Faced with disaster on almost every front, David Cameron and George Osborne are desperately talking up the British economy.
The International Monetary Fund predicts that Britain’s economy will grow by 3.2 percent in 2014, the fastest among the Group of Seven leading industrial economies. In the US the news also seems good, with the S&P share index ending on a record high last week.
But when one begins to probe this last figure the picture becomes murkier.
The Federal Reserve Board, the US central bank, ended quantitative easing (QE) last week. First adopted after the September 2008 financial crash, QE involves central banks buying corporate bonds and other kinds of financial assets.
The effect is to create new money in the accounts banks hold with the central bank. The theory is that the banks then lend this money to businesses and households, and the resulting extra spending boosts the economy.
The Bank of England has also adopted the policy. But there’s enormous controversy about how effective QE has actually been. In any case the Fed has now decided that the US economy is growing strongly enough to justify turning off the tap.
This cheered the markets, but it was another event that sent them into overdrive. The Japanese economy has stagnated since its own financial crash at the beginning of the 1990s. This has involved, among other things, deflation.
This discourages spending, partly because debt becomes more expensive and because one can always defer buying expensive goods hoping they will be cheaper in the future.
After Shinzo Abe became Japanese prime minister in December 2012, he appointed a new governor of the Bank of Japan (BoJ), Haruhiko Kuroda, who boosted Japan’s QE programme. By buying £1.3 trillion worth of assets Kuroda aimed to push the Japanese rate of inflation up to two percent by spring 2015.
But “Abenomics” isn’t working. Consumer prices rose in Japan by a mere 1 percent in September. So last week Kuroda announced that he was expanding the BoJ’s asset purchases. This move had the desired effect of pushing the yen down against the dollar, thereby making Japanese exports cheaper.
The markets seem to be betting on the contradictory US and Japanese moves leading to faster global economic growth. They can only do this by casting a blind eye at the eurozone, which seems to be catching the Japanese disease of stagnation and deflation.
European Central Bank (ECB) president Mario Draghi seems to be psyching himself up to take on the pro-austerity fanatics who are especially powerful in Germany and introducing QE for the eurozone. So as the US abandons money-creation, Japan and Europe seem to be becoming more reliant on it.
One reason why there is scepticism about QE is that the new money that it puts into the banks tends to stick in the financial system. Despite all the ways the ECB has found to support the eurozone’s battered banks, the total amount of bonds and loans is lower now than it was in 2009.
The picture isn’t very different elsewhere in the advanced capitalist world. The banks’ apologists argue that this is the fault of official measures to prevent further crashes, like the stress tests that European banks have just gone through.
More fundamentally, however, the banks are doing everything they can to rebuild their profitability, and this has involved cutting lending.
Companies in any case aren’t short of money. The US non-financial business sector held £1.6 trillion in cash at the end of June. But they’re not investing. According to a recent survey, US corporate treasurers have started to run down their cash balances. But non-residential fixed investment is just five percent higher than in 2007.
Marxist economists such as Michael Roberts argue that profitability is still too low to encourage a big surge of investment. Instead, higher corporate spending is going into more takeovers and buying back shares, pushing up share prices.
The rising markets aren’t a sign of growing economic health, but a symptom of global capitalism’s continuing malaise.