What's Going On?

Chris Waller June 2013
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It's forty-odd years since Marvin Gaye asked that question, albeit in a slightly different context, though it was a comment on the socio-economic issues of the day in the US. There are two major concerns in the global financial economy at the moment: the recent precipitous fall in the gold price and the rally on world stock markets. In neither case can one see any substantial rationale to account for these two movements.

It could be argued that the recent rise in the dollar might have attracted investors away from gold as also might the rally in world stock markets, but in both cases one would have to ask exactly why both are rising. The Obama administration has pumped about $800 billion dollars into the US economy and this has ostensibly had some beneficial effects: it is said that 1.5 million new jobs have been created but it is of course impossible to say how many might have been otherwise created. Nevertheless, US debt continues to rise, and has indeed risen by 90% since 2009.

In Britain, the economy is moribund. The OECD, reporting at the end of May, reduced the forecast from UK economic growth in 2014 down to 1.5 percent. It is at least growing, unlike the economies of Greece and Spain, but that figure needs to be put into context. Over any extended period, the post-war British economy has grown at an average rate of about 2.3%. Despite all efforts to increase this, it has remained around this figure for the past 60 years and any attempts to boost it have generally resulted in inflation and balance of payments crises. In other words, the British economy needs to grow at 2.3% per annum just to stand still, that is, to allow for the general growth in population and to maintain standards of living. Growth of 1.5% per annum is actually economic contraction in real terms and the evidence from the real economy supports that, and all this despite the 400 billion that has been injected into the economy under the quantitative easing programme.

In April of this year Japan announced an economic stimulus programme under which it would inject $1.4 trillion (ca. 140 trillion) into the economy to end 20 years of stagnation. Against this background the value of gold is falling at an unprecedented rate. Gold is the ultimate hedge: in times of economic and political crisis, which is what we are seeing at the present, gold becomes the preferred store of value as faith in money declines. Yet, despite the current global economic and political uncertainty, people seem to be moving away from gold. It is true that Cyprus has had to sell a lot of itits gold to support the bail-out of it banks but that only amounts to $750 million and is insufficient to explain the scale of the drop in the gold price. In the first 3 months of this year, over $9 billion worth of gold was sold.

Governments around the world are pumping money into their economies in an effort to produce economic growth, but little of this seems to be finding its way into investment in productive capacity. It seems therefore that much of this money is simply being used to buy stocks, thus accounting for the current rally in world stock markets. In Britain for example, despite the Bank of England's making over 16 billion available to lenders through is flagship lending scheme since July 2012, lending to businesses continues to decline. As a result of this, unemployment in the UK remains at 7.8%, low by comparison to other European economies but almost half as high again as it was before the financial crisis.

The Independent Labour Organisation (ILO) reported in The Guardian ((3rd June) noted that:-

Looking behind the relatively low unemployment rate for the UK, the report notes that more than 60% of jobs created since the third quarter of 2009 have been either part-time or temporary. It also notes a sharp rise since the start of the financial crisis in the number of people saying they could not find full-time work.
Long-term joblessness is also a growing problem, the ILO report finds. The number of people looking for work for over a year has more than doubled since 2007, up from 391,000 to more than 902,000. As a share of total unemployment in the first quarter of 2013, more than a third of all unemployed people were in search of employment for more than a year.

In all events, despite the rise in corporate profitability and the attendant rise in executive pay, there seems to be no prospect of falls in unemployment. Rather, companies are stockpiling cash and raising executive bonuses. The ILO reports that in the UK:-

Chief executive paypay remains close to where it was before the financial crisis, while the vast majority of workers have seen their wages fall in real terms. In 2011 the chief executives of the 15 largest firms in the UK earned on average 238 times the annual earnings of the average UK worker

The report finally warns that the UK is caught in a vicious downward spiral in which, "Stagnating wages are adversely affecting demand, which in turn is dampening real investment, leading to poor job creation reinforcing weak demand and so on."

It might be thought therefore that this increase in corporate value is attracting people away from gold and into stocks but even this current surge in corporate value could not account for the movement away from gold. It could be that the market is being manipulated, though by whom and to what end is not clear, or it might be that we are coming to the end of an economic era where the old certainties no longer apply.

There is, though, in the background a muchuch bigger issue. Will Hutton, writing in The Observer (19th May), contemplated the future of employment in a world in which the rapid increase in digital processing power has brought us to the point where, within a very short time, there is practically no job that could not be automated. Even now we are at the point where processing power is looking for applications.

Three hundred years ago, at the beginning on the Industrial Revolution, the advent of mechanical power made possible the provision of goods on a previously unimagined scale. There was, it is true, disruption to old patterns of working: the advances in textile production put paid to hand-spinning and hand-weaving but the demand for goods could absorb those displaced by the rising technologies of the day.

We are now at a point where the demand for goods will not result in an increased demand for basic commodities. The developed world is in fact moving towards an economy where the demand for material will decline in gross terms. The vast majority of what we demand and produce today is getting smaller, uses less material but involves much more 'cleverness'. The future of production in the developed world will be almost entirely centred upon digital technology, increasing miniaturisation and new materials, graphene seeming to offer much promise as the new wonder material. And almost everything will be produced by robots. The question is then, what will people do with their time?

I sense that we are approaching a point in history which we have not seen for 300 years, since the beginning of the Industrial Revolution. We are on the cusp of something completely new. Around the world we see political and economic upheaval: Greece, Cyprus, Spain and Portugal are in dire economic and political turmoil; Italy is effectively without a government; France is in the grip of political uncertainty and its economic future, particularly as part of the eurozone, is far from certain. The Middle East is once again in the grip of factional fighting, and the future of Turkey is now unclear. In all of these countries the crisis in not just one of politics and economics but there is a cultural and generational aspect to the crisis. In Turkey, it is a battle between the old, the traditional and the conservative against the young, the educated and the aspirational.

Younger people now seem not only to have no faith in politics as currently constituted but seem not even to see what its purpose might be; it seems in no way relevant to their world. I can understand this: in the forty years that I have been able to vote, I have never once succeeded in voting in a government that I want; the best I have ever managed is to get rid of a government that I don't want at least, I have managed that only in concert with millions of other voters. Democracy ,as currently constituted in what we call 'the West', is a blunt instrument at best and no longer fit for the task of managing complex and rapidly changing societies. Politics has to deal with the real worldd and can never therefore be free of taint one thinks of Machiavelli's counsel on the business of realpolitik - but politics now is seen as the seedy old men of Westminster, the City, Fleet Street all conniving to rig events in their favour and pocket the proceeds. Now even the Upper House is apparently not above the lure of lucre as some of the Noble Lords seem keen to benefit from the trade in privileged access.

It occurred to me the last time I went back to my former home town in the Midlands that not only have the coal-mines disappeared but the mind-set that went with them has also gone. Even if the coal-mines were to be reopened, I doubt anyone could be found to work in them. When I look back at the early nineteen-sixties and recall those legions of men emerging from the mines at end of shift, black from head to foot, it seems almost medieval.

There is a sense in which we are in the grip of a fever, waiting for it to break. Whatever the economic and political prescriptions of the pastt, they will no longer work. If the global economy does recover, it will be despite government and other corporate monoliths, it will be as a result of people outflanking governments and corporations, and 'doing their own thing' as we used to say in The Sixties. It might be that the hopes of The Sixties will finally be realised, albeit it tempered by the realities of history -and fifty-odd years late.



Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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