John Maynard Keynes argued that one of the main reasons why capitalist economies are so unstable is because they are driven by investments that are essentially bets on an uncertain future. The present moment is one of peculiar uncertainty even by these standards.
The financial crash two years ago helped push the world economy into its worst slump since the 1930s. But, as Barack Obama reminded US voters, the huge amounts of money that leading capitalist states were prepared to spend in the winter of 2008-9 stopped the slump being as bad as, or more severe than, the Great Depression of the 1930s.
Officially we are in “recovery”. But the picture is contradictory. Thanks to a huge leap in investment funded by its state-controlled banking system, China has been growing fast for the past 18 months.
This has pulled up many of the economies that supply China, whether they be raw material exporters such as Brazil or producers of high-end manufactured goods like Germany.
But the US, still the centre of the world economy, has been growing very slowly. To understand why Obama received a caning in the mid-term elections you have to look no further than the unemployment figures.
Including those who are too discouraged to seek work, and part-time workers who want to work more, unemployed workers make up 17 percent of the US workforce.
October saw the biggest net increase in jobs for six months. But Heidi Shierholz of the Economic Policy Institute commented: “If the rate of job growth were to continue at October’s rate, the economy would achieve pre-recession unemployment rates (5 percent in December 2007) in roughly 20 years.”
Slow growth and high unemployment explain why the US central bank, the Federal Reserve Board, announced last week a new phase of “quantitative easing”—known as QE2.
At the height of the crisis, several leading central banks sought to combat economic collapse by the modern equivalent of printing money—buying government and private bonds and thereby increasing the amount of money in the economy.
Now the Federal Reserve has decided to pump in another $600 billion by the middle of next year. QE2 is intended to stimulate a sluggish economy. But it is not at all certain that it will succeed
Many firms and households are loaded down with the debts accumulated during the boom of the mid-2000s. They are cutting spending. Many banks face the same problem.
So QE2—which is also being considered by the Bank of England—won’t automatically increase spending. But there’s little else that central banks can do, as interest rates in many advanced capitalist states are already very low.
Keynes called this kind of situation a “liquidity trap”. But his favoured method for getting out of a slump—the state substituting itself for the private sector and spending more—isn’t politically feasible.
Austerity rules in Europe, and the Republican capture of the US House of Representatives means that Obama’s call for a fresh spending stimulus is dead.
QE2 could push the US dollar down—making American exports cheaper and thereby stimulating the economy. The prospect of QE2 helped the dollar fall against the euro and the yen in the past couple of months.
But there is one major currency against which the dollar’s fall has been sluggish—the Chinese renminbi. China’s rulers have pegged their currency against the dollar at a level that allows their giant export machine to continue humming.
QE2 will intensify conflicts among leading capitalist states. Cui Tiankai, a Chinese deputy foreign minister, and Wolfgang Schäuble, the German finance minister, have denounced it. The big economies of the Global South are furious that the US is flooding them with speculative money.
This will probably make the G20 summit in Seoul this week pretty explosive.
The warning by Brazil’s finance minister, Guido Mantega, that the world is heading towards “currency wars” seems right on the button.