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Shadow of the GFC, by John Hinkson

Another chapter in the lost recovery?

Once more since the GFC of 2008, the world economy is being wracked by wild gyrations. On the one hand there is the sudden and massive leap in the value of the Swiss franc, a movement no longer able to be contained by authorities and that has had immediate effects, such as bankrupting of some hedge funds and investors. What other effects there will be remain to be seen, but it is a major shock to investment markets. Another is the return to money printing on a grand scale by the European Central Bank, seeking to hold at bay forces that threaten to take euro-zone economies into reverse inflation or what is called deflation. The two events are closely linked and are signs of continued crisis.

As far as money printing goes, the euro zone now joins with Japan. Japan has an even larger money-printing project proportionally, one that has already shown clear signs of failure from the point of view of both seeking 2 per cent (rather than zero) inflation and hoping that the economy will be stimulated after twenty-five years of stagnation (what a comedown for the super state of the 1980s). The United States, on the other hand, has now discontinued its own money-printing project and considers itself to be on the road to recovery. The main beneficiaries of its splurge have been the investment markets, while ordinary people continue to experience a generalised decline in standards of living and working possibilities. There is reason to doubt the nature of any recovery here too, and more so if the euro zone continues to be in crisis and China encounters the limit of its own development strategies and goes off the boil. That the United States’ internal interest rates are near zero is a sign of continued ill health in itself. If US rates do rise, as predicted, yet another round of instability is in store for the world economy.

The other aspect of the present gyrations is commodity pricing. Various significant commodities like iron ore have collapsed in value—by roughly 50 per cent—and now, most notably, oil has joined the list.

The importance of oil as a commodity could hardly be overstated. Its centrality to the contemporary economy remains unchanged. The likely demise of available reserves has been a threat to the global economy for a couple of decades, reflected in pricing that has escalated, with hiccups, since the 2003 war in Iraq from roughly $25 to $100-plus per barrel. Sudden shifts in demand, like the consequences of the GFC, have had the effect of halving prices. Growing demand associated with the expansion of Chinese production has pressured pricing in the $100-plus direction.

Has the situation of predictable long-term oil shortages really changed? There has been a lot of hype around the development of shale oil in the United States, said to be a ‘game changer’ in terms of new and growing supplies. If this were true on a large enough scale it could easily be a factor in the present price collapse. But even the predicted return of the United States as a net oil exporter is far from reality. Shale oil definitely has medium-term effects—over perhaps five years—but only on a scale similar to the discovery of major fields of oil in the past, which were soon overwhelmed by a combination of growing demand and the exhaustion of old fields. In any case, if the present decline of oil pricing continues for a year or so it is likely to eliminate shale oil as a significant source because of its high cost structure—until such time as the price rebounds into another cycle.

It is always tempting to read long-term effects into short-term changes in commodity markets. It is usually wrong to do so. There has been some evidence that an important element in the present price collapse was speculative: investment markets had come to assume that oil prices would continue to rise, and this assumption tempted massive and unsustainable investment that amplified the degree of gyration (and loss) when the world was found not to be so predictable.

While old fields continue to be exhausted, the other element in the price collapse is the fall-off in demand from China and continued depressed economies elsewhere. At any one time commodity markets are finely balanced, and slight shifts in demand can have large short-term effects. As none of the large economies are expanding—they are unable to bounce back, as it were, as part of their recovery—there should not be too much surprise at the shift in pricing when combined with investment speculation. It remains to be explored what these various ‘gyrations’ mean for our prospects.

It is possible to assess these wild movements in terms of immediate effects. The obvious example is oil. From an empiricist standpoint, consumers can calculate how much better off they will be in terms of disposable income if petrol is 40 cents a litre cheaper. The pricing of iron ore is more complicated because iron ore is not an immediate-consumption item.

But our prospects are much more complex. There have already been major withdrawals of investment in shale oil and there are likely to be significant bankruptcies associated with the large investments necessary to bring shale oil to production. More generally, there will be massive realignment and upheaval in the mining industry.

But this pricing collapse across the commodity sector also has more general meanings. Here it joins up with the Swiss realignment of currencies and the further resort to money printing in order to handle tendencies towards deflation and the unresponsiveness of economies to stimulus.

Up to this point Australia has seemed to have avoided this internal economic crisis—unlike many of the European economies, for example. It is actually more complex than that, in that China has propped up our mining sector, allowing positive GDP growth while the balance of our economy has been in stasis because of the inflated Australian dollar. This balancing act is now coming apart because of the collapse of both commodity pricing and the Australian dollar. Set within the larger framework of global crisis, we are likely to look more like other Western economies than we have up to this point. Our main positive prospect now lies with the opportunities made possible by our currency decline—for the remnants of manufacturing that have managed to survive.

It is significant that fiscal stimulus for economies in the West has been abandoned in favour of money printing by central banks. This is in large part because fiscal stimulus requires expanded government debt, while money printing leaves debt consequences with the central bank rather than on the official government books. This does not mean it has no consequences. Loose monetary policy may take ten years to unleash its effects, but unleashed they will be. Even in Australia government debt is achieving significant levels, with little prospect for budgets to do anything other than add to it. As the effects of the commodity collapse make their mark, revenue sources for the government, which have already imploded, suggest that further deterioration is to be expected.

However that may be, the reality of the collapse in government revenues is a clear sign that economies, including Australia’s, are in a completely different phase to that of ten or fifteen years ago. Some face this in its proper significance (see the reflections of the conservative Australian economist Henry Ergas in his ‘Shock Waves from Zurich’), while others simply give it a benign interpretation. Time will tell, but it does mean something that economies have stalled on a global basis for seven years and show no convincing sign of ‘recovery’, and therefore debt escalation continues.

Economies have moved into this different phase because they have been de-leveraging debt since the GFC. This phase can be called a ‘deflationary’ phase, not meaning negative inflation but saying something more general about the economy. Japan has not had negative inflation throughout the last twenty-five years, but it is a good description to say that its economy is in deflation, being unable to respond to stimulus of any kind. It no longer responds to those processes that indicate a prosperous capitalist economy.

But this way of putting it is too narrow. It fails to indicate the significance of the situation of the West. The difficulties of the global economy lie in its very structure, which was born in the early 1980s. This was no economy in any normal sense because it was grounded in the cultural revolution of high-tech, one where technologies generated by intellectual institutions were joined with the previous institutions of the economy, including the market, and transformed them all (for an expanded comment on this, see my ‘Larger than Economy: Interpreting the Global Financial Crisis’, Arena Journal 39–40, 2013).

One of the features of this global economy, commented on by the Bank of International Settlements (BIS) among others, is the way it generates major distortions. These distortions no doubt are linked to the gyrations the world faces today. Their cause lies in the shift that was a major support to the rise of globalisation: the abandonment of fixed currency values that required internal budgetary measures whenever a currency was in crisis. The globalised world has abandoned all such measures and distortions follow. Among other things they allow the rise of export-oriented economies with massive reserves—like Japan and now China. BIS may regard these developments as unsustainable, but the main point is that there are no longer any available structural means that are preventative.

It is not just the economy that is in crisis; globalisation and its core institution, the neoliberal market, are in crisis. More to the point, we are in a globalisation trap. The great experiment, only in existence for thirty years or so, is wracked with distortions that do not allow a return to normality. What seemed to work in the short term is now an impossible burden that denies the local economy while being unable to work in its own terms.

When the world stumbled upon globalisation it implicitly ‘chose’ a global way of life. Ultimately, the present gyrations are elements of a crisis in that way of life. This is a cultural crisis, not a mere economic crisis. It is a crisis of how to live.

John Hinkson is an Arena Publications editor.

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