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Chinese investors
watch stock prices as a brokerage house in Beijing on 14 January, as
prices continue to fall. Photograph: How Hwee Young/EPA
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Why
are we looking on helplessly as markets crash all over the world?
The
imminent collapse of the Chinese Ponzi-scheme economy shows that we
need to bring control to the international economy
Will Hutton
Sunday 17 January
2016 00.05 GMT
There has always
been a tension at the heart of capitalism. Although it is the best
wealth-creating mechanism we’ve made, it can’t be left to its own
devices. Its self-regulating properties, contrary to the efforts of
generations of economists trying to prove otherwise, are weak.
It needs embedded
countervailing power – effective trade unions, law and public
action – to keep it honest and sustain the demand off which it
feeds. Above all, it needs an ordered international framework of law,
finance and trade in which it can do deals and business. It certainly
can’t invent one itself. The mayhem in the financial markets over
the last fortnight is the result of confronting this tension. The oil
price collapse should be good news. It makes everything cheaper. It
puts purchasing power in the hands of business and consumers
elsewhere in the world who have a greater propensity to spend than
most oil-producing countries. A low oil price historically presages
economic good times. Instead, the markets are panicking.
They are panicking
because what is driving the lower oil price is global disorder, which
capitalism is powerless to correct. Indeed, it is capitalism running
amok that is one of the reasons for the disorder. Profits as a share
of national income in Britain and the US touch all-time highs; wages
touch an all-time low as the power of organised labour diminishes and
the gig economy of short-term contracts takes hold. The excesses of
the rich, digging underground basements to house swimming pools,
cinemas and lavish gyms, sit alongside the travails of the new
middle-class poor. These are no longer able to secure themselves
decent pensions and their gig-economy children defer starting
families because of the financial pressures.
The story is similar
if less marked in continental Europe and Japan. Demand has only been
sustained across all these countries since the mid-1980s because of
the relentless willingness of banks to pump credit into the hands of
consumers at rates much faster than the rate of economic growth to
compensate for squeezed wages. It was a trend only interrupted by the
credit crunch and which has now resumed with a vengeance. The result
is a mountain of mortgage and personal debt but with ever-lower pay
packets to service it, creating a banking system that is
fundamentally precarious. The country that has taken this further
than any other is China. The Chinese economy is a giant Ponzi scheme.
Tens of trillions of dollars are owed to essentially bankrupt banks –
and worse, bankrupt near-banks that operate in the murky shadowlands
of a deeply dysfunctional mix of Leninism and rapacious capitalism.
The Chinese Communist party has bought itself temporary legitimacy by
its shameless willingness to direct state-owned banks to lend to
consumers and businesses with little attention to their
creditworthiness. Thus it has lifted growth and created millions of
jobs.
It is an edifice
waiting to implode. Chinese business habitually bribes Communist
officials to put pressure on their bankers to forgive loans or
commute interest; most loans only receive interest payments
haphazardly or not at all. If the losses were crystallised, the
banking system would be bust overnight. On top, huge loans have been
made to China’s vast oil, gas and chemical industries on the basis
of oil being above $60 a barrel, so more losses are in prospect.
Investors in China’s
stock market took fright in the new year, with falling share prices
only another turn of the screw. The only surprise is that nobody saw
through it all earlier. China’s leaders are visibly frightened and
at a loss, clamping down on any possible source of dissent as they
flail to keep their Ponzi economy alive. As consumer demand falters
in Europe, North America and Asia, so the demand for oil falls, even
as Saudi Arabia, waging economic war against Iran and US shale
producers, pumps oil out of the ground without limit. The whole
structure of banking that was predicated upon higher oil prices gets
more rickety still.
At just this
crucially sensitive moment, the US Federal Reserve last month raised
interest rates from their extraordinary lows, more concerned to
signal its ardent desire to return to the normality of business as
usual than to face the reality we live in abnormal times. There is no
danger of inflation. If credit growth is out of hand, the tool
central banks must use, as the Bank of England recognises
intellectually by equipping itself with such tools but as yet not
bold enough to use them, is direct quantitative controls to constrain
the growth of credit. The system is not robust enough to withstand a
rise in interest rates.
Indeed, further
evidence of global disorder, as the Fed must have known when it
raised interest rates, was the resulting acceleration of the flight
of capital out of the so-called emerging economies in Africa and
Latin America. Brazil, for example, is now in its worst recession
since 1901. But the US central bank accepts no responsibilities for
global economic management. Nor does anybody else.
Investment banking,
the world of high-velocity trading in trillions of pounds of
financial assets and mega-deals, wins few prizes in the integrity
stakes
Will Hutton Read
more
It’s clear what
needs to happen. There needs to be wholesale change in economic
thinking. Forces in world labour markets – new forms of
21st-century trade unionism – need to be strengthened. The power of
financial markets needs to be constrained. Credit growth needs to be
managed by direct controls on the growth of bank balance sheets and
banks need to be weaned off the financial casino they have built.
Great companies need to be allowed to purpose themselves around
creating value rather than dancing to the interests of disengaged
shareholders.
There needs to be
parallel change in how countries think of the international order: it
has to be built and sustained rather than assumed to be someone
else’s responsibility. We need to keep the EU together around open
trade, open movement of peoples (notwithstanding the refugee crisis)
and respect for political pluralism so menaced by new forces in
eastern Europe. To keep the world open, there has to be international
agreement on deepening and extending a framework for trade, and a new
system of managed exchange rates to replace the tyranny of floating
rates. Shia Muslims need to be befriended; Sunni Muslim helped to
weed out poisonous Jihadism. Israel needs to be a genuine
peace-seeker. China must be allowed to be convulsed by the coming
regime change, vital to depoliticise its economy, without fearing
foreigners are going to exploit the turmoil.
All this requires a
new generation of political leaders prepared to throw off the
categories in which thinking has been cast since 1980 – and remake
our world rather as the world was remade in the years after 1945.
Prosperity, peace, co-existence and recognition of mutual
interdependencies are too easily taken for granted. The financial
markets are signalling deep unease, not least at the world they
themselves have helped build. It is a message that should be heeded.
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