(Weekly Organ of the Communist Party of India (Marxist)
December 07, 2008
BRITAIN IN RECESSION
There is an old saying that when the USA sneezes Britain catches cold!
Britain today is gripped by the very real danger of a prolonged and deep recession reminiscent of the depression of the 1930’s.
Businesses ranging from a one man operated small business to those employing thousands of workers are closing at the unprecedented rate of 43 per day and this is projected to increase to 140 closures per day. Official unemployment figures of 1.8 million people (already above 2 million in real terms) are expected to rise to 3 million people next year. Every day there are further announcements of thousands more job losses and more working people join the ranks of the unemployed.
Homelessness is on the increase with over 45,000 homes expected to be repossessed by the banks in this year alone.
The crisis of capitalism as detailed in the articles and features in People’s Democracy during the last year is real and present.
Britain prides itself as having a special close relationship with the USA and aligns its foreign and domestic economic policies to reflect the ups, downs and mood swings of America. During the years of Margaret Thatcher in the UK and Ronald Reagan in the USA in the 1980’s the manufacturing base of Britain was systematically and irreparably destroyed and has served to curb the power of Trade Unions and reign in the strength of the working class.
Britain of the noughties now has an economy heavily reliant on the financial services and house building sectors. It is ill prepared to meet the challenges of either of these two pillars of its ballooned economy. Britain now has the largest deficit of the developed world and largest personal debt amongst the western industrial nations. The deficit is projected to grow from the present 38 per cent to 57 per cent of GDP by the year 2011. This will create a staggering deficit of £500 billion from government figures and closer to £1 trillion according to the opposition parties.
In the summer of 2007, reckless 'sub-prime' mortgage lending to low-income (and indeed no-income) Americans began a ripple of financial problems around the world. It has made banks less willing to lend to each other and to consumers. That is the “credit crunch”. This descended into a full-blown economic crisis in October 2008 following which a rash of bank failures and nationalisations have swept around the world.
Meanwhile, consumers have also had to deal with price rises. Commodity prices rose sharply in 2007 and during the first six months of 2008, driven by demand from the booming economies of India and China making petrol, food and other basic costs significantly more expensive. This surging inflation had prevented central banks from cutting interest rates to help ease the credit crunch.
Other global factors included the curse of derivatives. The financial innovation of capital called the Credit Default Swap System (CDSS), is being described as the monster of the deep that has endangered capitalism. In basic terms it is a simple idea on how to make money by trading in expectations. It allows an investor to buy insurance against a company defaulting on its debt payments. A little like an insurance company selling you car insurance speculating on the risk of you crashing / not crashing your car.
At first it was a useful concept, as people in the finance sector felt comfortable owning corporate debt if they could eliminate the risk of the debtor failing. The extra appetite and availability of debt helped to lower the cost of capital and inflated the economy.
Sellers of insurance base their views on risk on past experience, but CDSS, being a relatively modern concept meant that insurers relied on the insatiable greed of the speculators. Indeed, such greed to the point that if Lehman and AIG had gone bust the whole share market system would have collapsed.
In Britain, the first to fail was the bank Northern Rock, one of the largest housing market lenders, followed by Bradford and Bingley, HBOS, Lloyds and RBS. The British government nationalised the first two banks and injected £60 billion, with an additional safety net of £400 billion into the finance sector buying up to 60 per cent of the equity of RBS.
With decreasing inflation the Bank of England, the regulating body for monetary policy, lowered the base rate of interest, from 4.5 per cent to 3 per cent. There is now widespread speculation that the Bank of England will have to lower the rate further still to 1.5 per cent, being below the all time low of 2 per cent in 1951. Retailers are competing to sell their produce at heavily discounted prices to stay in business and with a declining economy; there is now a real fear of deflation creating the black hole in the capitalist economic system.
The presidential elections in the USA beamed and followed across the globe, displayed to the world the downturn of the US economy and the crisis of capitalism. The realisation of these extraordinary events and the extraordinary response by the USA and western governments was and is unprecedented.
The bail outs started with Bear Stearns in March and the financial giants Fannie May, Freddie Mac and AIG. The collapse of Lehman Brothers in September 2008 and the $700 billion US bank bail out was unthinkable.
The members of the G8 followed suit to reverse the collapse in the financial markets and committed more than US$3 trillion without much success. The size of the global crisis has now reached such a magnitude that economists in the USA have to add more zeroes to describe this scale beyond the trillions.
The banking giant Citigroup is the most recent bank being bailed out by the US government with an injection of US$20 billion, as it faced collapse under a wave of sub-prime losses of £13.3billion. The bank employs 300,000 people worldwide with more than 12,000 employed in Britain.
The combined effects of the credit crunch, rising unemployment and poverty is giving way to shrinking economies.
The American automobile manufacturers General Motors, Chrysler and Ford are on the verge of collapse with the potential to lay off 3 million workers world wide. Manufacturers of cars in Britain including Honda have already announced the lay off of 21,000 of their workforce within the next three months.
The Tata Group, the manufacturer of Jaguar cars which employs 15,000 people, has held secret talks with the government to plead for a £1billion loan. Its appeal for a taxpayer bailout comes nine months after the Indian conglomerate bought the famous marques from Ford for £1.3billion. That deal was financed by a £2billion bridging loan from banks, which also provided funding to keep the business running. Tata, which also owns Tetley Tea and the former British Steel group Corus, now wants the UK government to provide it with a further two-year loan because it is difficult to access the debt markets since the credit crunch started. According to press reports, “The (British) Queen, spoke for the nation yesterday when she asked how the credit crunch could have taken so many economics experts by surprise.” She described the financial crisis as 'awful' and inquired that, since the meltdown was so massive, “Why did nobody notice it?” The Royal concern was revealed at the London School of Economics, where the Queen opened its new £71 million academic building. Professor Luis Garicano, director of research at the LSE's management department, said the Queen asked "If these things were so large, how come everyone missed them?" It is a question which will resonate with ordinary families baffled at why politicians, bankers and City experts all failed to spot the financial storm on the horizon. Explaining the origins and effects of the credit crisis, Professor Garicano said he told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”
A repercussion of this crisis could have grave implications for the migrant population including the 1.5 million people of Indian origin living in Britain. According to a recently leaked memo from the Home Office, a rise in anti-immigrant sentiment and ethnic tension is being anticipated. The hardships of the 1930’s had turned some Britons against foreigners with the rise of fascism and the cyclic recession of the 1980’s gave way to race riots. With the opening up of European borders immigration has increased dramatically and with it the electoral base of the parties of the far right. Ethnic minorities who are already feeling alienated and maligned, because of foreign policies and ‘anti terrorist’ measures will be further marginalised by the indigenous population.
It is acutely important for established organisations such as the Indian Workers’ Association to ally itself with the trade unions and other working class organisations, to defend the people and withstand the challenges of the recession.