Sunday 17 January 2016
It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.
They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures.
The story is similar if less marked in continental Europe and Japan. Demand has only been sustained across all these countries since the mid-1980s because of the relentless willingness of banks to pump credit into the hands of consumers at rates much faster than the rate of economic growth to compensate for squeezed wages. It was a trend only interrupted by the credit crunch and which has now resumed with a vengeance. The result is a mountain of mortgage and personal debt but with ever-lower pay packets to service it, creating a banking system that is fundamentally precarious. The country that has taken this further than any other is China. The Chinese economy is a giant Ponzi scheme. Tens of trillions of dollars are owed to essentially bankrupt banks – and worse, bankrupt near-banks that operate in the murky shadowlands of a deeply dysfunctional mix of Leninism and rapacious capitalism. The Chinese Communist party has bought itself temporary legitimacy by its shameless willingness to direct state-owned banks to lend to consumers and businesses with little attention to their creditworthiness. Thus it has lifted growth and created millions of jobs.
It is an edifice waiting to implode. Chinese business habitually bribes Communist officials to put pressure on their bankers to forgive loans or commute interest; most loans only receive interest payments haphazardly or not at all. If the losses were crystallised, the banking system would be bust overnight. On top, huge loans have been made to China’s vast oil, gas and chemical industries on the basis of oil being above $60 a barrel, so more losses are in prospect.
Investors in China’s stock market took fright in the new year, with falling share prices only another turn of the screw. The only surprise is that nobody saw through it all earlier. China’s leaders are visibly frightened and at a loss, clamping down on any possible source of dissent as they flail to keep their Ponzi economy alive. As consumer demand falters in Europe, North America and Asia, so the demand for oil falls, even as Saudi Arabia, waging economic war against Iran and US shale producers, pumps oil out of the ground without limit. The whole structure of banking that was predicated upon higher oil prices gets more rickety still.
At just this crucially sensitive moment, the US Federal Reserve last month raised interest rates from their extraordinary lows, more concerned to signal its ardent desire to return to the normality of business as usual than to face the reality we live in abnormal times. There is no danger of inflation. If credit growth is out of hand, the tool central banks must use, as the Bank of England recognises intellectually by equipping itself with such tools but as yet not bold enough to use them, is direct quantitative controls to constrain the growth of credit. The system is not robust enough to withstand a rise in interest rates.
Indeed, further evidence of global disorder, as the Fed must have known when it raised interest rates, was the resulting acceleration of the flight of capital out of the so-called emerging economies in Africa and Latin America. Brazil, for example, is now in its worst recession since 1901. But the US central bank accepts no responsibilities for global economic management. Nor does anybody else.
Investment banking, the world of high-velocity trading in trillions of pounds of financial assets and mega-deals, wins few prizes in the integrity stakes
It’s clear what needs to happen. There needs to be wholesale change in economic thinking. Forces in world labour markets – new forms of 21st-century trade unionism – need to be strengthened. The power of financial markets needs to be constrained. Credit growth needs to be managed by direct controls on the growth of bank balance sheets and banks need to be weaned off the financial casino they have built. Great companies need to be allowed to purpose themselves around creating value rather than dancing to the interests of disengaged shareholders.
There needs to be parallel change in how countries think of the international order: it has to be built and sustained rather than assumed to be someone else’s responsibility. We need to keep the EU together around open trade, open movement of peoples (notwithstanding the refugee crisis) and respect for political pluralism so menaced by new forces in eastern Europe. To keep the world open, there has to be international agreement on deepening and extending a framework for trade, and a new system of managed exchange rates to replace the tyranny of floating rates. Shia Muslims need to be befriended; Sunni Muslim helped to weed out poisonous Jihadism. Israel needs to be a genuine peace-seeker. China must be allowed to be convulsed by the coming regime change, vital to depoliticise its economy, without fearing foreigners are going to exploit the turmoil.
All this requires a new generation of political leaders prepared to throw off the categories in which thinking has been cast since 1980 – and remake our world rather as the world was remade in the years after 1945. Prosperity, peace, co-existence and recognition of mutual interdependencies are too easily taken for granted. The financial markets are signalling deep unease, not least at the world they themselves have helped build. It is a message that should be heeded.