The last few weeks have been witness to turmoil in share markets in Australia and other countries. The epicentre of this shock wave is the United States. Movements in interest rates have been and will continue to be affected.
While politicians go about proclaiming that the “fundamentals are sound,” everyone else is not quite so sure about where we are heading. Analysts put the blame on the troubles at the lower end (sub-prime) of the housing market in the US.
They say that easy credit and rising defaults on mortgage repayments are the problems.
They have led to a collapse that has struck at share markets and interest rates.
They say that these problems will be around for some time. This is all very true. However, it is not the whole story.
Over extension of credit and an artificial pumping up of the housing market through inflated prices is really a more critical problem, producing a tendency towards excess investment in some areas, typically in shares, bonds and real estate.
A further side effect is that interest rates are pushed down because of the decrease in the value of money.
The rate of return to investors goes down with this.
A resulting imbalance, as investment dollars fly from one place to another, fuels speculation and provides fertile ground for a large scale extension of credit to create new opportunities for profit, where previous means have not delivered.
Investment is turned to creating operations that move into more risky terrain.
When things go wrong, as they have at this point, there is a new flight of already volatile capital. In the areas affected, credit begins to dry up. Capital flies out to other areas of the economy and also overseas. It is causing volatility everywhere.
Responding to the immediate situation, the US Federal Reserve moved and cut its primary discount rate (loans to banks) to 5.75 percent, to allow more money into the economy.
The Reserve is also expected to cut the rate on inter bank lending. Through these means a massive $US350 billion is being pumped into the global economy.
Low end mortgage loan providers like Countrywide in the US and Rams in Australia may be helped with easier immediate access to refinancing.
While this might ease immediate panic, the lasting effect will be to exacerbate an already existing over supply of American money that will continue to distort the US and global economies.
Rather than pumping more money into circulation, what is needed is some control over where investment is going. There needs to be planning so that it can be ensured that economic growth occurs in a balanced way and on the basis of the needs of society. This is the dilemma.
Capitalism and imperialism in particular, is not capable of planning properly in a deregulated economy. Consequently imbalances will remain.
International trade relations have been affected by the increase in the volume of imports into the US and the huge outflow of capital. This has caused a ballooning of both the Terms of Trade and the Current Account deficits for the US.
In 2007, the Current Account deficit stands at almost 7 percent of US GDP, or at $US800 billion. There has been a large jump in the current year. To finance this blow out $US1 trillion of capital must be imported each year. This is more than $US4 billion each day.
To do this capital must be stripped from other counties.
But when the rate of return in the US is marked by a comparatively low rate of interest, it does not encourage an inflow of capital. This is problematic.
Speculation and easy credit will attract investment, but it does so at a price. It offers a quick return, but leaves the investor and economy vulnerable. The collapse of the US housing market shows this.
Increasing debt without a corresponding increase in the production of sufficient new surplus value is not sustainable in the long run. It just creates debt burden.
Other than private debt brought about by the operations of the financial institutions, there is government debt.
The US government has also been using more dollars to pay its domestic debts and the cost of intervention in the rest of the world, especially its war adventure in Iraq.
Add all this together and there starts to emerge a wobbly house of cards. Some of these cards are starting to fall. How far this will go it is yet too early to tell.
Recent developments point to a weakness in the global economy, based on the dominant role the US has been playing.
This spells problems for other countries, and mostly for those enmeshed in the web of economic dependence on the US. Australia is a case in point.
It calls for demands for greater control of capital flows around the world and action to create a global economy that is not dependent on a single centre, but which is diverse and respects the right of nations to develop harmoniously and not be subjected to the interests of multinational corporations and big banks.
To assist its multinational corporations and big banks, and to shore up the American economy, the current US administration is working to export economic difficulties through the imposition of a global regime that forces costs onto other countries, through unequal trade relations, pushing for the devaluation of other currencies, imposing import restrictions and through rising interest rates.
This is the main agenda the US will bring to the APEC conference in Sydney.
Other countries and their peoples are not the cause of the problem and it is not right that they be made to pay the price. When push comes to shove, such moves will cause a counter reaction.
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