Last weekend’s warm-up to the G20 meeting in London next month delivered few tangible results. At their meeting in Sussex, finance ministers resisted US pressure for yet more government spending to prevent the world economy sliding deeper into trouble.
The US was isolated because its policy is not working. Indeed, spending vast sums to try to reflate an economy ravaged by a collapse in property prices was tried in Japan during the 1990s. It failed – and saddled a generation of Japanese with an intolerable burden. Nearly half the government’s tax receipts this year will be swallowed by interest payments on this debt.
Barack Obama’s administration has failed to absorb this lesson, although other G20 leaders seem less willing to pile debt upon debt.
There is another problem with borrowing vast sums to try to administer a dose of so-called “fiscal stimulus” – it fails to address the problems in housing that triggered the crisis.
Mortgage rates have not fallen anywhere near enough. Many borrowers are saddled with huge negative equity, but are still being charged close to double digit mortgage rates or more.
By the end of last year, one in nine US homeowners with a mortgage was either in arrears or in the throes of being repossessed. That figure may soon rise to one in eight.
Meanwhile the US faces a social catastrophe, with unemployment spiralling upwards. The official jobless rate rose to 8.1 percent in February – but that figure is misleading.
Many have given up looking for work and thus do not count in the official tally. And over eight million are working part-time because they cannot find full-time work or their hours have been cut.
The US Bureau of Labour Statistics publishes a more comprehensive measure of unemployment, known as the U6 rate, which includes these categories of “discouraged workers” and “involuntary part-time workers”.
This leapt to 14.8 percent in February. It is very likely to reach 20.0 percent by the end of this year on current trends. Many of the part-time workers are in the auto sector and are likely to lose their jobs as demand for cars continues to slide.
The jobless rate in the US could rise into 2010 and beyond if the Obama administration persists with its current flawed policies. It could easily reach 25 percent next year.
But the US is not alone. Japan will be the first major industrialised economy to fall into depression. Its first quarter GDP report is likely to show a decline of more than 10 percent from the peak, the usual benchmark for depression. Germany will not be far behind, along with other major manufacturing exporters such as Sweden, South Korea and Taiwan.
Eastern Europe remains the biggest global risk. Latvia has already entered into depression. And from the Baltics down to the Balkans and across to Kazakhstan, there are around 20 countries likely to hit this unwelcome benchmark.
The decline in Britain will be less severe in the short run. Ironically, less exposure to manufacturing has limited the economic contraction here. Banks are shedding workers. But many are still on life-support and the loss of jobs has therefore been limited – so far.
But overexposure to financial services will eventually take its toll. The rise in unemployment in Britain is still in its infancy. The monthly rise in the claimant count may yet double from the 79,000 increase witnessed over the past three months.
The obsession with driving profit rates up at the expense of wages lies at the core of this crisis. Until that is addressed, G20 leaders will never come close to resolving the underlying contradictions of capitalism that brought the world to the brink of depression.
Nevertheless, it is striking that even the most basic remedies pursued in the 1930s – when borrowing costs were forcibly driven lower through government intervention – are not being followed now. This economic crisis has a very long way to run.
Graham Turner is an economist and author of The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis. It is available from Bookmarks for the special price of £10 – phone 020 7637 1848 or go to » www.bookmarksbookshop.co.uk