that could destabilize the carefully built edifice of Chinese capitalism. It's not hyperbolic to say that the future of the world will be dramatically affected by whatever happens there.

Big Bucks At Big Banks

Whew, that's a relief. The figures are in and Canada's big banks are making big bucks again. The Royal Bank saw its profits surge a whopping 24 percent to $1.6 billion. The saw its profits go up by almost 7 percent. National Bank also had a profit boost of 6 percent. TD-Canada Trust had a whopping 48 percent profit explosion compared to its previous quarter.
I'm sure everyone feels warm and fuzzy that the banks - the ones who caused the present crisis by creating dubious and opaque "derivatives", "asset-backed debt obligations", sub-prime mortgages, "credit default swaps" et al - will feel warm and fuzzy that they are the first to recover from the crisis that's wiping out jobs, and personal disposable incomes.

It does show, however, that when the government puts its mind to it, in this case by buying up $125 billion worth of bank held mortgages to inject liquidity into the system, it actually has an impact on that sector. It does raise questions, the first being why are we rewarding the sector responsible for the crisis? But more importantly, why is the government pumping money into a sector that will not directly stimulate job creation or retooling the economy?

The banks sat on the newfound liquidity and only now are increasing loan activity, but had the government invested that money directly in infrastructure it would have created, perhaps, 1,375,000 jobs, since it's reckoned that every $1 billion invested in infrastructure creates about 11,000 jobs. Instead, we're getting a commitment to $12 billion over two years - if municipalities, many of which are totally strapped - meet any federal investment. In other words of total money invested in the economy, if we include the entire $30 billion "stimulus package" from the January budget, 19% went to what I will call direct investment (infrastructure, tax breaks to individuals, housing, etc), the remaining 81% went to the banks. This doesn't include the $10.5 billion bailout to GM and Chrysler, which will go towards paying off old debts, rather than new production capacity. I will only note that Time Magazine listed it as one of the "worst business deals of 2008":

"The Canadian rescue package works out to more than $340,420 for every employee at Chrysler Canada, which has 9,400 hourly and salaried workers on payroll. That's 15% more than the $295,000 per employee that Washington is shelling out to save about 40,000 Chrysler jobs in the U.S. "This money will never be paid back to the Canadian government," says Toronto auto analyst Dennis DesRosiers, with DesRosiers Automotive Consultants. 'The deal has been spun in a positive way, but if taxpayers understood what's really going on, they would revolt.'"

But back to banks and the rest of us. The money that has gone to restore the banks' profitability comes from government coffers. Those coffers are filled via tax revenue. The government receives 46.6% of its revenue from personal income tax, while only 16.8% comes from corporate income tax. Another 12.3% comes from GST (which business don't pay) and 6.8% comes from EI premiums.

In other words the government gets 66% of its revenues straight out of our pockets. Yet the money it has shelled out has been directed by priority in almost exactly the opposite proportions. The Tory government "recession strategy" has been nothing more than another transfer from our pocketbook to the pocketbooks of corporations and the wealthy.

Newsflash: Shithouse Goes Up In Flames

When the US Federal Reserve Bank decides to cut interest rates by three-quarters of a percentage point, between meetings, that’s what you call the smoke that tells you there’s a fire.
This is the first time that the Fed has cut rates at an emergency meeting since September 2001, after the World Trade Center attacks. And it’s the biggest single cut in interest rates since 1982.
And word is that there will be another half percentage point cut by the end of the month if this adrenaline shot to the heart attack patient doesn’t revive it. But a lot of folks are worried it’s too little too late and that the economy is already in a self-reinforcing downward spiral.
A look at the numbers certainly would indicate that things are not good :
“U.S. payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, and unemployment jumped to a two-year high of 5 percent, according to Labor Department figures released Jan. 4.
“The housing slump also deepened last month, with home construction falling 14 percent. Starts were down 25 percent for all of last year, concluding the worst year for the industry since Jimmy Carter was president. Sales of previously owned homes also slid in December, as single-family property prices posted their first annual decline since the Great Depression, the National Association of Realtors said today.”
Claims that the US isn’t already in recession are belied by these kinds of numbers and the panic that’s setting in on stock markets and in government. The degree of slowdown isn’t known yet but what is known is that it is greater than they’re saying.
The stats for the third quarter in the US indicated that growth had “rebounded” to 3.9% but once inflation and population were factored in, it was actually closer to 1.5%. The fourth quarter numbers haven’t been released yet but don’t be surprised if we’re already in a contraction.
In the face of this unfolding debacle the US government has also stepped in with its own $150 billion economic stimulus package. However, that package is entirely in the form of tax rebates of up to $600 per head, plus $300 per child. In other words a family of four that earns a household income of less than $75,000 would get a cheque for $1,800.
Now, $1,800 is nothing to sneeze at and it shows what bogus are the claims of from politicians and economists that the market should rule. $150 billion dollars is a big interference in the market.
But the package specifically doesn’t include extending unemployment benefits or granting more food stamps. US rulers live in fear that workers in the US will get uppity or decide that the poverty of unemployment insurance is better than their shitty, soul-destroying and/or dangerous job.
There’s a problem here though and it is two-fold.
The basis for restoring the US economy is consumer spending, which makes up 70% of GDP. But the trouble is that consumers have no more cash. In fact, they are drowning in debt, which has been increasing at a rate of 7.5% per year since 1997. In that time the amount of household debt has increased from $8 to $14 trillion dollars. In other words household debt as a percentage of GDP has rocketed from 66% to around 95%.
And not surprisingly, debt servicing payments are now at record highs.
I haven’t even gotten into the massive and ballooning US government debt, which is headed towards $10 trillion.
The point of all this is that the $1,800 that family of four is about to get in the mail is probably going to go on paying down the credit card to ease the interest burden. This is especially the case since some see house prices declining by 20 to 30 percent, which means that any further credit against home value will have dried up for a lot of Americans.
And credit card payments are not an economic stimulus – that’s just paying for old growth, not creating new growth. So, the layoffs will continue, which will reduce demand and create more layoffs.
Giving out money is also stupid economics.
$150 billion dollars that is dedicated towards specific employment projects, such as they had in the 1930s is a much more efficient way to spend money than to just throw it in the air.
Economic enterprises have multiplier effects on the economy – building the Hoover dam gave jobs to thousands of workers, those workers spent money, the project bought equipment and raw materials, those materials had to be shipped, etc.
Of course, other than in the field of military spending, this doesn’t fit with the neo-liberal consensus. What does that mean – the shithouse is going up in flames and they’ve locked us inside.