Double whammy

Aug 12, 2011 Editorial

While most of us have been transfixed at the spectacle of the downgrading of the creditworthiness of the US and the subsequent implosion of its stock markets (as well as the world’s) resulting in the loss of trillions in equity for investors, we have missed the possibly even more momentous economic crisis in Europe.
With this double whammy, the world is on the brink of an even deeper recession than the one from 2008, from which we have not recovered. Small nations such as Guyana, heavily dependent on exports and stability in the global financial infrastructure, will almost certainly be negatively affected if, in fact, stability is not returned very shortly.
In the US, the rating agency Standard and Poor’s (S&P) claims that it was not the economic crisis precipitated by the massive debt accumulated that caused the downgrade, but the lack of political will demonstrated by the political elite on both sides of the House, in confronting the crisis.
As this newspaper has been emphasising since 2008, the US has focused on generating profits from the financialisation of its economy rather than the production of goods and services. It has abdicated the latter roles to emerging economies such as China, India and Brazil – each of which has accumulated tremendous amounts of US credit – or from the US accounting, debts, that were used to satisfy the US consumer demand.
While it is widely conceded by impartial observers that the US needs to increase production within its economy through some sort of stimulus programs, the doctrinaire approach by the Republicans and the Obama administration on reducing the debt by cutting spending in the near term will achieve the opposite effect. And, it is feared, plunge the US’s very shaky recovery, into reverse gear.
The downgrade has also exacerbated such a trend, in that the holders of the US credit (US Treasuries) – especially China with US$1.5 trillion and the rest of Asia with a similar amount – have become sceptical of bonds holding their value as liquid assets. For the moment they cannot afford to dump treasuries by causing a self-fulfilling prophecy, but it is now certain that such a decision is on the cards, as well as the call for a new reserve currency other than – de facto – the dollar.
In the meantime, across the Atlantic, the Europeans are caught in their own financialisation crisis – one driven not by consumer demand, but rather governmental spending. Here, the European banks blithely extended credit to governments such as Portugal, Italy, Greece and Spain (the aptly-acronymed PIGS), that wanted to impress their voters by creating “European” style infrastructures and lifestyles.
The banks figured that with a unified currency (the Euro), the stronger economies such as France would not want their unification project to be seen as a failure through sovereign defaults by the PIGS. It appears that they have gambled well: Portugal has been bailed out; Greece has received its second (and certainly not its last) bailout, while Italy and Spain are fast approaching meltdown stage.
The Europeans, like the US, are now caught in a bind of their own making. Their financial institutions that made extraordinary amounts of profits through their speculations are now deemed “too big to fail”’ to force them to take their losses (“haircuts”).
The European Central Bank has backstopped the private banks’ profligacy by guaranteeing the extended new loans – also facilitated by the IMF. So the governments are made to institute cuts – in effect forcing their citizens to subsidise the banks, while accepting a lower standard of living. In Greece there have been massive protests, but to no avail.
While Britain is not part of the Eurozone, it has made the same decisions (after suffering from the same disease) – protecting the banks while effecting cuts that fall on its ordinary citizens. Even though the government – at the local and national level – has excoriated the riots and rioters that are dominating our TV screens for being “opportunistic”, the very visible anger is certainly a consequence of the inequities of who bears the burden of the crisis.

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