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The Credit Crunch , livre ebook

Pluto Press - Graham Turner

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254 pages

English

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This book argues that the current financial turmoil signals a crisis in globalisation that will directly challenge the free market economic model.

Graham Turner shows that the housing bubbles in the West were deliberately created to mask the damage inflicted by companies shifting production abroad in an attempt to boost profits. As these bubbles burst, economic growth in many developed countries will inevitably tumble. The Japanese crisis of the 1990s shows that banks and governments may struggle to contain the fallout. The problem has not been limited to the US, UK and Europe: housing bubbles have become endemic across wide swathes of emerging market economies. As the West slides, these countries will see an implosion of their credit bubbles too, shaking their faith in the free market.

Turner is an experienced and successful economic forecaster, whose opinions are sought by large international banks and top financial journalists. Drawing from his first hand experience of the Japanese property crash of the 1990s, he presents his analysis in a clear and persuasive style, showing that the end of housing market growth spells disaster for neoliberal globalisation.
Preface - Save Burberry Jobs

1. Globalisation and Credit Growth

2. Overinvestment and financial crises

3. Addicted to Debt

4. 'Free trade' and Asset Inflation

5. Dealing With The Fallout

6. Emerging Market Bubbles

7. Battling Deflation In Japan

8. Policy Failure In A Liquidity Trap

9. Where are we heading?

Notes

Index

Sujets

Economic History

Macroeconomics

Economics

Business

Informations

Publié par	Pluto Press
Date de parution	20 juin 2008
Nombre de lectures	0
EAN13	9781849644112
Langue	English
Poids de l'ouvrage	1 Mo

Informations légales : prix de location à la page 0,6250€. Cette information est donnée uniquement à titre indicatif conformément à la législation en vigueur.

Extrait

The Credit Crunch Housing Bubbles, Globalisation and the Worldwide Economic Crisis

GRAHAM TURNER

P Pluto Press LONDON • ANN ARBOR, MI in association with GFC Economics

First published 2008 by Pluto Press 345 Archway Road, London N6 5AA and 839 Greene Street, Ann Arbor, MI 48106

www.plutobooks.com

The right of Graham Turner to be identiﬁed as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library

ISBN ISBN

978 0 7453 2811 9 978 0 7453 2810 2

hardback paperback

Library of Congress Cataloging in Publication Data applied for

This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental standards of the country of origin.

Designed and produced for Pluto Press by Chase Publishing Services Ltd, Fortescue, Sidmouth, EX10 9QG, England Typeset from disk by Stanford DTP Services, Northampton Printed and bound in the European Union by CPI Antony Rowe, Chippenham and Eastbourne

List of Tables and FiguresPrefaceGlossaryGFC EconomicsAcknowledgements

1 2 3 4 5 6 7 8 9

Introduction Global Contagion Addicted to Debt ‘Free Trade’ and Asset Bubbles Dealing With the Fallout A Global Credit Bubble Japan’s Bear Market Policy Failures in a Liquidity Trap Where Are We Heading?

NotesIndex

vi ix xiii xvi xvii

1 14 26 48 84 109 135 159 188

194 222

LIST OF TABLES AND FIGURES

Tables

4.1 6.1 6.2

6.3 6.4 6.5 6.6 6.7 7.1

Manufacturing job losses under New Labour 70 South East Asia, balance of payments 1996 112 Foreign exchange reserves, various countries, December 2007 116 Turkey and South Africa, balance of payments 2006 119 Capital ﬂight, South East Asia 124 Capital ﬂight, various countries 125 Import cover ratios, various countries 126 Balance of payments, year before crisis 127 Japan property prices – the turning point 144

Figures

1.1 US house prices 2.1 US business investment/GDP, real terms 2.2 US consumption deﬂator, durables 2.3 US current account/GDP 3.1 US homeownership 3.2 US residential mortgages, foreclosures started 3.3 US residential mortgages, delinquencies 3.4 US household debt payments 3.5 US personal sector debt/disposable income 3.6 UK personal sector debt/disposable income 3.7 UK inﬂation 3.8 US inﬂation 3.9 UK average earnings 3.10 US average earnings 3.11 US trade balance 3.12 UK trade balance

2 21 22 24 31 32 33 34 36 37 39 39 40 41 42 42

LIST OF TABLES AND FIGURES vii

3.13 US house prices 3.14 UK house prices 3.15 UK retail sales and mortgage approvals 4.1 US wages and salaries/GDP 4.2 UK real average earnings 4.3 China trade balance 4.4 US personal savings ratio 4.5 US home equity loans 4.6 China direct investment inﬂows/GDP 4.7 US trade balance with China 4.8 US trade balance with Mexico 4.9 UK trade balance 4.10 UK trade balance with China 4.11 UK trade balance with Poland 4.12 UK trade balance with Hungary 4.13 UK trade balance with Czech Republic 4.14 UK trade balance with India 4.15 UK trade balance with Turkey 4.16 UK manufacturing employment 4.17 UK business and ﬁnancial services jobs 4.18 UK current account excluding ﬁnancial services 4.19 UK net external assets/GDP 4.20 US manufacturing employment 4.21 Developing country imports 4.22 China imports from US/China imports 4.23 China imports from UK/China imports 4.24 China trade balance 5.1 US assetbacked securities, mortgages 5.2 US durables ‘inﬂation’, consumer price index and import price index 5.3 UK retail sales deﬂator, nonfood stores 5.4 UK retail sales deﬂator, household goods 5.5 OECD consumer prices 1971–79 5.6 OECD consumer prices 2000–08 6.1 Foreign exchange reserves 6.2 Eastern Europe and UK, private domestic debt 6.3 Baltic Three and UK, private domestic debt

43 43 46 49 49 52 56 58 61 62 63 64 65 65 66 66 67 67 68 71 72 72 74 75 76 77 78 91

93 94 95 104 105 115 118 119

viii THE CREDIT CRUNCH

6.4 CIS, private domestic debt 7.1 Japan land prices, nationwide 7.2 Japan land prices, six largest cities 7.3 Japan money supply, M2+CDs 7.4 Discount rate and yen/$ 7.5 Japan domestic wholesale prices 7.6 Japan velocity of circulation, M1 8.1 Japan nationwide land prices 8.2 Japan savings, worker households 8.3 Japan corporate bankruptcies and bond yields 8.4 Japan yield curve 8.5 Japan government debt 8.6 US Fed funds target adjusted by core consumption deﬂator 8.7 Japan compensation of employees 8.8 Japan banks assets, JGBs 8.9 Japan bank lending and deposits 8.10 Japan, BoJ assets/GDP 8.11 Japan consumption deﬂator

121 143 145 145 147 148 153 160 161 163 166 167

171 173 176 177 179 184

PREFACE

‘Save Burberry jobs, save Burberry jobs’, they chanted. Around 60 angry residents had travelled from the former mining town of Treorchy in South Wales, to protest outside Burberry’s flagship stores in London’s expensive New Bond Street and Regent Street. On 6 September 2006, 300 workers at the Burberry factory in the Rhondda Valley had fallen victims to ‘commercial logic’. The factory at Treorchy had been producing clothes since 1939 and had been taken over by Burberry in 1989. Now the jobs were heading to China. Treorchy was no longer ﬁnancially ‘viable’ the 1 company claimed. It cost £11 to make one of its popular polo shirts in South Wales, but in China, it would cost £4. With the 2 power of the Burberry brand, they would sell for £60. Burberry had underestimated the backlash. Devastated by the closure of so many coal mines, Wales had also lost more than 3 46,000 manufacturing jobs since the mid 1990s. The workers of Treorchy vowed to ﬁght the closure, and enlisted the backing of local hero Tom Jones, Manchester United manager Sir Alex Ferguson, and actors Ioan Gruffudd, Rhys Ifans and Emma Thompson. Deﬁant to the last, the residents campaigned hard to keep the factory open. They failed, and on 30 March 2007, the workers marched from the factory gates through the streets of Treorchy, joined by a male voice choir, for their ﬁnal rally in the town. And for what? Like so many others, the luxury retailer had concluded that it could raise its proﬁts by relocating somewhere cheaper. The annual cost savings of £1.5 million were less than 1 4 per cent of the company’s operating proﬁts. But any boost to the bottom line, however small, would in theory boost the company’s share price. And it did, for a short while.

x THE CREDIT CRUNCH

Less than a year after the factory closed, Burberry was forced to issue a proﬁt warning. Its share price fell more than 16 per cent in one day. From the high of 725.5 pence reached a month after the factory’s demise, Burberry’s share price had slumped to 406.5 pence. As the credit crunch intensiﬁed, it carried on sliding, hitting 5 a low of 364 pence. The share price had fallen 49.9 per cent in less than a year. Free trade based around the simple premise of cost cutting was not working, and not just for the people of the Rhondda Valley. It was a stunning reversal, and one small example of what has gone wrong in the world economy. The credit bubble is the direct result of numerous companies across the West abusing free trade, moving jobs offshore simply to boost proﬁt margins. It has not worked for Burberry, because companies need consumers to buy. Consumers need jobs to be able to buy their goods and services. And they cannot do that indeﬁnitely by getting deeper into debt. As more and more companies ﬂed the West in search of cheaper production bases, the central banks were obliged to keep interest rates low, to stimulate economic growth. The rise in debt was the ﬂipside of jobs being lost to the East. Eventually, the credit bubble burst. As an economic strategy, it made little sense, even for the Burberrys of this world. After seven years of debtfuelled growth, 6 stock markets are now lower than they were in 2000. Free trade driven by cost cutting feeds and nourishes credit bubbles. It does not beneﬁt the workers, but it has failed corporations too. This book is not an attack on free trade. It merely seeks to unravel the causes of the credit bubble and the inevitable implosion of housing markets. Free trade is a good thing, but not when it is used by companies simply as a ruse to cut costs. The West has seen a buildup in debt levels that will take years to unwind. And the risks of serious policy mistakes aggravating the fallout are high. This book also draws a number of parallels with Japan’s experience ofdebt deﬂation, which the authorities are ignoring. Debt deﬂation occurs when falling prices push up the real burden of debts, precipitating more defaults, triggering bigger price declines thus perpetuating a vicious cycle. The Federal

PREFACE xi

Reserve left it too late to start cutting interest rates. And it was too slow in stemming the tidal wave of foreclosures. This book suggests the blame should not be laid exclusively at the doors of ﬁnancial institutions, central banks or regulatory authorities – though much of the criticism now aimed in their direction is unequivocally justiﬁed. The reckless lending policies fuelled the bubble and will aggravate the long downturn. But if we limit our focus, we shall fail to understand the real cause of the credit bubble. The politicians who stood by and let debt levels rise remorselessly, accepting the plaudits while the economies ostensibly boomed, are the real culprits. The subprime lenders were given a green light by the Federal Reserve, because the US politicians wanted economic growth, at any cost. Democrats and Republicans signed up to the free trade agreements that drained jobs from the heart of industrial America, caused the real median wage to fall and led to an inexorable rise in debt. Northern Rock was a bank out of control because it was not supervised. The Financial Services Authority and Bank of England failed because they ignored the warning signs. But New Labour was the architect of an economic policy that created the monster of Northern Rock. Gordon Brown boasted repeatedly that the economy was enjoying the best performance for three centuries, even though it was built on nothing more than debt. If the West is sinking in a sea of red ink, supporters of free trade will argue that many developing countries have at least beneﬁted. But we shall show that this is a fallacy too. They have also become subsumed by grotesque credit bubbles. In a large number of cases, their borrowing has risen faster than that of even the UK or US. And they are also heading for trouble. The great unwind began with the US, but will end with many of the emerging market economies. The damage inﬂicted by these credit bubbles will depend on how the authorities respond. If they make the same mistakes as the Bank of Japan in the 1990s, we are all in trouble. There will be a backlash against free trade, and the recessions will be steep and prolonged. If we learn the lessons quickly, the world economy may bounce back in short order. But time is running out. As the