There’s an old saying that, ‘When the USA sneezes, we all catch cold.’ Alistair Darling and Gordon Brown know that the USA is already in recession. They know that the financial crisis is causing the hatches to be battened down all over the world. But, they say, Britain is immune. They’ve even commissioned a Treasury report to try to prove it.
Don’t believe them. The chill winds of economic crisis are coming our way. The parallels between the US, which is already in the mire, and the UK are stark.
- Both economies have had consumer booms that were fundamentally unsound, based on a housing bubble.
- A housing bubble is when house prices go up because people are buying, and people are buying because prices are rising.
- A housing bubble means people feel richer. They can borrow on the basis of the rising price of their house. In effect they can use their house as an ATM.
- In both the USA and the UK consumers, who weren’t really getting much better off, went on a spending binge based on their rising paper wealth.
- In both countries the government built up massive deficits by spending more than they were getting in tax.
- Both countries accumulated huge debts with the rest of the world, in effect living at their expense.
- In both countries, the currency took the strain of the trade deficit, and went into an uncontrolled slide.
- Now the bubble has burst
This has already started happening in the States. It’s just a matter of time before it’s played out here.
According to John Authers (Financial Times April 3rd 2008) "Since 1988 US house prices have risen 155%." (They’ve taken a dive recently, and they’re going to go lower). "UK prices, in spite of a slump in the early 1990s, have risen by more than 300%.”
As we know, reckless bankers in the States lent out sub-prime mortgages to poor people who couldn’t possibly pay back. Now they’ve defaulted, the bubble has burst, and the banks are in schtuck. House prices have already fallen sharply. Financiers were up to the same trick over here. Capital Economics reckons we could see a worse fall in house prices here than across the pond – down 25% by 2010. Why not?
Consumer debt
US consumers racked up debt that was 128% of household income. UK consumers have gone one better. We managed 175%. Pity they don’t give Olympic medals for consumer indebtedness. We’d get gold. Households have traditionally been the sector of the economy that was always in surplus. Yet in both Britain and the USA households have moved into deficit – by 4% of GDP in our case.
It’s a financial crisis, right? In recent years the British economy has been booming in (guess what?) finance. A third of all growth in the economy has been generated in finance, mainly in the City and Canary Wharf. Now that’s gone into reverse. Tens of thousands of jobs will go.
It’s not just the consumers that have been partying like there’s no tomorrow. Governments on both sides of the Atlantic have been spending money as if it were going out of fashion. Bush’s profligacy is well known. He’s been wasting huge sums on weaponry and dishing out tax cuts to the rich, with no thought for how to make the figures add up. He’ll leave a legacy of government debt that stands at $9.2 trillion and is still going up every day
State spending
Meanwhile gormless Gordon Brown has wasted £170bn of our and future generation’s money on bent PFI schemes. This is the direct equivalent of Bush’s tax handouts to the rich. From a government surplus amounting to 2% of GDP in 2002, Britain has moved to a deficit of 3% – in a boom! This is important, because the government can’t now reflate its way out of the pickle we find ourselves in, as they are trying to do in the US with tax cuts.
Not only have the consumers and governments gone on a spree – so have both countries. Enabled by these wonderful new global capital markets, both nations have built up huge deficits with the rest of the world. Britain and the USA both have current account deficits of 6% of GDP. That means that we as a nation and the Americans are spending $106 for every $100 we earn abroad.
Devaluation
In the old days you just couldn’t do this. The Labour government in 1967 was forced to bow the knee, devalue and tear up its reform programme on account of a much smaller deficit – about 2% of national income run for a few months. More recently Britain has been permitted to run a deficit of 5-6% of national income for years at a time by borrowing the difference. No doubt the bankers will want their pound of flesh in time. Now the international banks are just like the high street version. They’re basically factories churning out debt. Their livelihood actually depends on our collective financial irresponsibility.
Deficit
The current account deficit means that foreigners are building up claims on UK assets to cover the difference between imports and exports. Traditionally both Britain and the USA, as imperialist countries, have relied on the export of capital to maintain their control and exploitation of other countries. (The export of capital was identified by Lenin as a key feature of imperialism.) In simple terms, imperialist countries make their living by plain old parasitism. Britain has enormous overseas assets of £5,000bn in 2005 (4 x GDP that year), a world record. But the net asset position is being nibbled away in both countries, as both countries live beyond their means and fall into debt. The layers of fat are melting away.
So both Britain and the USA are spending more than we earn, consuming more than we produce and borrowing to make up the difference. It can’t go on for ever. We can see that from what is now happening in America.
Assets
Then there’s the dollar’s slide. If a country is spending more than it’s earning, then it has to pay for the difference in its own currency. Since a currency’s value is determined in the global marketplace, a country with a deficit like the USA can expect the dollar to be worth less against other currencies. Now there is one way they can prop up the dollar. That is by jacking up interest rates so holders of dollar-denominated assets will get a better return. But Bernanke at the Fed is desperately driving rates down to try to stave off the recession. Bernanke is reckless – he could forfeit the confidence of foreign owners of US assets. Then the dollar slide would become an avalanche. As it is, every day the dollar hits new lows against other currencies.
Inflation
Since Britain is a country with as big a deficit as the USA, there is as much pressure on the pound as on the dollar. Sterling has fallen against the Euro from 1.45 in November to about 1.25 now. A Euro gets you 80p. There’s one important difference with the States. The Monetary Policy Committee of the Bank of England is charged with setting interest rates so as to stop inflation getting out of control. This rule comes from the monetarist dogma that monetary policy should be directed solely at the threat of inflation, and it can’t be used to influence the level of economic activity in a capitalist country. The real effect of raising rates will be to dampen economic growth though, especially investment, and that is supposed to cut inflation. It’s a pretty blunt instrument.
Really inflation is more than 4%, way above the permitted maximum. So the MPC can’t do a Bernanke unless it fiddles the figures – which is exactly what it is doing. It doesn’t have a lot of wriggle room. Britain is a ‘small’ economy, dependent on what happens elsewhere in the world, above all in the USA. Raising rates will hurt. But even cutting them would accelerate the decline of sterling against the Euro. And that will hurt too, by making imports dearer.
If the sterling goes down in value, as it has been, that makes exports cheaper and imports dearer. In theory, that should correct the deficit over time – but that’s economic theory, not the real world. It hasn’t helped the Americans. And it won’t get us out of a hole.
Crash
Just as it made us feel rich, so the housing market will take us into recession.
House prices are now falling in Britain as well. March saw prices down 2.5%, the biggest monthly fall since 1992. There are predictions of three million households in negative equity next year, trapped in homes they can’t afford just like in the 1990s. The Citizens’ Advice Bureau reports a worrying 35% rise in borrowers coming to them asking for help with their mortgage arrears. Dispossessions loom.
Dispossessions
Britain is subject to the same processes as those that have already laid the USA low. The structure of British capitalism is very similar to that of the US, specially the out-of-control role of finance capital. In both cases house prices have been in a bubble that is bursting. The same house of cards of unstable credit structures has built up in both countries. They gave a false feeling of wealth. It was only this dance of the millions that kept the boom going.
House prices
Now, when house prices collapse, they will bring real impoverishment to millions of people. So the banks that dished the money out are struggling (see ‘The housing tsunami pp 6-7). House building is the first part of the ‘real economy’ to take a hit. What is happening in the USA now will happen to us later on. That’s for certain.
The bankers and their system have screwed up. They were the ones responsible for blowing the bubble up. Now they are laying low, waiting for us to take the hurt and sort out the mess. No way. The system has got to go – here, in the States and all over the world.
