Ann Pettifor: 23rd January, 2009, 13.00PM
The election of a wise, astute and dignified man as US President; the sight of a happy loving couple, with a pair of well-behaved children taking over the reins of the White House; the power and dignity of Aretha Franklin’s voice, her glorious hat; the radiant faces of Americans in the Mall – all these sights and sounds lifted my spirits and warmed my soul this week. For just a moment. Then this week’s economic events chilled me to the bone.
It is hard to over-state the gravity and extent of the collapse of the global economy. I can barely find the words to fill a blog that I fear you, dear reader, may weary of. It is even harder to find an economy escaping the carnage, or to avoid politicians dashing for the cover of bail-outs. But one can still encounter economists confident and chipper in the face of such massive, global destruction – and the threat of sustained economic failure. One such is Jim O’Neill, chief economist at Goldman Sachs who in my presence advised a BBC World Service audience in August, 2008 that he had “lived through five such economic shocks” – and that this one was no different. He turned up on the BBC again on Thursday 22nd January, this time to advise listeners that Chinese consumers can be trusted to take up the global slack.
Another optimist is Mr. Bini Smaghi, a Chicago-trained economist that sits on the board of the European Central Bank. (see Wall St. Journal Friday, 23rd January, 2009). Mr. Smaghi is so confident that Europe will overcome this crisis, that he is devoting his energies – and the ECB’s interest rates – to preparing for the future, and ignoring today’s threats to the working men and women of Germany, Greece, Italy, Ireland, Spain and Portugal. He argues strongly for keeping the ECB rate well above UK and US rates. This helps keep the Euro high, and in the process crucifies the export sectors of EU countries. Nevertheless Mr. Smaghi, who like Jim O’Neill is confident that this crisis is nearly over, is voting to keep rates up he tells us in order ‘to prevent the next crisis’. Oh, the luxury of such a worry.
Lets set the delusional optimism of these orthodox economists in context.
Where shall we start? With Microsoft’s decision to lay off 5,000 staff? Surely Chinese consumers can be trusted to continue buying software? It seems not. Microsoft estimated that the market for personal computers fell by between 7% – 10% in the final quarter of 2008. “That’s vast” said Steve Ballmer, Microsoft boss, “for something that’s always grown a lot….We’re not used to down markets.” He went further: “The perspective I’d bring is not one of recession. It’s that the economy is resetting to a lower level of business and consumer spending”. Nice to hear a company boss telling it straight for once.
Another contender for worst news of the week is The Royal Bank of Scotland’s £20 billion losses in 2008, the biggest-ever in Britain’s corporate history. Gordon Brown must truly regret his patronage of Sir Fred ‘the Shred’ Goodwin – RBS’s CEO – and his decision to elevate this reckless (and by all accounts heartless) man to a knighthood. I remember vividly the desperation of my last encounter with a soon-to-be-sacked and close-to-tears NatWest ‘relationship manager’, who in 2005 had his commission cut, his attention to customers curtailed and his focus on further unsustainable lending sharpened by – Sir Fred.
Another contender for worst news of the week, and a sobering counter to Jim O’Neill’s optimism was Japan’s dramatic 35% fall in export sales this last quarter. As China is a major destination for Japanese exports, these numbers tell us a great deal about the ability of Chinese shoppers to take up the slack in time to prevent a further downward push on the debt-deflationary spiral engulfing the global economy.
But for me the most shocking chart of the week, thanks to the grand research of Graham Turner of GCE economics, is of the yield (effectively the interest rate) on bonds issued by non-investment-grade corporations. In other words the cost to ordinary, if a little risky, companies of trying to raise capital. At 25% I call these rates usurious. What other term is there to describe this massive extraction of assets from entrepreneurial companies, struggling in a historically unprecedented downturn? Things are not much better for such companies in the US, where yields have dropped from about 20% to 16% but remain, as Graham Turner argues, “punitive”.
It is these yields, or interest rates that explain better than any economist seems able to do, why companies are choosing bankruptcy and massive layoffs over usurious rates of interest on not just mountains, but mountain ranges of debts that under these terms are clearly unpayable.
What are politicians and regulators doing to stem this flow of bad news? And can our new hero in the White House plug the holes? Ah, those are thoughts for another column.