The upheaval in the global financial markets last week raised the spectre of a new crisis. It was also proof that the old one is still sending shudders through the system.
The Vix index, which measures market volatility, is also known as the “fear index”. It has soared to its highest level in more than two years. The Financial Times reported, “It is rare that so many indicators flash red.”
The Bank of England’s chief economist Andy Haldane claimed that the British economy was in “fine fettle” in a speech last week. But he admitted that future prospects made him, “gloomier”.
He also had to acknowledge that one of the problems with talk of recovery is that millions of people have suffered pay cuts—in real terms the average worker gets £50 a month less than in 2008. Haldane said wages had gone down during all but three of the past 74 months, amounting to a cumulative drop of 10 percent, a fall “unprecedented since at least the mid?1800s”.
There a number of reasons for the recent market turmoil. One is that the US state will shortly finish winding down its “quantitative easing” which has poured cheap money into the system to keep it afloat.
Another is that oil prices have tumbled to their lowest level since 2010. While most people would think this was good news, lower prices affect the scale of profits and feed panic at the prospect of deflation.
The sight of the slowing Chinese economy has also raised the “fear index”. Its growth rate has dropped from an average of 15 percent a year throughout the 2000s to 8.5 percent today.
This is still a level that European governments would envy but at the same time China’s level of debt has risen by 100 percent of GDP since 2008.
The Economist magazine points out that as previous financial crashes have been preceded by “a frantic rise in borrowing…it seems reasonable to worry that China could be heading for a crash.”
The very things that have protected the stability of the Chinese economy until now could cause bigger problems in the long run.
For example the centralised control of banks owned and backed by the state means that such institutions are not allowed to fail. But this may only be postponing the problem.
On top of these, there is a fundamental issue closer to home, Europe, which represents the biggest economy in the world.
As the New York Times wrote, “The global market turmoil is a vivid reminder that the European crisis didn’t go away— it has just been lying dormant.”
The priority of the politicians has always been to shore up the European banks, despite their role in creating the crisis in the first place.
There is no evidence that the practices that fuelled the economic collapse of 2008 have ended.
The Greek economy is still suffering under crippling levels of debt owed to these same banks. The burden of this has been carried by millions of ordinary Greek workers and the poor whose living standards are still being slashed.
Germany, seen as the economic powerhouse in Europe, faces falling exports among other problems. Mario Draghi, the president of the European Central Bank, has called on the German government to stimulate economic growth by dropping its rigid controls on public spending.
Commentators cite Germany’s crumbling bridges, potholed roads and overcrowded schools as evidence it is in dire need of investment. These are not images of a booming economy and show it is not immune to the pressures of years of economic contraction.
Workers in Britain and across Europe have constantly been told that the only way out of this economic crisis is to accept pay cuts and a slashing of welfare state services.
Politicians, both Tory and Labour, are likely to use the recent market panic to argue that the recovery is too frail to let up on austerity.
But instead it should be proof that forcing ever greater sacrifices on the majority of ordinary people only succeeds in maintaining the wealth of the few.