Can The Economists Who Failed To Foresee The Crisis See A Way Out For The Eurozone?
August 9 marked what many considered the fifth anniversary of the credit crunch. It’s five years almost to the day that anxious depositors began to form queues outside branches of Northern Rock, like Bailey Savings and Loan customers – without a George Bailey.
Beginning in the same way, marked by several of the same guideposts and running at roughly the same level of economic growth as during the 1930s – about 0.2% – the current financial crisis has been referred to as a second Great Depression. Writing for the Christian Science Monitor, financial journalist Pan Pylas remarked on August 9 that ‘the last five years have proved to be one of the most dramatic and volatile periods for financial markets since the stock market crash of 1929.’ Focussing on the UK, James Meadway, senior economist at the New Economic Foundation, observes that ‘the economy is recovering more slowly than it did from the Great Depression of the 1930s.
Some experts consider the failure of government action to stave off the crisis to be the result of misdiagnosis, pointing to Keynsian policies characterised by a single set of answers: ‘inject money into the economy and hike government spending,’ as market analyst Alasdair McCleod has it. Others observe that governments accepting responsibilities for the debts of their national banks, as Ireland and Spain have done on an even greater scale than Britain, has left nations burdened by sovereign debt and unable to spend their way out of the crisis, even if they wanted to: the future of Greece’s involvement in the Eurozone hinges on the Greek government’s ability to enforce an austerity package on a population that wants relief instead.
In the UK, readers of the Guardian newspaper answered a survey asking how the five years of financial freefall had affected them, and the overwhelming themes are of compulsory early retirement and of investments in stocks and shares at the behest of financial advisers which have ‘made next to nothing back,’ as one respondent, ‘Robert,’ has it.
The respondents also highlight the effect of unemployment so widespread it extends into high-ranking professionals who gone from being two-salary households where neither partner has ever been unemployed to living on state benefits in only a handful of years, highlighting the fragility of prosperity at the personal level.
Meanwhile massive cash injections by Eurozone states into their domestic financial sectors, and by the Eurozone Central Bank, have failed to increase financial liquidity or offer a way out of the debt crisis.
Analysis of the market’s performance clearly shows ‘safe-haven’ investments outperforming all others; in a comparison of investment strategies over the 2007-2012 period, which considered five investment options, the FTSE, S&P and DAX indexes all lost money, at an average annualized return of -1.6%. Meanwhile money invested in gold returned 28% and in silver 22%. This is used by some analysts as proof that ‘printing money’ in an ineffective strategy for coping with the crisis. Rather, argues McCloed, this is a policy ‘common to all failed states,’ and he offers the example of Germany as a country which has avoided the debt trap engulfing the rest of Europe.
However, the majority of the new investment and borrowing has been pumped directly into the financial sector. In some nations crippled by sovereign debt, financial trade continues according to the same rules as before and new building projects in the Frankfurt financial district are the nearest modern equivalent of the WPA. James Meadway, of the NEF, argues that until cash injections are focussed on restarting productive economic activity, additional aid will indeed be futile.
Meanwhile, the worst drought for more than fifty years has hit the American Midwest region. USA Today reported Jeff Schussler, a drought researcher at DuPont Pioneer, saying that ‘we would not expect to see any devastating soil effects’ on August 26. Chuck Raasch, the article’s author, remarks that expected 2012 average yields would have been records in 1991. However, there is additional pressure on farmland due to biofuel demand. This will be exacerbated by oil price rises which saw crude hit $124 a barrel earlier this year, and by OPEC’s decision to leave in place its production ceilings and to attempt to use slower increases to govern demand.
With manufacturing contracting across the Eurozone, farming hit in the US and international finances in freefall worldwide to the extent that Mr. Mcleod thinks it ‘threatens to bring down the entire global banking system,’ perhaps it’s time to buy gold?