US slides into recession - who's next?

Last month 100,000 American private sector workers lost their jobs. This is the third monthly rise in the unemployment figures in a row. Everything indicates that the USA is now in recession. As it is the biggest single market in the world, this will inevitably have a big impact on the rest of the world.

Last month 100,000 American private sector workers lost their jobs. This is the third monthly rise in the unemployment figures in a row. Bizarrely, the actual unemployment rate went down from 4.9% to 4.8%. This is because 450,000 people were deemed to be ‘not looking for work’ and were taken off the figures. It’s good to know that it’s not just the British government that fiddles the figures.

The financial crisis is worsening the recession, which was coming anyway. The crisis started with the sub-prime mortgage scandal. People with no income, no job and no assets were offered mortgages which they couldn’t possibly afford. Often they started paying on low ‘teaser’ rates that were yanked sharply up once they’d been hooked. This fiddle was only possible in the feverish atmosphere of a housing bubble, where the illusion spread that house prices would just go up and up for ever. But what goes up must come down.

These sub-prime mortgages were sliced and diced with other financial assets and sold on all round the world as pieces of paper that would pay the owner an unearned income. Nice for some. The problem is that the sub-prime mortgage holders can’t pay and are being evicted, literally in their millions. So these bits of paper are worthless and the sub-prime scandal has been ‘globalised’ to continents unconnected with the scam.

The sub-prime crisis did two things. It pricked the housing bubble, which has definitively burst. Now all house prices are down, by 15% in some states. The housing market has collapsed. Since the crisis began last summer, a third of a million building workers have lost their jobs. Last year saw 1.5 million repossession proceedings. And it will get worse. Every unemployed building worker is a ‘consumer’ who won’t be buying a new car. Every unemployed car worker is someone who won’t be moving in to a new house.

Secondly the sub-prime crisis produced a credit crunch. Banks had used the bits of paper which wrapped up the dodgy mortgages as assets on which they could let out money. Now lending has dried up. Banks are reluctant to lend to one another or to potential lenders. The Central Bank has responded by cutting interest rates to 3% compared with 5.25% last summer, and the odds are that they’ll be cut again. Since this rate is less than inflation, they are effectively paying you to borrow money. But, as Keynes said, ‘you can pull on a piece of string, but you can’t push on a piece of string.’ He meant that raising the rate of interest can be effective in restraining overheated capitalist growth, but cutting interest rates when they’re already very low doesn’t have much of an effect in reflating the economy.

The powers that be are doing their best. But it’s not good enough. Despite the joke that only two people in the USA don’t know the country’s in recession – Bush and Fed Chief Ben Bernanke - they are trying to prevent capitalism from slowing down and coming to a stop. George W. Bush is delivering more than $150bn in tax cuts to perk up the economy. But what use is a tax cut if you haven’t got a job? So their measures don’t seem to be working.

But Bernanke’s rate cuts are having an effect – on the foreign exchange markets. Speculators have the choice of putting their money in dollars or somewhere else. If the USA offers a low rate of interest they’ll put their money elsewhere. That’s what Bernanke has engineered. So the dollar has plumbed all-time lows on the foreign exchanges. This makes US goods cheaper and more competitive abroad. But it makes imports more expensive, feeding inflation. This is hurting the American consumer, who has been the driving force of economic growth all over the world for the past five years. No more. US consumer spending was all based on the house price bubble, which has now definitively burst.

The crisis spilled over from sub-prime mortgages to a credit crunch. Because banks became very suspicious of dodgy bits of paper they stopped lending to each other as well as to customers. So now the Fed is upping the money it lends to the commercial banks (it’s called a Term Auction Facility) to $100bn on Friday to make inter-bank lending easier. On Monday they doubled it again to $200 bn. Panic! The banks need the money to purge the toxic sub-prime out of their asset portfolio. Giant Citigroup has announced it may have to write off another $18 billion in bad debts.

Equally scary is what has been going on in commodity markets. The commodity price index has gone up by 288% in the six years to February 2008. For energy, it’s up 358%. This seems to be a long term rise in the demand for commodities and energy, and it’s outside the control of the US government. Nearly a third of the extra demand for oil comes from China. Tim Bond writes in the Financial Times March 6th,

“The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $2,000bn. By contrast prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the International Energy Agency, the global energy sector alone needs a real $22,000bn over the next two decades to meet the anticipated rise in primary energy demand...Predictably, the scale of response to each of these crises is in inverse proportion to their respective magnitudes. In the US, the credit crunch has elicited an instantaneous fiscal package to the tune of $168bn, or 1.2% of nominal GDP. In contrast, the latest annual budget appropriation for renewable energy spending is just $1.72bn – 0.01% of GDP.”

Capitalism has taken us to the brink of disaster. We need to plan the future, and that means changing the system.

Nouriel Roubini was written off as a professional doomsayer, but his predictions so far have all been remarkable accurate. He sees “a rising probability of a catastrophic financial outcome.” Step one is the worst housing recession in US history. He suggests house prices will fall by 20-30%, wiping out $4,000-6,000bn in household wealth. Stage two is sub-prime mortgage losses. Step three is the credit crunch spreading to consumer credit. Stage four is the monoline crash. Monoline is the name given to people who insure bonds for local government projects. It sounds safe and boring. The monocline financiers got so bored they started betting on other things. They lost – big time, billions. If wanted a little flutter, they should have stuck to the Cheltenham Gold Cup.

Now these are all happening before our eyes. Roubini then outlines the further stages in a financial meltdown – the commercial property market collapses, a bank goes bust, there’s a wave of corporate defaults. If it all comes to pass, “Total losses in the financial system will add up to more than $1,000bn and the economic recession will become more protracted and severe.” Roubini’s thoughts are no longer dismissed as ravings. Goldman Sachs economists now agree with him. Coming from the big business mainstream, they totted up total possible losses as $1,156bn

When insufferably smug capitalist commentators come over all apocalyptic, then you know something’s really up with their system.

A month later Roubini was back. He’d done some more sums. On plausible assumptions, he now reckoned total losses might hit $3,000bn (that’s $3 trillion). Martin Wolf surveyed this ‘rising auction of scary scenarios’ in the Financial Times of March 11th with a mixture of awe and dismay. As he comments,

“Losses of $2,000bn-$3,000bn would decapitalise the financial system. The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.”

Note that the representatives of the bourgeoisie don’t have an ideological objection to nationalisation. They are all in favour of losses passing into the ownership of the nation, as long as profits remain in their pockets.

He goes on,

“While the US government could afford to raise its debt by up to 20% of GDP in order to do this, that decision would have huge ramifications. We would have more than the biggest financial crisis since the 1930s. It would be an epochal political event.”

Could this happen? Sure. Capitalism is out of control. It’s not delivering the goods. And it’s not just in the USA. The alarm and consternation that has greeted every bit of bad news from the States in Tokyo, London and Shanghai shows that (as we predicted in World economy in crisis - The financial panic: where are we now?) the idea that the rest of the world can decouple and float away on its own from the economic problems in the USA is a fantasy. Even if capitalism doesn’t fall over and crush you this time, it will always be a threat to the welfare and happiness of workers all over the world. It’s high time we got rid of it.

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