Why It's Still Kicking Off Everywhere (15 page)

Then there is a second phase in which the disruption overwhelms the innovations: China's increased consumption of raw materials creates world-wide inflationary pressure; the house-price boom ends, because the banks run out of poverty-stricken workers to lend to; mass migration begins to exert a downward pressure on the wages of unskilled workers in Europe and the USA; the financial dynamic overtakes, dominates and ultimately chokes off the dynamics of production, trade and innovation.

The rise of finance, wage stagnation, the capture of regulation and politics by a financial elite, consumption fuelled by credit rather than wages: it all blew up spectacularly. If this process had been accompanied by dire warnings from economists and politicians; if Madonna and Fifty Cent had wagged their diamond-encrusted fingers at us and rapped, ‘Hey kids, be careful, it won't last'—then maybe the ideological shock would have been smaller. But the 2000s boom was accompanied only by yelps of glee. In Britain, the then chancellor in the Labour government, Gordon Brown, told us he'd achieved ‘an end to boom and bust', adding that the era would be seen as ‘the beginning of a new golden age for the City of London'.
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Even the diehard opponents of the system seemed cowed. Some of those who had organized the anti-capitalist revolts in Genoa and Prague moved to the West Bank to stand in front of Israeli bulldozers, others moved into concept art; the gritty eco-protesters who had mobilized against Shell and Japanese whaling fleets became sustainability experts for the newly greenwashed corporations. Aid charities that had flayed Bill Gates now gratefully received billions of dollars from Bill Gates, and toned down their criticisms accordingly.

But then it all exploded. The system, the conceits, the ideology. In fact, you need something better than the word ‘explosion' to do it justice.

The alien and its toxic blood

There is a scene from the movie
Alien
(1986) that offers a perfect metaphor for what's happened since the Lehman crisis.

In the spaceship's medical bay, the alien is sitting on John Hurt's face, breathing on his behalf: a perfect parasite. The surgeon tries to cut it off with a laser scalpel. But the alien's blood turns out to be acid. The blood splashes on the floor of the operating theatre and burns through. The crew rush down to the next level of the spaceship, but it's already dripping through the ceiling and fizzing through the floor. On the next level down it's the same. Horror-struck, they realize that if it burns through to the hull, the spaceship will explode. Luckily, after burning through several decks, it stops.

In this metaphor, the banks are the alien; the acid blood is the toxic debt; the scalpel incision is made by US Treasury Secretary Hank Paulson on 15 September 2008, as he attempts to amputate Lehman Brothers. And the unleashed toxic debt then burns through layer after layer of the global economic system.

The first layer it burned through was the credit system. The next layer was the real economy, whose output, trade and stock market valuations collapsed at a rate completely in line with post-1929: there was a 20 per cent fall in trade, a 50 per cent fall in global stock market valuations and an annualized 40 per cent fall in merchandise exports.
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But then it hit a deck that did not burn. In the spring of 2009, a slump on the scale of the 1930s was halted by the intervention of the state.

By spending taxpayers' money and reducing taxes; slashing interest rates and then printing money; quarantining trillions of dollars of bad loans inside the balance sheets of governments—the state became the barrier that contained the acid blood of toxic debt.

The ideological implications of the state's intervention are always avoided in conversations at Davos or Jackson Hole, or on the yachts of the super-rich. Because among the wealthy, the default theory of our age still rules: that the state is dysfunctional to capitalism; that (as free-market economic guru Milton Friedman taught) the regulator can never know more than the two parties in the deal and therefore should not, ideally, exist.

The dominant economic theory states that individual self-interest is the great driver of progress. According to this dogma, any attempt to impose rationality on economic life leads not just to inefficiency but—as another free-market economist, Friedrich Hayek, put it—to ‘serfdom'.

But even while mainstream economics struggled to understand the new effectiveness of the state, another problem arose. The state could not hold. That is to say, not all states, or state formations, were strong enough to absorb the acid bath of bad debt they were being asked to take.

It has now become obvious that four globally strategic institutions were corroded to the point of failure by the attempt to contain the crisis. These are: the eurozone, British social democracy, bipartisanship in American politics, and the network of Western-backed dictatorships that ran the Middle East.

That is nice work for one small alien over the space of three years, and its mission is not over yet.

The euro crisis

Ireland was bankrupted by its banks, which had become the conduit for hot money operations out of London during the boom. As they went bust, progressively, so did the Irish state, bailed out to the tune of €85 billion after a month of protesting there was no need to, on 29 November 2010.

Greece was bankrupted by ten years of co-existence with Germany inside a single currency. Southern Europe became a market for German loans and German cars: already boosted by the low Deutschmark exchange rate fixed on entry into the single currency, the German economy simply reaped the rewards of its institutional dominance. Meanwhile stagnant wages in Germany, alongside galloping unit labour costs in the periphery meant, as economist Costas Lapavistas put it: ‘Monetary union is a “beggar-thy-neighbour” policy for Germany, on condition that it beggars its own workers first.'
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Allowing Greece to join the euro with a detrimental real exchange rate, a dysfunctional tax system and rising labour costs practically guaranteed its future penury.

Portugal, meanwhile, was bankrupted by its failure to compete—not just with Germany but with China and developing Asia, as offshoring quickly sucked the life out of the country's traditional timber and leather industries. In a factory outside Porto early in 2011, I saw first-hand a whole shed full of equipment for making softwood Venetian blinds. It was deserted, the machinery laced with fine cobwebs; two years before, thirty people had worked there. Next door, an unbuilt speculative property development—no more than a deserted sales office and some tattered corporate flags—completed the narrative of broken dreams.

Greece, Portugal and Ireland could have been saved by early intervention. In the end they were saved too late, and therefore not saved at all. In May 2010 and again in July and September 2011, the entire euro currency was taken to the brink of breakup and collapse by the indecision of the eurozone's leaders, above all Merkel and ECB boss Jean-Claude Trichet. The three bailed-out countries are now destined to remain on life support for several years. But by August 2011 inaction had dragged Italy and Spain into the danger zone, so that the European Central Bank was forced to break its own rules and start buying up the debt of these two massive, un-bailable economies.

The dilemma throughout the euro crisis has been clear: whether to impose losses from south European bad debts onto north European tax-payers, or onto the bankers who had actually lent the money to these bankrupt countries in the first place. The outcome was always a function of the level of class struggle. By hitting the streets, Greek people were able to force Europe to impose losses on the bankers; where opposition remained within its traditional boundaries—the one-day strike, the passive demo—it was the workers, youth and pensioners who took the pain. Meanwhile Europe itself was plunged into institutional crisis. At summit after summit, the fiction at the heart of the Maastricht Treaty was exposed. Monetary union without fiscal union had failed; not as in a ‘failed aspiration', but as in a concrete girder tested to failure.

There are only two logical outcomes to the euro crisis. Either northern Europe, whose taxpayers will bail out the south, takes control of eurozone economic policy, issuing ‘Eurobonds' or some proxy vehicle to cement an effective fiscal union; or, the eurozone breaks up. Which-ever happens, north–south solidarity in the eurozone is corroded beyond repair. From Helsinki to Milan, the far right is gaining ground on opposition to bailouts for the ‘feckless south'. This means that, even if the eurozone's leaders summon up the courage to attempt fiscal union, they can hardly sell it to their electorates. Logically—though in practice its demise may take some time—the eurozone in its present form is doomed.

British Labour's ‘third way' collapses

For the thirteen years Labour ruled Britain it relied on an implicit deal: taxes from the bloated financial services sector were placed at the dis-posal of a welfare system that allowed 9 million people to become dependent on state handouts. Benefits and tax credits, together with neighbourhood policing and CCTV systems, made life tolerable in towns where there would never be high-paid work again.

For those who had bought their homes, including council-estate dwelling workers, the Blair years would see ‘equity withdrawal'—borrowing against rising house prices—equivalent to a stunning 103 per cent of GDP growth.
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Crime fell, and the feel-good factor increased with credit-fuelled spending power, especially for the poor; analysts noted that the main drivers of equity withdrawal were people ‘with low credit scores and high credit card utilisation rates, who are most likely to have been credit-constrained in the past'
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. But the fundamental lack of productive industry—indeed, in great swathes of the country the lack of any vibrant private sector beyond aerospace and military hardware—was never addressed.

Labour's then Business Secretary Peter Mandelson had summed up the party's strategy when he announced it was ‘intensely relaxed about people becoming filthy rich as long as they pay their taxes'; his Cabinet colleague Geoff Hoon is said to have told Labour MPs worried about the decline of shipbuilding that: ‘metal bashing is no longer a vital national asset'. Under Labour, Britain lost 1.3 million manufacturing jobs.

But this was social democracy. There had to be a palliative. The scale and persistence of poverty in Britain prompted Labour to extend the benefit system into the lives of those at work, in the form of tax credits. As a result, by 2010, 9.2 million adults out of a working-age population of 37 million were receiving state tax credits, while 5.4 million people were dependent on out-of-work benefits.
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By the end of the Labour government, former Labour minister Alan Milburn would admit: ‘We still live in a country where, invariably, if you're born poor, you die poor, just as if you go to a low-achieving school, you tend to end up in a low-achieving job.'
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Redistribution through welfare was never overtly sold as compensation for the destruction of the ‘old' working-class lifestyle, but that's how it was widely understood. When I interviewed ex-miners in Leigh, my home town, in September 2009, in a pub at lunchtime, it was the Conservative threat to their benefits that worried them most. ‘They closed the mines, but at least they allowed you to draw your “sick”,' one told me, meaning the Incapacity Benefit that large numbers of former manual workers were entitled to. ‘Now they're going to take away the sick.'

But by then, whatever deal Labour thought it had with this older, male, manual demographic had begun to erode. In 2003 Labour enthusiastically opened its labour market to workers from Eastern Europe; by 2010, the Office for National Statistics released figures that showed 81 per cent of all jobs created under Labour had been filled by non-UK-born workers.
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The influx placed a downward pressure, not so much on unskilled wages (which were pegged at the national minimum), but on the layers just above. Anecdotally, time and again, it was this that proved the deal-breaker for many of Labour's traditional supporters. In that same Leigh pub, numerous old miners quietly told me, off-camera, that though they were lifelong Labour voters, they had voted for the British National Party in the European elections of 2009. They were not alone.

In May 2009, 2.5 million people in Britain voted for the right-wing-conservative, anti-Europe party UKIP, and just under a million for the fascist BNP. A year later, in the British general election the BNP still gained nearly 600,000 votes, largely from among the traditionally Labour-voting ‘C2DE' social groups—which is sociological double-speak for manual workers.

Once again, the financial crisis had been the crucial deal-breaker between the politicians and the electorate. As long as their homes gained value and their credit-card limits were raised, people on low incomes could tolerate the ‘filthy rich' character of Labour's friends and donors, and Labour's encouragement for the influx of cheap, unorganized labour. Now, with the economy grinding to a halt, many could not.

Today, whatever its electoral fortunes may hold, Labour's thirteen-year strategy of a high-welfare, low-industry economy paid for by a finance and housing bubble, is finished—and agreed to be so by the party's leadership. What the future may hold for its relationship with its traditional base is less clear.

The collapse of bipartisan politics in America

Indiana, October 2010.
The university gym at Angola, Indiana, is not quite packed, but at $20 a ticket and $10 for the t-shirt, a couple of thousand people is a decent payday for Glenn Beck, the Fox News presenter who's to be the star attraction.

But Beck comes later. The day starts with a very fat man in a very tight polo-neck sweater singing ‘God Bless the USA' in an excruciating tenor voice. Everyone except me stands erect, many with fists clenched against their chests. Some put their hands in the air and close their eyes in an expression of quasi-religious rapture.