By Kumar David –

Prof. Kumar David

The global economic downturn is not petering out: Eurozone hits another deadly snag

It has been a dreary week, everything went as expected. The Rajapakse government had its ears boxed in Geneva, but it will go on just as before; or worse, if the Gotha–BBS–JHU fascist lump gains ground in a backlash of extremist ranting. (Are Mahinda and Gotha out of sync, or just playing bad-cop, worse-cop?). Internationally, Obama’s Presidential visit to Israel is the most inane in living memory. And thirdly, the global economy still shudders in the pits, despite misread signals of US recovery. More on the global economy anon, my subject for the day. I wish to start of with a few comments on the absurdity of Obama’s Middle Eastern gyrations.

The two-state solution is dead, buried and new settlements, if not grass, have overgrown its grave. I was among many who believed it was possible; it seemed the only feasible option. But Jewish settlements, with the fullest encouragement of Natanyahu’s allies have proliferated on the West Bank like spores on a child with chickenpox in-extremis. Settlers have swarmed and will never abandon newly occupied land; the government will not contemplate slowing settlements, let alone pulling back those already situated. Except for tiny Gaza Strip, there is no land for a Palestinian State, not even in a hideously serrated version of the Pondichchery-style. What can be imagined at most is a network of Palestinian municipalities, trapped and surrounded by a Jewish state.

A one state solution, Greater Israel (or Palestine), is also a non starter. Jews and Palestinians of the greater region (Israel, West Bank and Gaza) are equal in number – 6 million each – not counting 3 million Palestinian refugees in Jordon, Lebanon and Syria. Palestinians breed twice as fast as Jews (more fecund women, higher sperm count in men, or more frequent copulation I do not know) and will massively outnumber the latter within a decade. That would be curtains for a Jewish state. What to do? Declare Palestinians vote-less, right-less Bantus, as Afrikaners called blacks, or make them stateless as Senanayake-Bandaranaike rendered Upcountry Tamils? Two states are no longer feasible; one state will be an Old Testament nightmare for Jews. Why Obama played pantaloon in Jerusalem I don’t know. The elections are over, no need to keep the lid on a troublesome Jewish-American lobby; what’s he up to?

Little Cyprus derails the mandarins in Brussels

Having got these gripes off my chest let me turn to the New Depression which is stubbornly with us. None of the fundamental restructuring that needs to precede a re-floating of global capitalism has been undertaken; the Eurozone has hit a hard rock in Cyprus; the spill may spread to Southern Europe; the touted recovery in the US is a chimera; India is slowing; these days even China is feeling unwell. I will confine this piece to the Cyprus-Eurozone conundrum and the US false dawn.

The Cypriot banking system has collapsed; only blood transfusion from Europe, pillaging savings over Euro 100.000 (could be as high as 40% confiscation) and closing down banks has staved off death. When the Greek economy crashed, the state was indebted beyond its ability to repay, so arguably one could say the people had been living beyond their means. (This is not strictly true; it is the propertied and financial classes that were responsible for the squander). The glaring difference with Cyprus is that it is not the state, but the banks that have gone belly up. Cypriot banks played finance capital’s game to the hilt, opening offshore accounts and dodgy instruments that saw their deposits at one stage exceeded the GDP of the country eight fold! When New Depression contagion reached Greece, banks in Cyprus who had put money into Greek sovereign bonds, lost $4 billion in the “rescheduling” (partial default) and tottered. Hence the collapse in Cyprus is not obscured by a crisis of government. It is an unambiguous flop of finance capital and its panoply of new fangled products. It bears repetition, again, that profligacy or over consumption by the people of Cyprus played no part in the disintegration; it is caused entirely by finance capital’s wheeling and dealing. Crumbling of the finance sector, specifically the banks, is a textbook case of the “normal” life cycle of finance capital in an interconnected world. It is a cog in the mechanics of the global New Depression.

The Cypriot aliment looks like peanuts; a $20 billion handout from the ECB or Germany can fix the impending default. But politics to the fore; taxpayers in rich Europe are fed up with bailing out Portugal, Ireland, Spain, Greece; their legislatures are in strident protest. Angela Merkel has to find a way out that won’t be suicidal at the next elections. The fix that the mandarins in Brussels offered was “OK we will come up with $13 billion, but Cyprus must contribute $7.5 billion by confiscating a portion of bank deposits”. Initially, a 7 to 20% confiscation rate on all deposits depending on size was mooted. All hell broke loose and the streets of Nicosia ran red with revolt. Parliament, under pressure from the streets, threw out the deal without a single vote in support. Now what? Will the ECB pull out, will the banks collapse, will there be a run on the banks in Greece, Spain, Portugal, even Italy, will Cyprus be kicked out of the Eurozone (How? There is no exit mechanism in the EU Charter)? Little Cyprus has thrown the Eurozone, and the wider EU into panic. Eventually Cypriots were frightened and browbeaten into a compromise and thousands of bank workers will be fired.

What grates is that the offshore money stashed away in Cyprus is loot laundered by Russian oligarchs (Euros 20 billion). They plundered Russia, in and before the Putin period, with about as much restraint as Ferdinand, Imelda and their cronies looted the Philippines. Bail out Russian crooks using the savings of Cypriot wage earners and German taxpayers! The morality stinks and images of the rot are not lost in peripheral Europe. The first alarm signal will be if panic spreads and there is a bank run elsewhere in Southern Europe. The capitalist state can no longer guarantee citizen’s deposits since, by predilection and preference, it protects senior bond holders, investors, market funds and institutional investors. Cyprus is threatening to open the flood gates of a very dirty sewer.

As the Eurozone staggers from crisis to crisis, Europe as a whole has not shown signs of economic recovery. The British Government admits recession will drag on for another 18 months; Germany entered recession in the last quarter of 2012; Italy seemed to recoup, but after the February elections nothing can be said; Syriza on the left and the fascist ultra-right are gaining ground in Greece. Europe is stumbling.

America the magnificent?

In the midst of gloom the numbers coming out of America were greeted as a beam of sunlight. The Dow stock-market index, at last, broke through its pre financial crisis record and reached 14,250; unemployment declined to 7.7%; business confidence indices and consumer spending are both up since the last quarter of 2012; US house prices have been recovering for four months. The question is will a strong US recovery, with a little help from China, pull the rest of the world with it? Is the New Depression finally petering out? My response is a big NO.

This recovery is a Fed-Treasury engineered chimera. Ok, the job of athe capitalist state is to bailout capitalism when it falls flat, and to care not a hoot about the free-market; which in any case died five years ago when neo-liberalism was debunked. The Fed-Treasury engineered an apparent recovery by massive injection of liquidity, holding nominal interest rates so low that real rates are probably negative much of the time, and accumulating sovereign and central bank debt like there is no tomorrow. Isn’t this classic Keynesianism where government intervenes with programmes of public works and demand creation which, through a multiplier effect, kick-start the economy? Decidedly not! The trillions of dollars printed in quantitative easing (QE) interventions are not feeding public works, infrastructure building, employment generation and demand creation. I dare say some of this is happening, but the thrust of the QE programmes is consolidating bank balance sheets, rescuing mortgage backed security instruments, and holding up finance capital lest it totter and fall again. The difference between government intervention in the Great Depression and the New Depression is that the former targeted the real economy, the latter aims to rescue finance capital. This is a measure of changed balance of class forces in America, but I cannot pursue that here.

An asset-price bubble, fuelled by QE’s cheap money, is sizzling. US stock prices (Dow) have more than doubled in value in the last two years though US GDP rose only 7% in the period. (The Shanghai stock-market has hardly moved though China’s economy has grown 40% in five years). US company dividends outside the financial sector are disappointing, equity p/e ratios hover around 25; too high. Markets are spiralling into a bubble which will end in a bust when the Fed tightens liquidity and raises interest rates, as it must at some point, to control burgeoning sovereign and corporate debt. The same is true of another financial sector; mortgage finance and a cheap-cash driven housing market. Excess liquidity is moving into Corporate Bonds and yields have fallen. All serious bourgeois economists I have read are unanimous that this bubble is unsustainable; some predict a bust worse than 2008 – another Lehman Moment.

It is the one sector that does matter, manufacturing, broadly the real economy of goods and useful services, that has not turned the corner. The exception is shale gas, shale oil and industries that benefit directly from these advances. Here something worthy of capitalisms once fabled innovative dynamic of feverish growth is discernible. A flicker before darkness descends? Elsewhere, China has pruned back its forecast GDP growth rate for the next several years to a shade over 7%, while India’s is dipping badly having fallen to 4.5%. To hope that deceptive economic indicators from USA signal salvation is delusory.