Hardened boosters of capitalism must be tempted to dismiss the global economic and financial crisis as history.
The Financial Times reported last Saturday that the hedge funds that profit from speculative bets in the financial markets now manage over $2,000 billion—“more money than they have ever done before, surpassing their peak in the pre-crisis boom days of 2007, when the industry could lay claim to $1,930 billion of client investments”.
“Names such as Paulson & Co and Brevan Howard, firms that have made billions of dollars for their founders and their clients of late, have seen the crisis add to, rather than subtract from, the investing aura that comes as a hedge fund standard,” it says.
In fact, the situation is less promising than such reports suggest. The recovery from the global slump of 2008-9 rests on two pillars that potentially undermine each other.
The first is China. The Chinese ruling class retained collective state control of the banks and so avoided the speculative madness that blew up the American and European financial system. They used the banks to pump over $1,000 billion into the economy, mainly in the form of new loans to finance investment.
So China resumed headlong economic growth, in the process pulling up those economies supplying it raw materials and food, like Brazil and South Africa. It is also thanks to its role as an exporter of high-end manufacturing goods to China that Germany has been enjoying what the head of its central bank last month described as a “roaring” recovery.
But the very vigour of the Chinese boom is destabilising. The money with which the state flooded the economy has fed a property bubble. The situation bears an alarming resemblance to the one in the US and parts of Europe that precipitated the crisis in the first place.
Moreover, China’s apparently insatiable appetite for food and raw materials has helped sharply increase the prices of primary commodities.
Most visible is the oil price, which is back to over $100 a barrel, 35 percent higher than last year’s levels. But alongside the rising price of oil, the International Monetary Fund’s overall commodity index rose by 32 percent between mid-2010 and February 2011. The resulting surge in food prices was one factor precipitating the revolutions in the Arab world.
At a more banal level, Barack Obama’s re‑election campaign has got off to a weak start because of voter discontent over high petrol prices.
Inflation in China itself hit a 32-month high of 5.4 percent last month. Anger over rising fuel prices and harbour fees has led truckers to blockade Shanghai’s Baoshan port, the largest in the country.
This latest dispute comes against the background of last year’s scandal over workers’ suicides at Foxconn’s vast electronic parts plant at Shenzhen and strikes at Japanese-owned car plants.
These forced the Chinese authorities to raise the minimum wage. For the advanced economies, this means they can no longer rely on China as a source of ever‑cheaper manufactured goods.
China is becoming an exporter of inflation. According to the reigning neoliberal orthodoxy, the conventional remedy for higher inflation is to raise interest rates as a way of slowing down economic activity. But this threatens the second pillar of the recovery, which is the support given to the financial system by the main central banks.
In the US, Britain and the eurozone, interest rates have been at or close to zero since the 2008 financial crash. The sluggishness of the US economy led the Federal Reserve Board last November to institute another round of “quantitative easing” (QE2). This involved the American central bank buying US government bonds, which is the modern electronic way of printing money.
The financial markets now want to see interest rates raised. The European Central Bank took the first step in this direction earlier this month. QE2 is set to run out at the end of June. But the recovery in the US and much of the eurozone is still quite weak. Combating inflation by kicking away the state‑provided crutch holding up the financial system may stall it—or even cause it to reverse.