Can we make it to the millennium in plenteous times? It now seems less rather than more likely; the sheer weight of economic misfortune in the world is against a continuation of the long boom of the nineties. Soon, the growth and feeling of comfort that has sustained our and other western governments will be replaced with the anxieties of slow growth, possibly recession (that is, six months or more with no or negative growth). Then the nature of politics changes; arguments about wealth and its distribution become harsher, the support for governments more uncertain.
Our main shield against this has been and still is the sheer wanton recklessness of the American consumer. Rarely has so much been owed by so many to such a spree. Americans, over the past several years, have felt so good about their economy that they have spent hugely and saved almost nothing. Instead, they have relied on the steady rise, throughout the Bush and Clinton years, of a stock market in which more and more US households gamble their surplus money; new financial instruments, especially the mutual funds and (for the rich) hedge funds have performed so far ahead of the very slight rise in prices that people have felt rich, or at least richer, year after year after year.
Leon Levy, one of America’s richest men and the creator of two mutual fund and brokerage companies, said at the end of last year that he saw three largely insoluble problems. First, the US was sucking in vast amounts of foreign goods that were priced low because foreign currencies like the yen had sunk, and the trade deficit was thus huge and growing. Second, savings were tiny and thus the spending spree was dependent on a stock market that would, sooner or later, turn down. Third, there may be too much capital investment. “I know the world can make more automobiles than it needs,” said Levy. “I think there may be too much investment in high technology. Only when the economy begins to slow is this obvious. Until then everything looks great.”
Economists typically think of capital spending as the main source of an economy’s strength. But as Levy observed, “that’s what many said about Japan”.
According to one estimate, Japan, between 1988 and 1992, added the productive equivalent of France to its already huge output potential. But in making such investments, it ran up enormous debts, which were often secured against vastly over-valued property. The collapse of the mid-nineties has revealed a banking system that cannot purge its bad debts faster than they appear, a government that is still hobbled by its thraldom to special interest groups, a once-revered bureaucracy now routinely anathematised for inaction, corruption and secrecy, consumers who (in complete contrast to the Americans) don’t dare spend because they are fearful of the future and an industry that is showing red ink everywhere. Nissan Motors, second only to Toyota in size, can now barely service £20 billion of debt, while the great electrical corporations Hitachi and Toshiba are in loss for the first time since the 1940s. Japan’s crisis is also South-east Asia’s, to which it exported and from which it imported some 40 per cent of its goods.
It is also likely to be China’s crisis this year. The Chinese government has stuck to figures of 8 per cent annual growth; but like the (rather more modest) figures for growth in Europe this year, few believe it. It is probably already down to 3 or 4 per cent, which is not enough to employ anything like the numbers coming on to the labour market for the first time, or those laid off by the still-dominant state sector. China’s figures are so sketchy and manipulated that it is impossible to know what is really going on but the crash, when it comes, could be politically horrendous in such a chaotic, half-liberated, half-suppressed land.
Over-extension, or too much investment, is not confined to a few countries, however. Worldwide, the automobile industry, as a result of investment over the past 15 years, has the capacity to produce 20 million more vehicles than it can sell. That is why General Motors, Ford, Daimler-Chrysler, Volkswagen and Toyota are now gobbling up ever larger companies in order to get the brands, markets and economies of scale without which they cannot trade profitably in an era when car prices are falling and car electronic gadgetry increasing. BMW, for example, losing fortunes supporting Britain’s Rover Group, is now vulnerable to take-over, perhaps by Volkswagen. Or it could merge with Japan’s Honda or Italy’s Fiat.
Whoever goes with whom, the net result will be cuts in production and employment – especially in places like the UK, where the entire motor industry, save for little speciality houses, is foreign-owned, and thus more vulnerable to downsizing than the national champions like Fiat or France’s Renault. If, as Levy believes, there is also over-investment in computers and electronics – especially in microchips – then the scale of job losses following the end of a consumer boom could be very large indeed.
High investment, usually regarded as a good thing, is one of two paradoxical weaknesses in the world economy. The other is the decline of inflation. For most of the postwar generations, inflation has been the demon to exorcise; the task consumed the Wilson and Heath governments in Britain, and it was the driving force behind Margaret Thatcher’s union legislation.
Its centrality as the mark of a well-run economy has elevated the central banker to god-like status – because central bankers, it was assumed, would make inflation-slaying their lodestar. It was in order to prove new Labour’s economic bona fides that Gordon Brown gave control of interest rates to the Bank of England; and it was to show that the euro would be the hardest of currencies that the statutes of the European Central Bank (ECB) were drawn up to make price stability the alpha and omega of its existence.
But inflation is now a problem only in wild places like Russia. For much of the developed world, the opposite is the problem: deflation is either here already or it is on its way. Commodity prices, especially of energy, are very low indeed. Interest rates in Japan are at zero (and still the populace will not spend). Over-investment, and the continuing effects of miniaturisation through electronics, put savage pressure on prices. Central bankers have become gods just as the world no longer needs the message they preach.
This explains a large part of the economic war which is now going on in the European Union. Oskar Lafontaine, the German finance minister, supported by Dominique Strauss-Kahn, his French equivalent, is noisily pushing for a cut in interest rates to boost employment. Wim Duisenberg, head of the ECB, supported by other god-like beings in the central banks all over Europe, says interest rates are already very low (in fact, they are not, in real terms, as low as they have been in the past) and stonily refuses to cut them.
Deflation has benign consequences, such as low prices for many commodities. But if it tips too far, it courts recession and depression; hence the comparisons with the great 1930s slump and its attendant political horrors. So far, the crisis has been contained. But both Russia and Brazil could be plunged into new crises and these would involve knock-on disasters for the regions (the former Soviet Union and Latin America) that they dominate.
The men who saved the world last year – or at least the rich part of it – are still working hard to save it this year. They are Alan Greenspan, chairman of the US Federal Reserve; Robert Rubin, the US Treasury secretary; Larry Summers, the deputy Treasury secretary for international affairs; and Stan Fischer, first deputy chairman of the International Monetary Fund. They preach low inflation, low budget deficits, fidelity to debt repayment pledges, and open trade. Where a country disobeys, as Russia did in some respects, it is isolated.
These men make up a close-knit group. In a hagiographic piece in Time earlier this month, Summers, Greenspan and Rubin are described as constantly in each other’s company, all equally high on the intellectual excitement of managing the world. They believe deeply in the goodness of their project, and believe equally deeply that only the US and the IMF (which has tended to function as an extension of the US Treasury in areas such as Eastern Europe, the former Soviet Union, South-east Asia and Latin America) can effectively write and enforce the rules of globalisation.
Their critics, however, are increasingly vocal. In the US, Robert Reich, labour secretary in Bill Clinton’s first term and now back in academia, has launched a sustained attack on the president’s cutting of the welfare system; while Jeff Sachs, a Harvard professor and adviser to Latin American and former communist states, charges his old friend Stan Fischer with using the IMF as a rich countries’ protector.
Sachs wants the Group of Seven advanced countries to expand and admit some of the poorest states in the world. Then, he argues, the reforms required by the capitalist system (in which Sachs believes) could be “owned” by the developing world rather than simply imposed on it.
Outside the US, too, criticism is growing. The increasing self-confidence of the European social democrats will, sooner or later, mount a sustained intellectual and political challenge to US hegemony – if the euro launch is confirmed as a success. The developing and transitional (former communist) states no longer feel like obeying the IMF. One of the leaders of the Romanian opposition told me in Bucharest earlier this month that the painful IMF programme to which his country was being subjected should be suspended. “Who believes in the IMF any more?” he asked. “What countries has it saved?”
This is a world on the edge. Good macro- management may give us a bumpy landing rather than a crash. But that is probably the best we can hope for.
The nineties have been good to most of us who live in rich countries; we will not be so lucky for much longer, and we will have to give some real thought to the nature of politics in a sparser time.
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