The Elusive Recovery

Published on The Bullet, Socialist Project’s E-Bulletin No. 925, by Prabhat Patnaik, January 8, 2014.

The world capitalist crisis which began in 2008 not only persists but is worsening … //

… Still in the Grip of Crisis: … //

… The Role of the Banks:  

  • Why has “quantitative easing,” while keeping the system afloat, not caused a recovery? This is because the money pumped into the economy by the Federal Reserve has disappeared into the banking system, but the loans of the banking system that constitute the means through which the level of aggregate demand in the economy expands, have not increased. The banks have held on to excess reserves or made some changes in their balance sheets, in consequence of which some of this money has spread itself all over the capitalist world, including entering third world economies to sustain currencies like the Indian Rupee, the Indonesian Rupaiah, the Brazilian Real, and the South African Rand. All this however has not increased expenditures and hence the level of world aggregate demand.
  • An example will make the point clear. If American banks enter, say, India, if not directly then at least indirectly via a chain reaction of balance sheet adjustments, to buy Indian equities in the stock market, then this may help in sustaining the present level of India’s current account deficit, and hence in preventing the cut in world demand that would occur if India curtailed its level of activity to curb its deficit; but it does nothing to enlarge the level of world aggregate demand.
  • The reason why banks do not increase loans to expand the level of expenditure and aggregate demand is because the private sector in the capitalist economies, in particular in the economies of the advanced capitalist countries, are already in so much debt that they do not wish to borrow more for the purpose of spending. They would rather pay back their debts and thereby improve their balance sheets than increase their debts for the purpose of spending more, even for adding to the stock of their assets, i.e. for undertaking investment.
  • What this means is that monetary policy which refers to the intervention of central banks has become totally inconsequential for combating the current world recession. The short term interest rate which is typically the instrument used by monetary policy is almost zero in the advanced capitalist world; hence it cannot be lowered any further, and cannot play any further role. This was indeed the reason why “quantitative easing” was introduced: the idea was that since the short-term interest rate had lost its bite, central banks like the Federal Reserve should try intervening through the long term interest rate by directly purchasing long-term government bonds. But even this, as we have seen, has become useless for expanding the level of activity.

Government Fiscal Policy: … //

… Possible Solutions?

  • Since none of the advanced capitalist countries is in a position to undertake larger fiscal expansion individually, only two other possibilities remain: one is a coordinated fiscal expansion by all of them in unison which is an idea that had been mooted during the Depression of the 1930s but shot down by finance capital. The opposition to such a proposal today, when finance capital itself has acquired an international character and hence even greater clout than it had at that time, would be far stronger.
  • The second possibility is for individual governments to undertake fiscal expansion within national boundaries, i.e. behind protectionist walls, with the promise to enlarge domestic employment, which could gather domestic political support for such an agenda. This however entails a reversal to post-war Keynesianism, a throwback to the past, which is precisely what the process of globalization of finance has succeeded in overturning. Globalized finance will vehemently oppose any attempt to “put the clock back.”
  • It follows that no matter which way we turn, global capitalism appears to be in an inextricable situation. A new “bubble” upon which it has pinned its hopes could pull it out of the morass in which it is stuck; but there is no sign of it as yet. Monetary policy which is an instrument that finance capital approves has become ineffective. Fiscal policy which could conceivably have an expansionary effect is disliked by finance capital. The situation therefore is quite desperate. And it will become even more desperate if, as is not unlikely, segments of it such as the Eurozone get trapped into a state of deflation.

(full long text).

(Prabhat Patnaik taught at the Centre for Economic Studies and Planning in the School of Social Sciences at Jawaharlal Nehru University in New Delhi, from 1974 until his retirement in 2010. He will be giving the keynote address at the Congress 2014 (May 24-30 2014) of the Society for Socialist Studies this Spring at
Brock University in St. Catharines, Ontario).

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