New downturn in global economy

Brothers, gov­ernments around the world took on increased debt as they made available trillions of dollars to prevent a com­plete collapse of the financial system.
Meetings of the Group of 20 were dominated by pledges there would be no return to the conditions of the 1930s and assurances that the lessons of history had been learned.
The writings of John Maynard Keynes, the British economist of the 1930s who advocated increased govern­ment spending to counter depressions, were suddenly back in vogue.
But a sharp turn came in June 2010, when a meeting of the G20 initiated a turn to austerity, empha­sising the necessity to impose “fiscal consolidation.”
The essence of this programme was to claw back the money given to the banks through massive cutbacks to govern­ment spending, especially on social services.
However, this programme brought a contraction in eco­nomic growth leading to decreased profit opportunities for major corporations.
Faced with this situation, the US Federal Reserve initiated a policy of “quantitative eas­ing”—the provision of unlimited supplies of money to banks and financial institutions.
Central banks around the world cut interest rates to record lows and followed that up with their own versions of quantitative easing (QE).
Under conditions of a stagnant real economy, these measures were aimed at boosting the value of financial assets, thereby providing a new avenue for finance houses to realise speculative profits.
While the QE programme and its equivalents have been touted as a means of preventing a slide into global reces­sion — US Fed Chairman Ben Bernanke claimed the recently enacted QE3 programme was motivated by contin­uing high unemployment — they have done virtually nothing to boost the real economy.
Their only significant impact has been to increase profits through financial manipulation, with the ultra-cheap money provided by the central banks.
But now there are signs that a new stage in the global breakdown is underway, marked by growing recession­ary trends, as the impact of the central bankers’ programme wanes.
Share prices in the US, which had been lifted by the QE programme, have started to fall as companies report a downturn in sales and profits amid announcements of further job cuts.
This week American companies pointed to weakening global demand and the fears generated by the continuing financial crisis in Europe.
Dow Chemical announced it would axe 2400 jobs, 5 percent of its global workforce. It also said it would shut 20 plants and cut capital spending by US$500 million, citing a “slow-growth environment in the near term.”
DuPont, the largest US chemical group, announced 1 500 layoffs and a loss for the third quarter.
It pointed to a sharp drop in sales to the Asia-Pacific region, where volumes were down 10 percent compared to a year ago, dealing a blow to claims that so-called “emerging markets” would pro­vide an alternative source of global demand.
Overall, US corporate profits and earnings are expected to fall for the first time since 2009.
The latest data on the US economy shows that gross domestic prod­uct grew at an annual rate of only 2 percent in the third quarter, well below that required to maintain employ­ment levels.
Were it not for the effect of an increase in defence spending, the figure would have been signifi­cantly under market expectations.
The most significant feature of the US GDP data was investment spending. Its continuing decline reduced the overall growth figure by 0.1 percentage points for the quarter, while imports and exports both fell, taking off 0.2 percentage points.
While the central bankers will continue to pump money into financial markets, these measures will do nothing to turn the situation around.
This week, in a major speech, the governor of the Bank of England, Mervyn King, noted that every increase in the money supply had a declining impact on the real economy.
His warnings are confirmed by historical trends. Writ­ing in the Financial Times, financial analyst Satyajit Das pointed out that between 2001 and 2008, borrowing against the rising value of houses contributed about half the growth in the US.
“But ever increasing borrowings are needed to sustain growth. By 2008, US$4 to US$5 of debt was required to create $1 of US growth, up from US$1 to US$2 in the 1950s. China now needs US$6 to US$8 of credit to gen­erate $1 of growth, an increase from around US$1 to US$2 15-20 years ago.”
At the meetings of the G20 in 2009, government lead­ers insisted there would be no return to the protectionist measures of the 1930s which had such a devastating impact on world trade.
But the QE programme is producing a twenty-first century version of the beggar-thy-neigh­bour policies of the Great Depression. The flood of money from the US Federal Reserve has pushed down the value of the US dollar, hitting the export markets of its competitors and leading to the development of “cur­rency wars” as they try to maintain their position. — WSWS.