By Alex Callinicos
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Pumping in money won’t restart growth

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Issue 2348

A big talking point in Washington at the minute is a new book by David Stockman, who was Ronald Reagan’s budget director from 1981-85. Disillusioned by his failure to stop Reagan cutting taxes and boosting military spending, he became a right wing libertarian.

According to Stockman, the rot set in 1933, when Franklin Roosevelt took the United States off the gold standard. He says this began an era of “crony capitalism” in which the state props up private firms. 

This “state-wreck” reached its peak with the bank bailouts by the US government as both George W Bush and Barack Obama responded to the financial crash of 2007-08. 

Stockman reserves special anger for the Federal Reserve Board, “a rogue central bank that has abetted the Wall Street casino”. 

He said it had “crucified savers on a cross of zero interest rates and fuelled a global commodity bubble that erodes Main Street living standards through rising food and energy prices”.

Stockman’s remedy is to tie the dollar to gold again. It’s typical of the free market utopianism that is influential on the Republican right these days. But this doesn’t mean his diagnosis is completely wrong.

Nearly six years into the crisis, the main contradiction is between fiscal austerity and what George Osborne likes to call “monetary activism”. On the one hand, governments are trying to lower the economic profile of the state by cutting public spending and borrowing. On the other hand, the central banks have been left with the job of keeping the financial system, and therefore the world economy afloat.

In the US and Britain this takes the form of “quantitative easing” (QE). The central banks buy government and corporate bonds to pump money into the financial system. 

The European Central Bank has so far prevented the collapse of the euro—though Cyprus may prove to be another nail in its coffin. This is through a combination of public reassurance and cheap loans to banks. Interest rates remain at record lows.


The most dramatic move in this direction came last week, when the Bank of Japan’s new governor Haruhiko Kuroda, announced a gigantic QE programme. Economist Gavyn Davies calculates this will involve buying bonds equivalent to 15 percent of national income in 2013-14, three times what the US Federal Reserve is planning to do over this period.

The Japanese economy has been stagnating since the collapse of a huge financial bubble in the early 1990s. The new right wing prime minister, Shinzo Abe, appointed Kuroda with the aim of reviving economic growth by, among other things, boosting the amount of money.

Abe hopes this policy will help push down the yen against other currencies and make Japanese exports cheaper. He’s not alone in trying to boost economic growth through devaluation.

Ben Bernanke, chairman of the US Federal Reserve, has been widely accused of provoking “currency wars” by using QE to cheapen the dollar. And until recently Bank of England  governor Mervyn King was openly talking the pound down.

Free marketeers like Stockman complain that these policies are distorting the financial markets. Awash with cheap credit, these have been zooming upwards.

More seriously, there’s no sign that QE is working. British manufacturing industry remains in the doldrums, despite the sterling devaluation. The latest US unemployment figures on Friday of last week reported that 88,000 jobs were created in March—less than half of what was forecast.

The broader picture is one of stagnation rather than complete collapse. According to the Marxist blogger Michael Roberts, “most parts of the world capitalist economy are expanding, if at a crawl.  Only the eurozone is in a significant contraction.”

QE is a false remedy because what is preventing growth isn’t a lack of money. Companies used the Great Recession of 2008-9 to squeeze their workers harder. In the US profits per employee doubled between 2002 and 2012. 

But Robert calculates that the US rate of profit—profits compared to the stock of capital firms have invested—is below its most recent peaks in 1997 and 2005.

So the bosses are sitting on their profits hoping for better times. They may have a long wait.



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