Wednesday, 26 January 2011

Mervyn King speech: cheap money for the banks, misery for the masses

Chief of the Bank of England Mervyn King spoke in Newcastle today about the pain "we" will all be suffering in the coming years. His speech acted to reinforce the bad news about the decline in the UK's GDP in the last quarter of 2010.

GDP declined by 0.5 per cent; if bad weather is accounted for then it flatlined at 0 per cent – the third quarter it has declined from its beginning of the year height of 1.2 per cent.

King clearly outlined in his speech the strategy of finance capital and the government at this stage of the crisis.



Ignore King's crocodile tears about the fate of the mass of people, after all he played his part in getting us to this place; let us concentrate on what he said about two key economic tasks, combating inflation and keeping interest rates low.


Reducing living standards in the UK

King spoke of the erosion of savings and the coming pain "like the 1920s", a decade that saw absolute falls in the living standards of workers and a general strike; he pointed out that living standards had already declined to 2005 levels and that he was unwilling to do anything to reduce inflation for the forseable future.

"The Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.”
Of course the Monetary Policy Committee (MPC) could do something about the decline in living standards, but has chosen not to do so. The MPC's sole remit is to control inflation around a 2 per cent target – King with full backing from the government has abandoned this.

He even went onto say that many realised the difficulties were "the legacy of the banking crisis and the need to rebalance our economy.” Two years ago he was talking about moral purposes and regulation, now the bankers are back in the driving seat  and dictating government policy King can say that the banks are to blame but you must suffer because no one is going to do anything about it.


Inflation in the UK is running at just under 5 per cent (if housing costs are included) or 3.7 per cent if they are excluded. The EU's rate is about 2.3 per cent (using EU criterion UK inflation is about 3.3 per cent). Also international comparisons show that it is averaging globally just under 3 per cent. So the UK's, and USA's, rates are high.

However, inflation is variable, food and fuel are rising a lot faster while household goods are holding their own. Inflation for the majority of workers is therefore a lot higher.

So why let it run high? Precisely to slash living standards. King, Cameron, Osborne and their friends in the city want to reduce living standards even further in order to boost profitability. The less the bosses have to pay out in wages the more they can keep for themselves. It has been the favoured strategy of the UK ruling class since the 1980s and is the UK's way of trying to overcome the low levels of investment in production, which is the normal way of increasing profitability.

In addition to the slash in wages is the destruction of welfare and social services provided by government and councils. People will have to spend more out on leisure, libraries, social services for older and disabled people and a whole raft of provision in the past provided by councils. There is even the threat that paying for health will increase. This is the goal of the Big Society – the end of "social" ie paid out of general taxation and the existence of volunteers, charity and failing services.

Given that the UK economy is more and more dominated by foreign capital then why should they care about the mass of the population as long as their bankers are getting paid.

Low interest rates and cheap money


Under normal conditions the way a central bank would counter a rise in inflation would be to raise interest rates – making money more expensive and restricting spending. But King isn't ready for this step. The Telegraph stated: "King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and 'those who behaved prudently' would be among the biggest losers in the squeeze."

So the saving middle classes – usually hailed as the bedrock of Conservatism – are being sacrificed in order to keep cheap money and letting inflation rise. Cheap money for the banks of course, the rest of us are still having to borrow at high rates of 4 to 5 per cent while UK businesses are screaming out for more money.

The interest rate has to be kept low in order to provide cheap money for the banks and financiers in order for them to continue the road to profitability and the domination of finance capital.

And, as today's GDP figures show, the government are not concerned in their is a double dip recession, they are not even concerned if we go the way of Ireland. What is important is to slash labour costs and free up as much cheap money for the banking system to safeguard its domination. The bankers are still worried about their holdings in Ireland, Greece, Portugal, Spain and other parts of the world.


The return of bubbles

The result of cutting living standards and too much cheap money looking for a return is that another bubble is being blown. The mass of the population needs homes, cars, consumer goods, even holidays for a decent standard of living. How, if living standards are cutback, are they going to afford these items? Only through credit lent to them by banks, restored to profitability and power – and so the whole cycle starts again.

The pain surely will get worse, unless we challenge the diktats of capital.

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