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A House of Cards

Osborne's 'recovery' built on sand

Just as the ConDem coalition is trumpeting a “return to growth” – one that is more apparent than real – their hopes for a sustained economic recovery have been shattered by the eruption of new phase of the global crisis.

Late last night Turkey’s central bank joined India’s in emergency measures designed to stem the flight of capital from their countries as investors continue to withdraw funds from “emerging” economies around the world.

In attempting to reverse the collapse of its currency, the lira, and against opposition from prime minister Tayyip Erdogan, who is in the midst of a corruption scandal and desperate to maintain growth in the run-up to an election, Turkey’s central bank raised interest rates to levels which shocked economists, more than doubling its overnight borrowing rate from 3.5 percent to 8 percent.

The Reserve Bank of India’s rate rise of 0.25%, small by comparison, is the third since September. But the country is struggling with 10% inflation, a halving of its projected growth rate to 5% and the value of the rupee falling 11% last year as investors moved their money out of the country. The Congress party government of Manmohan Singh, also battered by a corruption scandal, faces an uphill battle in elections due by May.

These are just two of the countries whose problems were dramatically accentuated by the US Federal Reserve’s decision last month to slow the creation of credit by way of “quantitative easing”, aka printing of money.

The flight of capital was already underway long before the Fed’s decision. Just suggesting the possibility of reducing the $75 billion a month programme of money creation in June 2013 was enough to start the ball rolling. Now it shows all the signs of turning into a rout, a panic.

So-called “emerging” countries are those willing and able to provide global investment funds with favourable high-profit conditions – including cheap labour, low taxes, and government-funded infrastructure. They became the home for trillions of dollars of the new credit, invented in the desperate attempts to resuscitate the world economy following the 2007-8 crash.

Ironically, throughout the half-century leading up to the crash, global corporations had taken advantage of cheap labour by the transfer of manufacturing from the relatively high-wage, richer, “developed” economies to the ultra-low wage economies. In doing so they reversed the competitive drive for productivity which tends to increase the ratio of fixed capital investment to the quantity of labour. The rate of growth of productivity – the quantity of value produced per hour of labour – slowed as a result.

So, globalisation of manufacturing and finance led to two significant results – a slowing in the rate of productivity growth, and far more volatile markets for finance capital, which was invested in easily tradable emerging countries’ bonds and currencies rather than in factories, roads and other infrastructure.
In the wake of the crash, capital investment to replace ageing facilities, let alone new manufacturing, came to a virtual standstill. As a result, in 2009, productivity growth turned negative. The emergency rescue measures managed a reversal. A temporary reversal.  The trend has continued downward ever since.

That, in brief is the back-story to the Financial Times’ warning for the ConDem’s absurdly euphoric chancellor Osborne. “Scratch beneath the surface, however,” says the FT’s economics editor “and Britain’s deepest economic challenge just got deeper”.

The problem is that the trend the Bank of England, the Treasury and economists want to see most – an end to productivity stagnation – appears to be absent. In the latest labour market figures… total hours worked grew 1.1%, indicating that output per hour worked fell again in the final quarter.

Unless Britain’s productivity performance improves, the economy can catch up its lost ground with people working longer and unemployment falling. But once this is done, prosperity will stagnate, as it has for the past six years.

To say that the dynamism of capital is waning is to put it mildly. Add in the flight of capital from India et al and you have the recipe for another global crash. Whatever the ConDems’ fantasies, capitalism isn’t working and the so-called upturn is built on sand.

Gerry Gold
Economics editor
29 January 2014

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