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Warnings of new economic collapse mount

With Spain no longer able to borrow on the money markets, German banks downgraded and key indicators pointing towards a massive international downturn, the global economy is heading towards a new meltdown.

As the G7, the group of the world’s richest countries, held an emergency teleconference to discuss the financial crisis in the eurozone, and its implications for the global economy, they heard the news that a tipping point had been reached in Spain.

After weeks of denial, Cristobal Montoro, the country’s finance minister appealed for European leaders to allow the country’s troubled banks to get direct financial help. The country's high borrowing costs effectively excludes it from accessing credit markets.

Mariano Rajoy, Spain’s prime minister, warned that the country was in a situation of “extreme difficulty”. But the European Union only allows bail-outs through the agency of government, so Spain’s appeal is certain to fall on deaf ears.

This morning, German banks became the latest victim of the contagion of economic and financial crisis as it spreads rapidly throughout Europe and ricochets around the rest of the world.

Credit rating agency Moody’s downgraded seven German banks and their subsidiaries, including Commerzbank, the country’s second largest, as well as one German subsidiary of a foreign group. The agency said its decision was taken because of "increased risk of further shocks emanating from the euro area debt crisis," and the banks' inability to compensate for losses.

The inseparable connection between finance and economic activity – the production and exchange of goods and services it reflects – is underlined by a warning on contracting global money supply. The measure of cash and overnight deposits for China, the eurozone, Britain and the US has been contracting since the early spring. China's money supply has been falling at the fastest pace since records began.

According to Telegraph columnist Ambrose Evans-Pritchard, “any further falls risk a full-blown global recession”. The relationship between money and real production is a two-way street.  As the global slump deepens irretrievably, pressure on governments and central banks to print more money must appear in inflation – a consequential decline in the value of money – somewhere in the system.

The current contraction of money supply is closely connected with commodity prices which are falling hard, with Brent crude oil down to a 16-month low of under $97 a barrel. Sliding commodity prices are also the result of contracting production.

The predictive power of money supply figures serve to confirm the expectations of production managers throughout the world recorded in the country by country purchasing managers’ indexes (PMI). Figures below 50 indicate a contraction. The euro zone PMI fell to 45.9 in May, down from 46.7 in April. Germany’s index dropped to 49.6, down from 50.5, and that of France fell from 45.9 to 44.7.

China is far from exempt. Previously seen as an economic bright spot, its managers also expect the worst, recording negative figures. HSBC’s preliminary PMI for China fell to 48.7 in May from 49.3 the month before. The index has been below 50 for seven consecutive months.

In Britain, the PMI for manufacturers plunged to 45.9 in May from a downwardly revised 50.2 in April, its lowest reading since May 2009 and the second-steepest fall in the survey's 20-year history. Analysts had expected a more modest dip below the 50-point mark that separates contraction from expansion, to 49.8.

"This is a collapse, this is a huge decline. We're still a little bit above the lows we hit in the depths of the 2009 recession, but we're heading that way sharply," said Ross Walker, an economist at RBS.

The deepening global crisis has already left hundreds of millions of victims in its wake as they’ve lost jobs, homes, savings and pensions – and any hope of a future in the current, capitalist system. Capitalism isn’t working – let’s make it history before the world is plunged into an unprecedented depression with all the political consequences that entails.

Gerry Gold
Economics editor
6 June 2012

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