Wednesday, May 26, 2010

On a knife edge

Share markets around the world suffered another roller-coaster day yesterday as nervous traders decided it was a good time to sell. Everything points to the most dangerous moment for global capitalism since the autumn 2008 meltdown.

Many and varied reasons are being cited by the traders who sold (and later bought) shares during the day, moving huge sums to (relatively) safer places, including US Treasuries and German government bonds.

The Financial Times’ Chris Giles blamed Europe’s sovereign debt crisis, which, he said, “sent shock waves across the world as it proved that the recovery from the great recession was neither steady nor guaranteed.” It sounds authoritative and convincing.

"The main reason for the fall in South Korea, is the risk of war with North Korea," said Kim Joong-hyun, a strategist at Shinhan Investment in Seoul. The warship was sunk two months ago, on March 26, and North Korea’s leader Kim Jong Il has now severed all communications with the South.

The US Dow Jones sank below 10,000 due it was said, to disappointing news of falling house prices. New regulations on US financial institutions are adding to the problems, threatening banking profits. Credit in the US has been shrinking for two years - overall bank lending is down more than 20% percent from where it began 2009 - and Obama’s legislation has been under way for months.

In London, the FTSE 100 index of Britain's biggest companies dropped 2.5%, falling below the 5,000 mark to 4938. It was shadowed downward by markets in Germany, France and Spain. Here the reason given for the collapse was an instruction from the International Monetary Fund to Spain’s government to sort out its bankrupt banking sector. At the weekend, the Bank of Spain seized Cajasur, a small but troubled savings bank and trade unions have started preparations for a general strike.

Each of these and many other different localised “explanations” for market movements reveal aspects of the crisis in each region of the global economy. Others are searching for a connecting thread. Washington Post staff writers Howard Schneider and Neil Irwin believe they have found one in the realm of politics:

“The knife-edge psychology currently governing global markets has put the future of the US economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.”

They suggest that one false move could lead to a sovereign default in Europe, adding: “Bank holdings of European debt are now being studied with the same focus given to holdings of US mortgage-backed securities as the global financial crisis unfolded in 2008 - and with the same suspicion that problems in one part of the world could wreck others.”

What they are describing is a universal crisis of the capitalist system, brought about by decades of attempts to offset falling rates of profit with pumped up balloons of credit- and debt-led growth. Politicians and states are struggling in vain to keep up with the unravelling that began two years ago.

The crisis makes its appearance in the realms of the economy, in international relations, in the crisis of the democracy and the state, in the tipping of the planet’s ecosystems into irreversible changes, and in the degrading commodification of culture.

Many new people joined A World to Win on the revolutionary road at our conference last weekend because not one of these parts of the crisis can be resolved on its own or within the economic and political framework of capitalism. You should make the same choice.

Gerry Gold

Economics editor

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