Patrick Bond on world financial volatility

[Louis Proyect <lnp3@xxxxxxxxx>]

Znet, December 26, 2004

World Financial Volatility

By Patrick Bond

Addis Ababa - When an Indian-based network of dissident economists - the
International Development Economics Associates
(http://www.networkideas.org) - recruited critical African intellectuals
for two dozen seminar sessions last week, the stability of world capitalism
naturally came up for debate. The Council for the Development of Social
Science Research in Africa and the Ethiopian Economics Association mainly
lamented the structural conditions in world markets which have left African
cash-crop exporters ever poorer and more vulnerable.

Is a different, inward-oriented strategy appropriate? I think so, but
perhaps a prior question is whether the world financial power center, in
Washington, might weaken sufficiently to make a progressive approach more
politically attractive, technically feasible and economically rewarding.

To answer affirmatively requires adding more meat to the bones of my last
column, 'Crunch time for U.S. capitalism' (ZNet Commentary, December 4). I
argued that the economic slowdown since the 1970s generated falling
corporate profit rates and speculative investment bubbles. But the
'displacement' not resolution of these problems meant they actually get
worse: through, for example, volatile financial markets, ineffectual Third
World structural adjustment imposed by the World Bank and IMF, and more
desperate, brutal imperialist looting methods.

It is a good time to think outside the neoliberal box, these economists
agreed, since the Washington Consensus universally failed the masses of
Ethiopians and billions of other Third World people. In addition, financial
volatility has been evident not just in the dollar price, but in other
markets across the world, even after the dust settled in East Asia
following the 1997-98 meltdown. While the Clinton Treasury Department
managed to pass the costs of these problems elsewhere, the chickens have
recently been coming home to roost in the U.S. itself.

The main organizer of our gathering, Jayati Ghosh of Nehru University in
New Delhi, is one of the sharpest critics of bourgeois macroeconomics,
combining robust anti-imperialism with a Keynesian concern for consumption
and equity: 'Financial liberalization that successfully attracts capital
flows increases vulnerability and limits the policy space of the
government. Unfortunately, the dominance of finance globally has meant that
such debilitating flows occur even when individual developing countries or
developing countries as a group have no need for such flows to finance
their balance of payments or augment their savings.'

Concludes Ghosh, 'The real benefit of such flows is derived by the U.S.
government, which, being the home of the reserve currency, can resort to
large scale deficit financing which it opposes in developing countries.'

This isn't merely a government dilemma. Consumer credit is also expanding
the bubble, as U.S. household debt (as a percentage of disposable income)
ratcheted up from below 70% prior to 1985, to above 100% fifteen years later.

To be sure, on the one hand, financial product innovations and advanced
technology permit a somewhat greater debt load without necessarily
endangering consumer finances. On the other hand, during the same period,
U.S. individual savings rates fell from a range of 7-12% of income to below 3%.

Moreover, household assets are mainly in real estate, in the wake of the
2000-02 stock market crash. But the property market began inflating out of
proportion to underlying values following the 1998 drop in interest rates
(the Fed's response to the Asian crisis), which spurred a dramatic increase
in mortgage refinancings.

As a result of the huge rise in property prices that followed, the
difference between the real cost of owning and of renting soared to
unprecedented levels, according to the left's guru on this issue, Dean
Baker of the Center for Economic and Policy Research in Washington. With
the housing sector contributing roughly a third of U.S. economic growth
since the late 1990s, this bubble is particularly important. Overpriced
property is also a severe threat in cities in nearly every country.

full: http://www.zmag.org/sustainers/content/2004-12/26bond.cfm


Louis Proyect
Marxism list: www.marxmail.org