Economic recovery: Fact or mirage?

Global capitalism still wobbling seven years after recession

began

by Kumar David-July 11, 2015,

7:14 pm
The IMF hedged its bets but concluded cautiously on an optimistic note in
its 27 April World Economic Outlook document and press briefing. Jan

Hatzius, Chief economist at Global Investment Research at Goldman

Sachs, says "There is more light than shadow, but its a relatively finely
balanced picture". The Economist in its June 13-19 issue on whether there
is a US and global recovery comes down gingerly on the positive side. They
highlight different spanners in the works; the IMF the hangover of debt
("legacy problems"), Hatzius that when the Fed raises interest rates,
possibly in September, it will have disruptive global effects, and the
Economist that central banks and policy makers have depleted their
arsenal of recession fighting tools and will be empty handed if recession
returns. I will summarise this variegated picture without reference to last
weeks 61.3% vote in Greece against austerity and neoliberal economics,
an expression of confidence in Tsipraz-Syriza and shockwaves for Euro,
European finance capital and possible Grexit. These topics deserve full
length treatment on their own.
First, a startling reality can be explained using a graphic tucked away on
the last page of the same issue of the Economist. In the diagram, look at
the share of different actors in global GDP growth and focus on the four
most recent quarters. Global GDP grew at about 2.7% (annualised rate),
but of this 1.2% came from China while the USA and India contributed
about 0.5% each. All the rest of the world, the EU, Japan, Africa, Middle
East, Australia, Russia and all South and Central America contributed a
mere 0.5% to 0.6% to global growth; a huge drop from over 2% (about
half) just five years ago. I am nonplussed that in their obsession with a
possible US recovery, this sustained petering out of the collective output of
all countries other than China, USA and India has received little press from
pundits.
Secondly, the US economy has been a yoyo; ok, omit the first three years
after 2008 the downfall of US banking and look at behaviour from
about mid-2011 on the chart. The US has blown hot and cold from quarter
to quarter. The most recent data for April and May 2015 (second quarter,
not on chart) indicates negative investment and export growth but June
shows robust improvement in job creation; an irregular stagger. But then,
unemployment has dipped below 6% and job creation has been strong,
giving forecasters confidence that the US recovery though modest (below
3%) is here to stay.
The steady decline in Chinas contribution to global growth from 2010 to
2015 was expected as Chinese GDP growth fell from over 8% to possibly
as low as 6% (The bloodletting on the Shanghai stock market last week

wiping out $3 trillion was not expected!) The slowing down of growth is
good for the Chinese people as it is time to turn off the gush of breakneck
expansion that fattens the wallets of greedy businessmen and channel
resources into socially necessary healthcare, education, low income
housing and the hinterland. In India, robust growth took root in mid-2013
and the Modi administration can sustain 7% growth for the remainder of
its term. What a wonderfully lop-sided world! Does the data not beckon
trouble down the line in "all other countries"?
The curious mountain of debt
Economists at ING, a Dutch multinational bank and financial services
corporation, report that the world is drowning in a tsunami of $ 223 trillion
debt distributed in public (government), corporate (company) and
household (mainly mortgages) sectors. I have reprocessed the ING
findings into a table (which the webmaster may jumble into scrambled
eggs!)
At first sight these numbers are so large that they are unbelievable for
comparison, global GDP is $70 to $75 trillion and US GDP is $17 trillion;
the total GDP of the rich countries is about $42 trillion and total for other
countries including China is about $30 trillion. If there is $223 trillion in
global debt, well there must be creditors worth $223 who are they!
Everyone cant be a debtor; someone must be a creditor and a flush one at
that. What the economists dont tell you are a few things that many of
them dont grasp anyway. If A owes B $100, B owes C $100, C owes D
$100 and D owes A $100, in the eyes of these profoundly clever folk, the
circuit is awash with $400 of debt. My grandmother will scoff: "Balderdash
there is no debt at all!" So circularity accounts for part of the jumbo
numbers. True, interest rates round the circuit will differ and some in the
loop may be more dicey (risk prone) than others so that if the loop
fractures at one point all may drown.
Some debt will never be repaid. If a central bank prints billions to buy
treasury bonds which the treasury never redeems (more precisely, keeps
recycling) it is simply printing money to keep Zimbabwes Mugabe,
Venezuelas Maduro, or for that matter the US Federal Government afloat.
In the long run some of it will be inflated away; a billion lent on treasury
bonds 50 years ago will fetch less than 10 million in surrender value in real
terms today, leaving aside interest related accruals. Nevertheless, though
all banks create fiat money when the bulge is this big it is not make-

believe, it will not all evaporate away.

The third point is that a large part of government borrowing is from
pension funds and social security treasure chests which are continuously
replenished; a letter of demand on doomsday never arrives as one loan is
repaid and a larger one simultaneously taken. More secretive is finance
capitals use of derivatives (complex financial instruments and hedges) to,
quite frankly, bamboozle the public. Nick Dunbar said more than 10 years
ago in Risk magazine (June 2003); It is now widely known that since
1996, Italys Treasury has regularly used swap transactions to optically
(sic!) reduce its publicly reported debt and deficit ratios. Such trades are
controversial, and subject of fierce debate". In Risk January 2002 Italian
academic Gustavo Piga accused the Eurozone of "window dressing" public
accounts using derivatives. The worst such manipulation is Goldman Sachs
Mega-Deal for Greece where, in cahoots with a previous Greek
government, a complex web of currency deals and swaps were used to
cook the books. Mind you nothing was justiciably illegal as with all finance
capitals mega scams; banks and money barons look after themselves
leaving pensioners and wage earners to rot.
After making allowance for circularity of debt, and never-repay central
bank holdings (which relate to public debt only) and for subterfuge, there
still remain tens of trillions of credit that someone must own. Who? The
"owners" of this massive loot are the worlds financial moguls, billionaire
investors and the stinking rich. The 1% own it; investment houses trusts
and banks only collect and organise the finances of corporations and
individuals. Hence part of the global debt crisis is nothing other than
another face of the massive inequality of global wealth in late capitalism. If
the 1% hold 90% (or whatever) of global wealth, there is your answer to
the who owns it question. According to the Boston Consulting Group
global private wealth stood at $165 trillion in 2015, which fits my analysis.
At root, the standoff between creditor and debtor is also a class conflict;
German finance capitalist versus Greek citizen.
The IMFs expectation in its World Economic Outlook presentation is for
somewhat higher global growth (3.5%) than the authors of the chart that I
have shown (Haver Analytics, IMF, Economist) anticipate. This is to do with
the way different country contributions are weighted, but there is no
dispute that aside from China, the US and India the outlook for the rest of
the world is bleak. INGs fears that the huge private and public debt
overhang is a roadblock that cannot be cleared is corroborated by the IMF.

My friend and one time colleague Professor Harsha Sirisena in New

Zealand impishly calls for mega global debt forgiveness: "There is no other
way, just write most of it off"; he is probably right.
A depleted arsenal
Theoretically, there are two conflicting ways for capitalism to climb out of a
recession in practice a mix is used the Austrian or now mostly out of
fashion (except for torturing Greece, but thats for a different purpose; to
force regime change) neoliberal approach, or the bastard-Keynesian way.
The former entails budget cuts, savage austerity and welfare, pension and
wage cuts, till the economy is "cleansed" and growth commences. The
alternative, the classical Keynesian trajectory was government spending on
infrastructure and employment creation as in the New Deal of the 1930s.
Today this classical approach is drowned out by pumping money
(Quantitative Easing or QE) into the treasury and banks, tax cuts for the
rich and low interest rates. To rescue finance capital from near death, it is
not employment generation through public spending but money in the
pockets of big capital that is expected to revive the economy". This
bastard-Keynesianism is not to be confused with Keynes prescriptions.
Interest rates are nearly zero (or in the case of Japan, real interest rates
are negative) and hundreds of billions are being pumped into treasury and
bank bonds by central banks. If recession bites again there is no more
space to lower interest rates, shave budgets or pour more money via QE;
the Feds balance sheet now stands at $44 trillion. Inflation, asset price
bubbles and crazy stock market gyrations will aggravate future crisis. This
scenario keeps the editors of the Economist awake at night; sans interest
rate tools, fearing that more austerity will provoke unrest (hence the
conspiracy for regime change in Greece) and having reached the limit of
rolling the currency press, if recession strikes again soon central banks and
policy makers in the great capitals stand defenceless.
The high US dollar and low commodity prices indices are a complication
that is good for some and problematic for others. The high dollar is good
for US trading partners but it is pushing the American trade balance
deeper into the red the US net trade balance worsened at an annualised
rate of 7.5% in the first quarter of 2015. The relative decline in the value
of the Euro and the Yen is of course raising hopes in these two regions of
better export performance but their own data, paradoxically, does not
support the expectations. The global economy is awash not only with debt

but also contradictions.

There is another complication that I have space only to mention;
commodity prices. The price of oil is down 43% compared to $110 a barrel
12 months ago; global food prices down 18% and industrial goods down
12%. Despite near zero interest rates for years and the gush of the
currency press, inflation, paradoxically, is keeping its head low. This is
good for consumers, bad for producers and manufacturers; good for some
countries and bad for others. I will take this up at greater length some
other time.
Posted by Thavam