http://wsws.org/articles/2009/nov2009/econ-n10.shtml
Speculative recovery sows seeds of an even greater economic crash
By Barry Grey
10 November 2009
Last Wednesday the Federal Reserve Board’s policy-making Federal
Open Market Committee announced it was holding its target federal
funds interest rate to the current level of zero to 0.25 percent.
While that decision had been widely anticipated, there was much
speculation that the Fed would employ language in its announcement
to indicate that it would soon begin to raise interest rates.
In the event, the Fed repeated its recent mantra of keeping
interest rates “exceptionally low” for “an extended period of
time.” A change in the formula from “an extended period of time”
to “for some time” would have been seen as a signal that the Fed
was preparing to shift from its policy of near-zero rates.
The Fed’s signal of no early end to its extraordinarily cheap
credit policy sent stock markets surging. Since the Fed
announcement last Wednesday, the Dow Jones Industrial Average has
surged hundreds of points, despite Friday’s dire Labor Department
report of an official US jobless rate of 10.2 percent. On Monday,
the Dow Jones Industrial Average gained 205 points, closing at a
13-month high of 10,227.
This most recent surge in stock prices continued a trend that has
emerged in recent weeks: stocks moved in close and inverse
relation to the value of the dollar on world currency markets.
Last Wednesday, the dollar fell the most in relation to the euro
in two months. That trend continued Monday, with the dollar once
again falling to $1.50 versus the euro.
Also in keeping with recent trends, oil, gold and other
commodities surged as stocks rose and the dollar fell. The
connection between soaring asset prices and a falling dollar
points to the extraordinarily speculative and unstable character
of what is being called a global recovery from the financial
crisis and recession of 2008 and early 2009.
It is a recovery in corporate and bank profits and financial
assets that is richly benefitting the most powerful financial
interests in the US and around the world, even as joblessness and
poverty soar and basic production remains mired in the deepest
slump since the Great Depression. It is a “recovery” that is
driven almost entirely by a surge in speculation in risky assets
fuelled by the US government’s policy of virtually free credit for
the major banks and a vast buildup of debt.
As CNBC commentator Charles Gasparino put it in a November 6
column in the Wall Street Journal, “Interest rates are close to
zero; in effect the Federal Reserve is subsidizing the risk-taking
and bond trading that has allowed Goldman Sachs to produce
billions in profits and that infamous $16 billion bonus pool
(analysts say it could grow as high as $20 billion). The Treasury
has lent banks money, guaranteed Wall Street’s debt and declared
every firm to be a commercial bank… They are all ‘too big to fail’
and so free to trade as they please—on the taxpayer dime.”
The Wall Street Journal reported Monday that Morgan Stanley has
concluded that the amount of cash circulating in the global
economy is at its highest level by far since the firm began
tracking it 30 years ago. This vast wave of hot money can find no
profitable outlet in production, so it is being pumped into stock
markets and speculation on commodity prices and currencies. The
result is a colossal global asset bubble that must sooner or later
burst.
Here are some indications of the scale of this bubble:
“Since its March 9 low, the Standard & Poor’s 500 stock index has
gained more than 50 percent. An index of stocks for 22 “emerging
market” countries (including Brazil, China and India) has doubled
from its recent low. Oil, now around $80 a barrel, has increased
150 percent from its recent low of $31. Gold is near an all-time
high, around $1,090 an ounce.” (Robert J. Samuelson in Monday’s
Washington Post).
A central component of this policy is a tacit encouragement of the
ongoing fall in the dollar. Ultimately, the decline in the dollar
is dictated by the objective decline in the global position of
American capitalism. The financial crash and ensuing global
recession, which began in the US, have further eroded global
confidence in the dollar as it has diminished the weight of US
gross domestic product relative to global gross domestic product.
This is a profoundly destabilizing factor in the world economy,
which renders any recovery fragile and ultimately unsustainable.
Increasingly, the unique role of the US dollar as the world’s
major reserve and trading currency is being called into question.
This was highlighted last Tuesday when India’s central bank
announced it had purchased 200 metric tons of gold on offer by the
International Monetary Fund.
In making the announcement, India’s finance minister said that the
US and European economies had “collapsed.” The Indian purchase
came a few months after China, which holds an estimated $1.4
trillion in dollar assets, revealed that it had almost doubled its
gold reserves in the past six years.
The buildup of gold reserves is part of a growing move by creditor
nations away from the dollar. As BusinessWeek reported last month:
“Instead of buying just dollars for their foreign exchange
reserves, they’re diversifying into other currencies. The
countries that reveal the composition of their reserve holdings
put 63 percent of their new reserves into euros and yen in the
second quarter, according to an analysis by Barclays Capital.”
The mid- to long-term implications of the erosion in the world
position of the dollar are massive. A strong and stable dollar was
the bedrock of the international capitalist monetary system that
was established at the Bretton Woods conference at the end of
World War II. The dollar has served for nearly seven decades as
the world’s supreme trading and reserve currency. The unique and
privileged position of the dollar—which brought with it immense
advantages for US capital—was based on the unchallenged economic
supremacy of the US at the end of the war. That, in turn, was
founded on the global dominance of American industry.
The long-term decline of American capitalism, reflected most
importantly in the decay of its industrial base, resulted in the
massive global imbalances between debtor nations—first and
foremost, the US—and creditor nations, such as China, Japan and
Germany, which led to the implosion of the world economy a year
ago. It is the transformation of the US from the industrial
powerhouse of the world to the center of global financial
speculation and parasitism that, in the final analysis, underlies
the erosion in the international position of the dollar.
This underscores the reckless character of US monetary policy. The
United States is flirting with the disaster of a precipitous fall
in the dollar, which has already declined 15 percent since its
recent high last March against the currencies of Washington’s
major trading counterparts. A full-blown dollar crisis would wreak
havoc on the US and world economy.
It would compel the US to sharply and precipitously raise interest
rates, plunging the US economy into a depression and bankrupting
major financial institutions. It would choke off the US market for
export-oriented countries such as China, Japan and Germany and
spark competitive currency devaluations and trade war measures.
Nevertheless, to gain a short-term trading advantage against its
capitalist rivals and provide the liquidity to enable major US
banks to reap bumper profits and award their executives and
traders record bonuses, the US, through the Fed, has carried out
the electronic equivalent of printing a trillion dollars and
flooding the financial markets with cheap credit. It has done so
knowing that the dollar will continue to fall, making US exports
cheaper and foreign imports more expensive.
The short-term effect is an intensification of global monetary and
trade tensions. Last Friday the US levied duties against Chinese
steel pipe imports. This followed Washington’s imposition two
months ago of tariffs against Chinese tire imports. China
responded Friday by denouncing “abusive protectionism” and
pledging to retaliate against US autos and other exports to the
Chinese market.
The provocative character of the US move on Friday is underscored
by the fact that it precedes by less than a week President Barack
Obama’s trip to Asia.
Meanwhile, New York University economist Nouriel Roubini is
sounding the alarm over an alternate scenario for the dollar that
would likewise have disastrous economic consequences. Roubini, who
came to prominence by predicting in 2006 the impending collapse of
the housing bubble and financial meltdown, is warning of a
short-term rally in the dollar that will result in a collapse of
the global asset bubble.
In a November 1 Financial Times column entitled “Mother of All
Carry Trades Faces an Inevitable Bust,” Roubini writes: “Since
March there has been a massive rally in all sorts of risky
assets—equities, oil, energy and commodity prices… and an even
bigger rally in emerging market asset classes (their stocks, bonds
and currencies).”
He contends that at the heart of this rally is “the weakness of
the US dollar, driven by the mother of all carry trades.” The
latter term refers to the speculative practice of borrowing cash
in currencies with low interest rates and investing the cash in
assets denominated in more expensive currencies.
The US dollar has supplanted the yen as the major funding currency
in carry trades. Speculators are borrowing dollars in highly
leveraged trades, betting that the dollar will decline further,
and using their resulting profits to invest in risky assets around
the world. As a result, speculators are effectively borrowing
dollars not at the zero interest rate set by the Fed, but at very
negative rates—as low as minus 10 or 20 percent on an annualized
basis.
As a result, Roubini states, carry trade investors have been
realizing total returns in the 50-70 percent range since March.
As the “reckless” US policy is forcing other countries to keep
their interest rates artificially low, “the carry trade bubble
will get worse… the perfectly correlated bubble across all global
asset classes gets bigger by the day.”
One day the bubble will burst, as economic factors or an external
event—such as a military attack on Iran—lead the dollar to
“reverse and suddenly appreciate.” Roubini concludes: “But the
longer and bigger the carry trades and the larger the asset
bubble, the bigger will be the ensuing asset bubble crash. The Fed
and other policymakers seem unaware of the monster bubble they are
creating. The longer they remain blind, the harder the markets
will fall.”
Roubini is not alone. Last week, both the International Monetary
Fund and the World Bank issued warnings of growing asset bubbles,
fueled by hot money, in the Asian economies.
To the extent that the US and international bourgeoisie has a
strategy to deal with the massive growth of debt that is funding
the speculative “recovery,” it is to impose the full cost of the
crisis on the working class. Last month, the Organization for
Economic Cooperation and Development (OECD) declared that spending
on health, education and other social programs will have to be cut
as countries deal with the high levels of debt incurred in the
financial crisis and recession.
The OECD was seconded last week by the International Monetary
Fund, which issued a statement calling for a decade of sweeping
spending cuts and tax increases across the industrialized world.
The IMF specifically urged a sharp reduction in the growth of
spending for health care and pensions.
For its part, the Obama administration is committed to the same
policy, pledging to reduce government and business costs for
health care as a prelude to a regime of fiscal austerity. Its goal
is to reduce the consumption of the working class, using mass
unemployment to drive down wages, boost labor productivity, and
turn the US into a cheap labor center for exports to the world market.
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