The World Economy:

An Introduction to a Dogfight

by Ian Griffiths

"They be blind leaders of the blind. And if the blind lead the blind, both shall fall into the ditch." St. Matthew ch. 15, v. 14

The economic world, as never before, has become an integrated whole. This is not to say that there is a global unanimity of purpose but in the last half of the twentieth century great changes occurred to previously determined political boundaries.

If the dawn of the 1900s was the age of empire then its dusk witnessed the end of empire and the rise of the nation and nationalism. When schoolchildren of the 1930s opened their atlas books they witnessed a political world map of predominantly few colourful swathes representing the distant lands still governed by European powers with the addition of the Soviet Union occupying the former imperial Russia.

Today's map of the world has the appearance of a children's paint box, a myriad of separate colours representing the 193 sovereign states of the United Nations and the ten other national entities recognised by at least one UN country as being independent, for example the Turkish Republic of Northern Cyprus. In addition there are the dependencies and territories that remain from the colonial past.

Though under different forms of government all have one thing in common, they trade and have trading partnerships with as many other countries as possible. Despite holding membership of trade alliances, economic unions and areas of common currency however, most nations still attempt to maintain a significant independence of identity and action.

It is the routes of trade and the network of financial exchange that knits together the whole in what is described as the globalised economy.

Globalisation was very much the buzzword of the 1990s following negotiations towards and the formation of the World Trade Organisation (WTO) that, in 1995, replaced the General Agreement on Tariffs and Trade (GATT).

The GATT had been established as a bi-product of the Bretton Woods agreement in 1947. Since that time the West has made dogged attempts to create a system of trade, which it can mould in its own image and dominate, in its own self-interest. In pursuit of this goal the world has witnessed one so-called 'Round' of talks after another through the intervening years. (Seven in all from the first Annecy Round, 1950 to the Uruguay Round, 1993.) The latest WTO ‘Doha Round’ all but met its end in the frozen economic landscape of Davos 2009.

Although broad agreements have been reached there has never been the unanimity that America and Europe have attempted to impose in trade and/or political relations, principally through the organisations that they initiated and dominate - the United Nations (UN), the North Atlantic Treaty Organisation (NATO), the World Bank and the International Monetary Fund (IMF). Indeed, it is through these organisations that they have imposed their political, military and economical will in an attempt to develop and maintain latter day imperialism.

Increasingly it has been the emerging and smaller nations who have attempted to achieve a greater political role, a more dominant control of their own economic affairs and a more equitable share of sustainable trade particularly in extractive and agricultural produce that, for many, is often their sole source of foreign revenue.

In trade terms both the European Union and America have an internal system of 'negotiated' subsidies in place which protect their domestic suppliers and which in turn deflect the political pressure of their domestic agricultural lobby. The Common Agricultural Policy is a classic example of an 'accepted' protectionist measure that is maintained because of fear of the electoral power and pressure of farming communities in France, Italy and Greece in particular. Similarly, the mid-West has an iron grip on the determination of the American presidency.

In ‘What is Happening?’ we cited the Baltic Dry Index which registers the amount and cost of world, bulk carrier, shipping trade which had rapidly collapsed by November 2008. Since then we have witnessed these massive ships ‘tied-up’ around the world and now being used as floating warehouses in which to store excess produce, particularly new cars, for which there is no longer any demand.

The Index has risen a little since the start of the year, even in a depression trade continues, particularly in fuels and food staples – grains in particular, but there is no indication that trade has improved in fact the contrary is true.

Fuel is a vulnerable commodity as the trade conflict between Russia and the Ukraine has demonstrated which was underscored by the protectionist instincts of one country over another.

'Protect - and Survive?’

Thus there is always a presence of national interest and protectionism. Even at this high point of globalisation and mercantile multi-nationalism it is overwhelmingly the domestic issues that continue to concern and worry elected politicians the most.

In addition, all multinationals have a national home where one can find their headquarters, the major percentage of their shareholders and the nub of their productive activity all of which provide boards of directors with domestic considerations.

As we shall see, over the coming weeks and months, it is to these safe havens that they withdraw in times of crisis and it is their domestic workforce that poses the greatest threat to their assets and which they defend with the most vigour.

The most recent example of this process is the once independent Swedish car manufacturer Saab, the subsidiary brand of US giant General Motors, which the parent company has shed from its books and is now likely to be declared bankrupt should the Swedish government not step in to bail it out. In Germany, Opel is another potential victim of this fallout whilst in Britain it is Vauxhall.

Under current economic conditions, the intractable problem that all developed nations will fail to overcome is that each company and, in turn, each country will act primarily in its own interests rather than the needs of any other. It is only when their disparate interests intersect that any unanimity will emerge and alliances will be forged.

Enormous efforts will be made to maintain a united front in the face of this Depression and its symptomatic challenges - falling growth, social upheaval, debt, deflation, liquidity, inflation, etc. But nation states only reflect the system of economics that their political structures, political aims and policies represent.

We must remember that capitalism is not a co-operative structure. It is a system based on the generation of profit whereby individuals and companies are compelled to make profit from their investments and trade. In fact, in a period of downturn individual companies and conglomerates become more determined to compete more brutally to eradicate the opposition and thereby amass whatever profit is possible from a shrinking market. Directors are not altruistic benefactors with a desire to dispose of their own personal wealth nor their companies' wealth in a spirit of good will and for the benefit and betterment of a needy majority.

As it is with the generators of profit so it is with those who facilitate their endeavours, the countries within which they function and the politicians who assist their cause.

Few countries or companies have the luxury of a monopoly of production and trade. If, for example, you wish to purchase a vacuum cleaner you will see that there are hundreds of models, tens of international manufacturers and hundreds of trade outlets from which to make your choice of purchase.

In order to make profit every manufacturing company must compete with the other manufacturers and each retailer must compete with its high street neighbours for your custom.

It is this competition that drives production and which determines outcomes. In this economic environment some companies will make a profit whilst others will fail only to be destroyed, their assets and market share devoured by the victors - and in this there is a desperate human cost.

It is a dog eat dog world and the real victims of this dogfight are the company employees, the workers, those who were dependent on a company salary or weekly wage, those who leave the house each day in office clothes as well as those who leave in boiler suits. It is at times such as these that we realise that in our personal incomes we all hang by the same tenuous thread; no matter what social position we thought we previously occupied.

As it is with companies so it is with nations. Over a number of forthcoming articles we will attempt to examine each trading bloc and also each significant, national economy in order to better understand the global nature of the slump, its intensity and the direction and rate of development.

First, however, there is a need to deal with some of the big issues that will become part of the decision making of all politicians in all countries. These will be returning themes in the accounts of individual economies.

Last autumn there was an act of unanimity when the world's leading nations, the Group of 8 (G8), indulged in a co-ordinated interest rate cut but the scale, scope and rate of decline struck them with such 'shock and awe' that subsequently, all action has taken the course of 'saving one's own skin'.

The bank bailouts, the car industry subsidy interventions, interest rate cuts and fiscal policies have all been designed to primarily dam domestic fallout and quell growing social disquiet. These are the faint overtures of a 'devil take the hindmost' dance of death.

Whilst all government leaders publicly rail against protectionism - and with the same breath lecture the rest of the world about its consequences - they are trapped in its vice. This is due to the necessity of their self political survival and legacy. The most open act of protectionism by a single country was undertaken at the start of February when India placed a ban on the import of all toys from its neighbour and its most direct regional competitor, China.

For months Barack Obama's $787 billion quantitative easing package has been presented as the US cavalry riding to the rescue of an encircled world yet it also is overwhelmingly designed as a vain attempt to save America with little evidence to suggest that it will stimulate world trade. Indeed the most concerning element, particularly raised by European steel makers and EU ministers, has been the packages' enclosed clause promoting the use of US companies, materials and labour in the construction programme.

Over coming months the career of any prime minister or president will be measured in days if he or she were to promote a package of policies that will help or be seen to help the financial bailout of another struggling country, stimulate the import of foreign goods or similarly be judged to be providing any assistance whilst bankruptcy, unemployment and homelessness were on the rise at home.

Already Jacqui Smith, the British Home Secretary, has announced a review of the criteria requirements of foreign, skilled artisans and professionals seeking work here. This was a protective piece of restrictive legislation that was introduced on the back of populist resentment of foreign labour and only within the last twelve months.

Thus all stimulus packages are designed for one purpose, to protect the interests of the rich home nation at the expense of their poor neighbours' and its former dependents.

At this early stage of the downturn it is not wide of the mark to predict that the future existence of the European Monetary Union, and thereby the European Union, is threatened. There is no co-ordination, no pan-European policy, nor can there be when each country's problems are individually nuanced.

An array of different domestic demands are arising each requiring a made to measure financial stimuli or subsidy. This cannot be an intervention role played out by a European Central Bank which would soon be accused of favoured nation practices by one disgruntled party or another.

France has led the way with the first overtly biased subsidy which the Sarkozy government has awarded to French car manufacturers on the understanding that they retain their domestic workforce ahead of their foreign based -read other EU countries' - assembly lines.

But this only follows on the heels of Gordon Brown's tactic of firstly allowing the pound to tumble against the euro whilst applying his modest VAT cut - I explained in ‘What is Happening?’ how the French would view this in particular but it has also impacted on Ireland as hordes of its shoppers have flooded over the border to Northern Ireland to do their weekly shopping to the detriment of Irish retailers, particularly affecting border towns such as Dundalk.

Not to be outdone, the Germans have added demand stimuli to their economy to kick start consumer spending. One example is the car scrapping programme whereby owners of cars of ten years old or more are given assistance over and above the car's value towards the purchase of a new car.

They too have been critical of British monetary policy but they, together with the Austrians, will soon be faced with a more pressing problem of East and Central European debt refinancing to which they are dangerously vulnerable.

These all represent the challenge of attempting to deal with problems of an individual nature which then produces a diverse system of tit for tat responses, none of which lay the basis for an harmonious, co-ordinated, pan-European benevolence.

Gordon Brown believes that he will bring together all these disparate parties with the wider world and thrash out a united global response to the crisis at a G20 (the leaders of the world's top twenty economies) meeting in London in April. (As a side issue it is rumoured that at this meeting a new world financial regulatory body will be proposed to oversee the global banking system and that Gordon Brown will be offered its directorship. This, perhaps, provides a possible reason why he, before any other western leader has been summoned to Washington for an audience. This position would allow him an emergency exit by which to slide away from his economic crimes here and join his partner felon, Tony Blair, in lucrative exile.)

Brown's big, world saving, economic wheeze is a strengthened International Monetary Fund, which currently holds a mere £200 billion or so of emergency bailout funds. He thinks this bank balance should be massively increased in size so that a threatened avalanche of failing sovereign states will be able to draw down from its funds.

The problem is that the US and the UK (and soon other countries) have already run out of any spare cash and are now reduced to printing their own promissory notes of dubious value in order to overcome their own domestic shortfalls.

The only nation financially able for this rescue is China but, for the West and particularly America, to resort to such overt dependency – despite China’s underpinning of US debt and the value of the dollar - it would graphically demonstrate their own weakness to the rest of the world. It would represent an admission and declaration that their power was drained, their hegemony over and, there from, an ignominious resignation of status. It would signify the baptism of a new power structure - the acceptance of a new world with a new overlord.

Despite Obama's intended aim of a different kind of foreign policy, of a new US approach to the world, of 'jaw jaw' rather than 'war war', it is difficult to imagine that American supremacists and lowly rednecks would accept such a public humiliation and retreat from the world stage, hanging on to the coat tails of what they still regard as the ‘red menace’, communism – albeit a transitional structure.

It seems ironic that a country that is the world typification of the neighbourhood bully, would bring into question their heritage, their Cold War history, their previous wanton human sacrifice and then each individual's own chauvinistic, political 'gung-ho' virility and persona.

Thus this Far Eastern lifeboat for capitalism looks holed below the waterline before it could ever be launched.

The international economy is fatally wounded and has been laid low by its own exuberant excesses. The financial profligacy has spread crisis through every conduit of exchange and into every corner of the globe. No one sector is insulated from its toxic poison, no one individual is immune to its venom.

There is no remedy for this economic pestilence within the bounds of capitalism. One is reminded of Hilaire Belloc's 'Cautionary Tales':

Physicians of the Utmost Fame

Were called at once; but when they came

They answered, as they took their Fees,

'There is no Cure for this Disease.'

As it was when the quacks of old attempted to cure disease with purges and poultices of every description, often causing the patient more suffering and pain, the modern doctors (Econ.) will attempt to apply this palliative and that treatment to this canker but all to no avail.

It is not for those of us who abhor this brutal system to proffer advice to its strategists and controllers but whatever they attempt they will not be able to prevent decades of penury for the world's masses nor their retribution. What is required is for the world’s populations to realise their potential and dutifully dispatch this reckless system to the graveyard of history.

In the meantime, existing governments will attempt all cures with the likelihood of intensifying the torture. So-called quantitative easing is one such measure that will only serve to prolong the "death agony of capitalism".

The bourgeois are so fearful of the consequences of runaway deflation that they will risk longer term, galloping hyperinflation and it in turn will have the impact of choking off any life breath that they will have temporarily pumped into the patient's body. This is a no win situation.

Already the evidence of deflation is apparent. In property, land and commodity prices (other than those of precious metals and farm goods affected by the vagaries of climate) the evidence is overwhelming. The product of the automobile industry is rapidly devaluing, as is the output of other non-essential consumer durable produce. The only robust prices are those of food, particularly staples.

In Britain prices have fallen by 3.8% in the five months since September 2008 and average wage increases in manufacturing industry are down to 1.8% from 2.9% in the November. Such falls are quite rapid and the overall rate of decline in the economy has become alarming, especially because unemployment is only just accelerating and which will result in more demand being squeezed from the system. The whole process will come to represent a vortex of despair until a floor of destitution has been established from which growth can regenerate. Unless we act our small children will be men and women before any meaningful gains will influence their lives, that is if they make it to maturity. For many of those who are less fortunate in this world it will be an horrendous experience.

Thus the stage is set. In the weeks after April it seems more than likely that open trade warfare will come to the fore with a generalised sentiment of 'let the devil take the hindmost'. This is the backdrop to our study of the politics and economics of the trade blocs and individual nations (including such national 'regions' as the Basque country, Flanders, Scotland and Wales) as the depression deepens. Red Writings copyright 2009