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Capitalism is forever blowing bubbles

Usually, this column begins on a serious note, especially when we’re talking about the global economy. Today, however, I bring you the chorus of a song that made its debut in America in 1918 and is better known as the club anthem of West Ham United.

I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.

What’s the connection, you may well ask? Well, with the International Monetary Fund lurching about all over the place and central bankers confessing in public that they are not sure what’s going on in the global economy, you can be sure that there’s real trouble ahead.

One of their real concerns is that the “easy money” policy introduced after the 2007-8 financial crash has had unintended consequences. Instead of stimulating genuine growth in the real economy, the policy has instead created “bubbles” that, unlike the soap version, will burst with real venom.

The IMF once encouraged austerity as a response to the financial crisis and budget deficits. That hasn’t worked, so they’re now telling George Osborne and others to loosen up. But does the IMF know what’s going on? Clearly not,  if Lorenzo Bini Smaghi, the former member of the European Central Bank’s executive board, is to believed.

At the IMF’s spring meeting this week, he confessed: “We don’t fully understand what is happening in advanced economies.” Central bankers have printed $12 trillion in new money, kept interest rates at zero and cut public sector spending.

However, despite this intervention, while there may be signs of growth in a park near you, there’s no discernible movement in terms of “growth” in output, which is the lifeblood of the capitalist system. What is looming, however, is a new phase of financial instability.

Janet Yellen, vice-chairman of the US Federal Reserve, admitted that “in the years before the crisis, financial stability became a ‘junior partner’ in the monetary policy process, in contrast with its traditionally larger role.” Now she is concerned that central bankers are repeating their errors, storing up “financial distortions” for the not-to-distant future.

With returns from the real economy meagre compared with the pre-crash period, there is speculation in all sorts of “assets”. Stock markets around the world are nearing the peaks they achieved before 2007 despite the continuing global recession. Trading in junk bonds – debt – is soaring. In London, house prices are leaping off the charts.

And now we are presented with a new phenomenon – the “carbon bubble”. The warning comes from Lord Stern, author of the ground-breaking 2006 report on climate change that described global warming as a market failure, and the think tank Carbon Tracker.

Their report published today says that stock markets are inflating an investment bubble in fossil fuels. "The financial crisis has shown what happens when risks accumulate unnoticed," said Stern, who added that the risk was “very big indeed”. The “carbon bubble” results from a massive over-valuation of oil, coal and gas reserves.

Back to the IMF and José Viñals, its head of financial stability. “Put simply, we are in uncharted territory.”

Fear not IMF and central bankers. Coming over the horizon is one Ed Miliband, leader of the Labour Party and wannabe prime minister. In an interview published on the Shifting Grounds website, Miliband says that what is required is a “proper skills system, a proper banking system, an industrial policy, tackling short-termism, infrastructure. It's about a suite of things that come together and form a body of ideas around responsible capitalism.”

I knew someone out there had the answer.

Paul Feldman
Communications editor
19 April 2013

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