Cuts deepen the crisis

Submitted by Matthew on 19 September, 2012 - 10:04

In the UK, wages accounted for 70.6 per cent of GDP in 1975. Recent figures from a UN agency show that fall to 62.6 per cent by 2010, the largest drop of any advanced economy except the US. The government wants to go further along the same road.

Real wages have been falling since 2009, and are set to carry on falling. Far from doing anything to reverse that trend, the government now (17 September) talks of cancelling the automatic upratings which are supposed to ensure that benefits at least keep up with price rises.

Why? To boost profits at the expense of wages and social provision.

The strange story of Ben Bernanke tells us a lot. Mitt Romney now sees Bernanke, head of the Federal Reserve (the USA’s central bank), as the symbol of economic laxity and insufficient capitalist rigour in managing the crisis.

On 13 September Bernanke announced “QE3”, a policy under which the Fed will buy bonds and other financial paper, mostly from banks, without limit until a capitalist recovery is well underway in the USA.

This policy is a version of “printing money”. A dollar is an IOU from the Fed. Dollars held inside the Fed, therefore, do not function as money. (If you write yourself an IOU, you don't become better off).

When the Fed buys bonds from a commercial bank, it is not like an ordinary buying-and-selling operation. The commercial bank which previously had bonds now has cash. The total amount of hard cash outside the Fed increases.

This is not quite the same as there being generally more money in circulation.

The “monetary base” is defined as notes and coins in circulation outside the central bank, plus commercial banks’ balances with the central bank. (Commercial banks have accounts with the central bank in the same way as individuals and firms have accounts with commercial banks). That “monetary base” expands. In the USA, the monetary base is now three times as big as in August 2008. There is three times as much “hard cash” in the USA as there was four years ago, although output and sales have stagnated.

Individuals or firms, however, count how much money they have not just from their purses or petty-cash boxes, but also from their bank balances. To estimate how much money there is sloshing around in all the various marketplaces of a capitalist society, we must add bank balances (and arguably some other balances) to hard cash. Broader money, in that sense, is in the USA at present about four times as much as hard cash.

Broad money is manufactured out of hard cash by bank lending. If I put $1000 into my bank account, and the bank then lends that $1000 to someone else, then the operation has manufactured $2000 in broad money out of $1000 in hard cash.

Because credit has been frozen or drastically cooled, broad money has expanded only slowly in the USA since 2008, while hard cash (the monetary base) has been expanded very fast.

Bernanke’s view is that if hard cash hadn’t been expanded so fast, then broad money would have shrunk, leading to a collapse in prices and a deeper slump. In a capitalist economy, when prices and wages fall overall, then individuals and firms become unable to pay off loans or outstanding invoices, and they postpone purchases because everything becomes cheaper if you wait. It’s bad news.

QE3 shows that Bernanke is alarmed. Very alarmed. The expansion of hard cash hasn’t gone far enough and fast enough. He is guaranteeing rapid future expansion of hard cash in the hope of unfreezing credit and opening a way out of slump.

Mitt Romney says this is giving the US economy a “sugar high”. Jens Weidmann, the German representative on the board of the European Central Bank (which is for the eurozone what the Fed is for the USA) thinks much the same about ECB boss Mario Draghi’s 6 September “OMT” plan. OMT is also a bond-buying plan, though very much more limited than Bernanke’s QE3.

That central bankers, of all people, have become more expansive and growth-oriented about economic policy than mainstream politicians, and that those bankers are being condemned as soft-hearted spendthrifts by a significant minority of mainstream ideologues, tells us something.

Bernanke’s policy is directly and explicitly based on the doctrines of Milton Friedman, who from the 1970s to his death in 2006 was a benchmark for right-wing economic views. Friedman inspired the economic policies of Margaret Thatcher’s Tory government in Britain after 1979.

Friedman’s “monetarist” principle was that if inflation is high, then the central bank must act to shrink the stock of broad money. Thatcher did that after 1979. Conversely, if there is a risk of deflation (falling prices), then the central bank must act to expand the stock of broad money. Friedman’s academic standing among economists depends on a study of the Great Depression of the 1930s in which he argued that the Depression was due to the Fed not acting to expand broad money.

Bernanke has called Friedman’s book “the leading and most persuasive explanation of the worst economic disaster in American history”. At a birthday celebration for Friedman in 2002, he said: “I would like to say to Milton and Anna [Schwartz, co-author of the study]: Regarding the Great Depression, you’re right, we [the Fed] did it. We’re very sorry, but thanks to you we won’t do it again”.

So a man who is following the doctrines of the benchmark right-wing economist of recent decades gets slammed... for being a pinko.

More liberal mainstream economists argue that monetary operations like Bernanke’s cannot be enough. At a certain depth of crisis they become like pushing on a string. In slump, governments should also expand public services and public spending, and deliberately run budget deficits.

That more liberal view had a brief triumph in 2008-9. Panicked governments, however right-wing, deliberately ran budget deficits and boosted public spending, for a short time. They did other things that had been anathema to them, like nationalising banks. In the test of acute crisis, they had to admit that the capitalist market system is not self-stabilising, and that economic life with advanced industry needs extensive public regulation.

It was always, however, only a skewed “socialism for the rich” — socialising losses where gains had been privatised. As soon as the immediate panic ebbed, the governments changed tack.

Their motto now was pronounced in early 2009 by Rahm Emanuel, then Barack Obama’s chief of staff and now the Chicago mayor who is trying to break the Chicago teachers’ strike. “You never want a serious crisis to go to waste. [It] is an opportunity to do things you think you could not do before”.

Thus wave after wave of cuts. And not just cuts. Privatisation. Marketisation. In the European Union, a central drive to strip workers’ rights and conditions, like the recent EU-ECB-IMF calls on the Greek government to remove the ability of unions to negotiate conditions across whole industries and to increase Greece’s standard work week to six days and cut the minimum daily rest to 11 hours.

It is partly that the governments are scared of the global financial markets. Unless governments show themselves “hard” enough, international financiers will refuse to lend to them, or demand over-the-top interest rates. Bernanke is less hidebound because the USA’s standing in world capitalism means that it is less worried than any other state about the risk of being unable to borrow in global markets.

It is not just that. If they just wanted to reduce deficits, they could tax the rich. Most of all, the governments want the crisis not “to go to waste”. Each government wants to use the crisis to shift the balance of class forces in its country decisively and lastingly against the working class, so that an eventual recovery can build high profits on the basis of permanently lowered wages and social costs, and permanently curtailed workers’ rights. Each government wants to do that more ruthlessly than others, so that its country will be the favourite destination in future for footloose global capital.

These policies deepen slump and delay recovery. But the governments don’t mind. That is secondary to “not wasting” the crisis.

Our fight against government policies is not just, or mainly, an argument about economic doctrines. It is a fight about whether the crisis will be used by the capitalist class to hammer social conditions, or used by us to advance working-class awareness and confidence to tackle the crisis and to overthrow the capitalist system which generated it.

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