There has been a slight recovery of nerve in the financial centres of Wall Street and the City of London over the past few weeks.
“We are seeing signs of progress,” said US treasury secretary Hank Paulson. “The markets are considerably calmer now than in March.”
This is mainly because the leading capitalist states have made it clear that they are willing to use their central banks to pump in whatever money is needed to prevent the international banking system from collapsing.
Martin Wolf, the senior economic commentator at the Financial Times, is a bit of a weathervane in these matters. In March he was very gloomy.
“This is not a crisis of ‘crony capitalism’ in emerging economies, but of sophisticated, rules‑governed capitalism in the world’s most advanced economy,” he wrote. “Yes, the government can rescue the economy. It is now being forced to do so. But that is not the end of this story.”
But by last week Wolf was back to his old arrogant neoliberal self, telling us that “the market is right”. The subject was the oil price, which is now hovering at an all-time peak of $126 a barrel.
Wolf dodged the controversial question of to what extent the rise in the prices of oil and other primary commodities are being driven by financial speculation.
He said, in effect, that speculation isn’t having any significant impact on prices and that it plays a useful role by aligning supply and demand.
Another less high-profile Financial Times columnist, Tony Jackson, took a very different line in a piece last week headlined “Speculators Feast on Soaring Commodities”.
“In 2006, the International Monetary Fund (IMF) concluded that in commodities generally, speculative activity responded to price movements rather than the other way round,” he wrote.
“But by this March the IMF was puzzling over why prices were still rising in spite of the credit crunch and economic slowdown. A large part of the reason, it decided, was financial buying.”
Speculators have worried for some time that the financial bubble might burst – with reason, as it turned out. They started investing in commodities as their prices started rising in the mid-2000s.
“And more recently with the world waking up to the dangers of inflation, commodities have emerged as an explicit inflation hedge,” Jackson added. “The snag is that insofar as such buying pushes the price up, the effect is that of a hamster on a wheel.”
Whatever the forces driving up the oil price are, some analysts now predict it may even reach $200 a barrel. This would make a severe global recession inevitable whatever happens to credit markets.
That’s why George Bush made a point of pleading for higher oil production during his visit to Saudi Arabia last week. He hopes higher production will lower prices in exchange for the promise of US military protection for the oilfields.
The Saudi royal family carefully waited till after Bush had left before announcing that that they had already decided to boost oil output a week earlier – a sign that even the most venal Arab regime can’t afford to be seen as the US’s lapdog these days.
But even if the rise in the oil price does pause, the US and the world economy aren’t out of the woods yet. Jean-Claude Trichet, president of the European Central Bank, pointedly refused to say that the credit crunch is over when he was interviewed by the BBC recently.
The interest rate banks charge each other is still very high, reflecting their basic lack of confidence in each other. And house prices in the US continue to fall at unprecedented rates, spreading further losses through the financial system.
It’s still hard to be sure how serious the developing recession will be. But, as usual, ordinary working people will be expected to pay. Mervyn King, governor of the Bank of England, made this crystal clear when he said last week that “the nice decade is behind us”.
Higher prices would mean “a squeeze on real take-home pay which will slow consumer spending and output growth, perhaps sharply”, he added. So we can’t say we haven’t been warned – the question is what we’re going to do about it.