The real cost of keeping us poor
Those in positions of power and responsibility are supposed to play it cool. They are supposed to understate bad news and overstate good ones. But doing so is proving to be a difficult job now that financial experts and economists are sounding well nigh apocalyptic, implying that a double-dip recession, if not a second credit crunch, is just a matter of time. It is difficult to say what form it will take, although most are agreed that it will come from the Eurozone.
Bail-outs and downgrades
There are good reasons for thinking so. Twelve UK banks and building societies – including Lloyds TSB, Santander, RBS, and Nationwide – have been downgraded by Moody’s, one of the world’s big three credit rating agencies. This means ‘market confidence’ in the government’s willingness to bail them out is at an all time low. Both Italy’s and Spain’s sovereign credit ratings (their ability to expand their economies and pay off external debt) have been downgraded by Moody’s, Standard and Poor, and more recently by Fitch. Bailed-out Franco-Belgian bank Daxia is going under and requires a second rescue.
Is this bad? It seems so, as a direct result of the downgrades Prudential, the large UK based insurance company, which provides pension-related services has slashed its annuities (similar to a pension fund) to its customers. Observers fear that other companies will follow this example and cut their pensions too.
Added to that the European Central Bank (ECB) which controls the Eurozone has rushed in to extend direct, unlimited short-term and long-term loans to European banks. This is done to solve an immediate liquidity crisis, that is, to make sure that banks have enough money to lend to each other, since banks have massively reduced interbank lending due to many banks’ exposure to bad Greek debts.
England, on the other hand, has taken the much-tabooed route of increasing money supply to spur economic growth. This process is euphemistically known as quantitative easing or QE, where a central bank virtually creates money and with it buys assets (usually government bonds) in large quantities. This money then circulates through the banking sector, where it is hoped that the banks will lend to businesses. The problem with this method is that it risks driving up an inflation that is already running at a painful 4.5% (measured by the Consumer Price Index).
The Bank of England had already released £200bn through a first round of QE in 2009 at the beginning of the crisis. Now it has added £75bn more, which came as a shock to the system. Other central banks are expected to follow, but they are resisting. The BoE expects food and fuel costs to fall next year, which it thinks will absorb the inflation, but manufacturing costs (both of raw materials and price of finished products) are rising steeply. This will push up the prices of retail goods, passing on that burden once again to ordinary consumers – you and I. This manufacturing cost (measured by the Producers Price Index) has to be factored in before measuring real inflation.
Besides, hoping that banks will lend to medium and small businesses in a laissez faire economy is unreliable, since they have no legal obligation to do so. This is why even some Liberal Democrats are calling for the nationalization of certain banks like RBS so that they can be forced to lend. This is in the midst of fears that RBS may need another bailout.
To add to these local woes, Germany and France agreed in late September to extend the bailout package for Greece, Portugal and Ireland to 780bn Euros or £670bn from the initial 440bn Euros or £383bn. UK taxpayers are already contributing £12.5bn to this package. We don’t know yet if this contribution will be increased. All we know is that the people here or anywhere else are in no mood for generosity. It may well be that UK’s austerity scheme could be expanded further, as is happening in Europe, even as liberal and Left experts argue for more spending to stimulate the economy. Portugal and Greece are held ransom by the unholy trinity of the EU, the ECB and the IMF who are using this opportunity to force cruel, neoliberal reforms upon those countries, and ruling elites everywhere are abiding by it.
No way out
Right now we are in a no exit situation. A second credit crunch will make things a lot worse than they already are. Politicians of all stripes are utterly clueless and cannot think beyond austerity because that’s what the financial system wants of them. Social spending coupled with an unregulated finance economy has proved to be utterly unsustainable with its extreme debt levels and rapid transfer of wealth to a small financial elite. Whether functional or in breakdown this system is disastrous to the ordinary masses. Therefore a mere anti-cuts appeal will not succeed in mitigating our long-term problems. Hope lies only in a meaningful anti-capitalist movement that will make its resistance systemic rather than focussing on single issues like “greedy bankers”, “corrupt politicians” or “anti-cuts”.