Now the Party’s Over

What We Think

Now the Party’s Over

THE BELL is tolling for the decade-long US economic boom. With all the US economic indicators showing signs of slowdown, US Federal Reserve Chairman Alan Greenspan’s surprise cut in US interest rates has started speculation that something in the US economy is about to go spectacularly wrong.

Initially, the interest rate cut had Wall Street and world financial markets jumping for joy and share prices leapt up accordingly. Then questions were raised about why the ultra-cautious Greenspan was lowering interest rates in between the regular monthly meetings of the Fed.

Rather than calming nerves about a recession, Greenspan’s decision could lead to panic. Numerous rumours are circulating that a potentially bigger collapse than that which threatened Long-Term Capital Management (LTCM) in 1998 is imminent and that is why Greenspan has lowered interest rates.

One potential candidate is the Bank of America and a number of other financial institutions (including Barclays in Britain) that threaten to implode because of their liability over California’s ailing privatised electrical utilities.

But the bigger fear is that the US economy as a whole is about to tip into a deeper than anticipated recession, which could see it go into a long period of stagnation, like the Japanese economy suffered throughout the 1990s.

All the indicators are that the US economic bubble is bursting. Now the fear is that even if Greenspan’s interest rate cut could start a final short-term spurt to the speculative shares bubble which will build in a worse recession in the future.

The so-called ‘New Economy’ of high-tech shares, which were grossly overvalued, saw a massive decline last year. The Nasdaq index that monitors these shares dropped 55% in 2000.

But this is no longer a matter of curtailing ‘irrational exuberance’. The consumer boom based on debt was reliant on confidence that income from shares would continually rise.

The decline in value of these shares has sucked out an enormous amount of personal wealth, causing consumer confidence to dip and sales to drop.

This in turn has affected the ‘real’ economy – manufacturing and retail – as has been seen in the mass layoffs at General Motors, Sears and many other large US companies.

The expectation that the boom would go on indefinitely has also left many US states massively exposed. In all, 12 states have not got enough reserve funds set aside to deal with a rise in unemployment benefit claims. If unemployment rises even marginally, then these states will become insolvent and will have to be bailed out by the US federal government.

The old adage that when the US economy sneezes the rest of the world catches cold is likely to be borne out once again. However, contrary to some cabinet ministers and commentators’ belief, the British economy is not ‘recession proof’ and could be heading for the flu or even pneumonia.

Stephen King, an economist at HSBC bank not the horror writer, sketched out the potential economic nightmare that New Labour faces in last week’s Observer: only Mexico and Canada – allied with the US in the Nafta trading bloc – are left more vulnerable by a threatened US recession.

That’s why Blair and Brown are hurriedly trying to hype up the government’s economic achievements, anticipating a May general election, which they hope will be before any significant world downturn.

But even then New Labour will not escape the fall-out. William Keegan, the Observer’s economics guru, said that “Labour’s economic policies will probably look ‘sound’ and ‘responsible’ until the election is out of the way. Then the fun will start.”

The feeling in the US especially is that the party’s over. Time magazine reluctantly conceded: “This time it’s different” and said that Karl Marx’s theory that capitalism is doomed to repeated recessions because of cycles of overproduction has once again been “vindicated”.

Marx also pointed out that workers bear the brunt of every capitalist downturn. But workers, as has been seen in recent strikes and anti-capitalist movements, will also want to ensure ‘this time it’s different’ and that the capitalists are made to pay for the mess that they’ve created.