The default, which did not happen in the US on August 2, and the following drastic declines on global stock markets (after the raise of the US debt ceiling and the decrease of US credit rating from AAA down to АА+) have made us listen to those experts who had been talking not only about the coming new wave of crisis, but also about the consequences of the neo-liberal economic model, which became the main source of the emerging economic and political problems…
Today, like never before, many countries have to find the answer to the questions: “Where should we put our money now?” and “How can we ensure our sovereignty?” These questions are linked closer with each other than one could imagine several decades earlier. The crisis has made it clear that no economy exists apart from politics and vise versa. This is valid on global scale …
Default without default – first consequences
Raising the US state debt ceiling by at least $2.1 trillion has bought time till 2013 when it will be necessary to raise the debt ceiling again. On August 1 and 2, both chambers of the US Congress approved the law on state debt and after that Barack Obama immediately signed it postponing the US technical default for two more years. Markets reaction came two days later – August 4, 2011 became a new “Black Thursday” as it was marked by the largest decline on financial and raw material markets since December 2008 (the crisis period). The main US indexes dropped by 4%-5% during the day, while Brent oil fell 5.3%. Such a significant fall pushed the figures back to the level of late 2010, crossing out the economic growth since the beginning of 2011. Only in four days Standard & Poor’s 500 index lost 8.4%, and almost 10% in comparison with the year’s maximum achieved in April.
Note, that in one week period of September 29 – October 6 2008, S&P 500 index plummeted by 25.6%, and in two months period of May-July 2010 – by 17%. At present – the decline is almost 10% and if this trend continues – the new stage of the crisis is guaranteed. It is likely that the US will do the same thing it did about its state debt – it will postpone the day of the collapse. Perhaps the US will do it by playing the third round of QE (quantitative easing).
In the end of George Bush Junior’s presidency the US state debt amounted to 70% of GDP and in August 2011 it accounted for 94% of GDP, which is a historical maximum. According to the forecast of the International Monetary Fund (IMF), by the end of 2011 this figure will be 99.5%.
Raising the state debt ceiling as such has only postponed the US default. It has postponed the default to let the US continue its old policy of “exporting crises”. This export continued.
On August 10, “bears” attacked markets again (1). Panic has gripped also the banking sector which may lead to the crisis in the real economy.
The leading rating agencies continue to “attack” countries where financial situation is getting worse.On August 6 they tore down the US with its rating and on August 10 they switched to powerful French economy. Rumors emerged that, Fitch had revised its forecast for the state of the French economy from “stable” to “negative”. By the end of the day those rumors were denied, but the market response to this rumors was significant: capitalization of French banks reduced by several times. In one day the largest banking group Societe Generalebecame 22.5% cheaper! By the end of the trading session Credit Agricole and BNP Paribas banks lost 11.8% and 9.5% respectively.
The further the merrier. According to the European banking agency, 90 largest European banks are holding about 98 billion euros in Greek state bonds (of 328.5 billions of Greece’s total foreign debt). In order to make the scale of the Greek economic disaster more understandable for wide audience economists calculated that it will take Greece about 600 year to cover its debt and to stabilize the economy. German and French banks remain the principle European creditors.
Will Barack Obama repeat Jimmy Carter’s fate?
The talks on raising the debt ceiling showed that Barack Obama lacks his own firm position on this issue. His moves remind of the policy Jimmy Carter conducted in the end of his presidency. Alan Greenspan, the former head of the Federal Reserve System, says that Carter tried to please all the sides. He proposed new social programs and at the same time he tried to reduce the budget deficit, he tried to reduce the level of unemployment and to lower inflation. All this was going on amid of the crisis of 1978-79.
Now Obama is proposing almost the same things, for example – his plan on default prevention envisages the reduction of so-called “discretionary costs” by almost $1 trillion in 10 years. This implies the reduction of the expenditure on defense sector and also other sectors.
Under the reached agreements a conciliation commission is to be formed which will include members of both chambers of the Congress and which will look for the ways to cut expenditure by another $1.5 trillion. In order to reach a compromise the US administration was to abandon its main demand – the liquidation of tax benefits for richest Americans (2). Besides that, the Republicans have managed to reach the reduction of state expenditure by more than $2.5 trillion. But Obama has managed to keep social expenditures unchanged.
The similar policy cost a lot to Jimmy Carter. He lost the election to a hard line neo-liberal Ronald Reagan, who definitely led the US to an open conflict with the USSR. Now when the superpower Soviet Union does not exist anymore and the world in the state of chaos the risk of new wars is very high. The US simply does not know other ways out of financial crises. But high level of globalization makes the policy of crises’ exports dangerous for the US itself. About one year has been left before the next elections, which is enough for Obama’s competitors to take any measures. The worse economic state the less chances Obama has to be reelected for the second term.
American treasuries – “deposits for the states”
After “gold standard” was abandoned in early 1970-s, money lost one of its main functions – the function of capital accumulation. Many people all over the world being financially illiterate still think that by saving money in banks they accumulate funds. In reality they are only collecting wrappers and allow banks to manage their money and that’s all. The collapse of pension funds and the largest banks as well as possibility that the US government (3) will refuse to finance pension programs, though pension savings still exist, shows that the money is not more than a tool of mutual payments. However, the governments and transnational corporations understood it a long time ago. They invest their money in more reliable assets. TNC invest into real estate, natural resources and politicians, the governments – in securities of developed countries. But … this entire system was built on mutual trust. Securities as such cost not more than paper. Economically they are non-liquid, they are liquid only politically. Thus, American treasuries are the “deposits for the states” and that’s why they are being bought. They serve as the means to keep money in. This was the case until other countries could trust the US. Now with the loss of confidence treasuries have ceased to be a reliable thing for money investments and a new tool should be found.
New reserve currency – what can it be?
So far attempts to replace dollar as the global reserve currency have failed. Euro has become the currency for mutual payments – countries pay each other in euros but they don’t hurry to invest in European securities. Moreover, the liquidity of Euro-bonds seriously depends on the US treasuries, because Europe keeps a considerable reserve in American securities. That is why problems with American securities directly affect European securities. As we see, Euro is not an independent and self sufficient currency. Besides that, the European Central Bank, unlike FRS, cannot conduct a fully independent policy on issuing securities, that is why the speed of decision making in the Euro-zone is slower than manipulations with dollar.
The situation with ruble and Yuan is almost similar. Both China and Russiaare among the main three largest investors in the US economy. China’s investment into US treasuries amount to about $1.5 trillion, Russia’s – about $600 billion. This fact as well as the internal contradictions in the countries of the Shanghai Cooperation Organization (SCO) and the Customs Union (Russia, Kazakhstan, Belarus) do not enable ruble and Yuan to fully implement the functions of regional reserve currencies.
In this respect it becomes necessary to use a more complicated and better balanced system which consists of sovereign and regional reserve currencies (supported by resources like in Russia, production like in China and technologies like in Japan), and also a certain new “gold standard” should be found. It is unlikely that will be gold, because the world is now in the state of a “reverse Spanish crisis”. In the Conquista time the volume of gold in Europe exceeded the amount of goods. Now on the contrary there are so many goods that it will take a multiple devaluation of all currencies to introduce a new gold standard, so nobody will agree on it. It is difficult to say if it will be an “energy-dollar”, “resource-ruble”, “labor-Yuan” or something more material. Nevertheless, in the near future without new means for saving capitals the world will see new the wars for resources, which will last for at least 50 years or even longer.
Gold as sovereignty basis
The question – where should we keep money – is now important not only for common people and companies but it is the key question for maintaining of sovereignty of states. The global crisis, which has been on for the 4th year already has showed that the US is not only one of the main “crisis makers” but also a very unreliable political partner. European members of NATO felt it when they began the military campaign against Libya and the US soon withdrew from it. In other words, the US stopped taking active part in the military conflict, which cost a lot to the state budgets of the participants and which destabilized euro as seriously as the pre-default crisis in Greece or Italy.
Very few people paid attention to one interesting thing – a significant part of gold and currency reserves of Libya was on the accounts of Western banks and not only in the form of the US treasuries but also in the form of banking metals kept on the territory of Libya. This rational and adequate policy enables Gaddafi to fight the US and NATO for about 5 months already. The chaos caused by the war and the following price hikes on gold (this is not the only but an important factor of gold value appreciation) is very advantageous for the Libyan leader as his assets are becoming more expensive! That means that the aggressors provide Gaddafi with the resources he uses to continue the war against them. But this is not a paradox but the direct consequence of globalization. By the way Immanuel Wallerstein wrote about it a long time ago stating that there is only one global system on Earth. That is why all large holders of the US treasuries should immediately get rid of them buying something more material instead – gold, natural resource etc. First of all, this concerns China, Japan and Russia.
At present, the answer to the question “where to keep money?” has become one of the key issues for the maintenance of stability in the existing global system. The variant with new reserve currency, issued by one country or a group of countries is bound to fail, first of all because “eternal alliances” and “constant stability” do not exist.
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(1) http://hvylya.org/analytics/economics/12423-trishkin-kaftan-reshenie-staryh-problem-evrozony-porozhdaet-novye.html
(2) http://ria.ru/economy/20110802/411092559.html
(3) http://banker.ua/bank_news/govregulations/2011/07/13/1180451065/
