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The Progressive Economics Forum

Wageless recovery and the politics of austerity

The UNTCAD just published its annual report on Trade and Development, titled Post-crisis Policy Challenges in the World Economy.

The report describes a two speed global recovery, showing how developing economies have come out of the crisis stronger then their developed European and American counterparts. There the author invokes the contradictory forces at work in a “wageless” recovery, where wage repression combined with austere fiscal policies will keep developed economies in a state of prolonged stagnation, even with all the monetary stimulus imaginable. Misguided policies combined with unfettered financial markets are largely to blame according to the author. Here in a nutshell is the gist of the argument:

Challenging the widespread re-orientation of macroeconomic policy, especially fiscal policy, towards austerity, the Report notes that fiscal imbalances were not a driving factor but a result of the crisis. Thus, fiscal retrenchment is not an appropriate response. Fiscal austerity seeking to cut fiscal deficits, curb public debt and thus “regain the confidence of the financial markets” is likely to be self defeating, as it affects GDP growth and reduces fiscal revenues.

The report discusses various options that could re-stabilize the global economy, but imply deep and politically difficult reforms such as:

In general, the financial sector needs to be restructured in order to reduce the risk of mis-pricing and the resulting systemic crises. Reforms should mainly aim a clear separation between the activities of investment and commercial banking.

And the construction of a new state centered international monetary system that would succeed and surpress the actual dominance of  the monetary system by the private financial oligopoly:

Greater stability of the real exchange rate could be achieved by a system of rules-based managed floating. Such a system could be built on the adjustment of nominal exchange rates to inflation differentials or to interest rates differentials. This can be practiced as a unilateral, bilateral or strategy, but the greatest benefit for international financial stability would result if the rules for managed floating were applied at the multilateral level.

All in all a good read !

Comments

Comment from Paul Tulloch
Time: September 6, 2011, 12:16 pm

“And the construction of a new state centered international monetary system that would succeed and suppress the actual dominance of the monetary system by the private financial oligopoly”

Sadly the current system is indeed state centered- but mainly on the USA, controlled by and centered on the interests thereof. (not necessarily USA focused, although I am sure the argument for a nation specific uni-modal distribution of those interests could be made).

However Eric I do like that statement as that the oligopoly center is focused mainly on perpetuating the continued financialization of the capitalist core amd extending whatever is needed for growth and persevere.

Even the threat of Basel III today in Australia made headline news across the financial district. So it sure is going to be quite the monstrous journey to build something that goes way beyond Basel III. Can you imagine it, Basel III is merely a 4.5 % mandatory holding requirement. And then they wonder why the system can crash so easily. Holy mackinaw, can you imagine the 2nd orders on thos erates of change when the herd is spook. Its no wonder liquidity becomes a huge issue. And yet companies are sitting on mountains of cash.

The whole logic of the system is now in a territory that if we collapse again, much more than Basel III band aids will be required.

Great post Eric, you are reading my mind today.

Comment from Murray Reiss
Time: September 7, 2011, 6:44 pm

Fiscal austerity is touted as necessary to “regain the confidence of financial markets.” I would love to see sites like The Progressive Economics Forum start reaching out to people by demystifying language like this and taking us behind the veils. Who are the “financial markets”? How did these people gain such power that governments quake at their possible displeasure?

Comment from Travis Fast
Time: September 7, 2011, 7:12 pm

Murray wrote:

Who are the “financial markets”?

Short sighted, shit for brains, trained monkeys.

“How did these people gain such power that governments quake at their possible displeasure?”

By investing the retirement savings of short sighted, shit for brains, trainers of monkeys.

Comment from Eric Pineault
Time: September 7, 2011, 7:26 pm

I think in this case, the financial markets tied to the austerity drift of european fiscal policy, are actually european investment and commercial banks (actually they aren’t separated), more specifically french banks… kind of paradoxical since the the report touts the french presidency’s desire to confront the financial systems hubristic power…
Anyhow, in French a good and reasonable read on the global banking oligopoly that presents itself as “the markets” is François Morin’s Le nouveau mur de l’argent”, to bad it hasn’t been translated.
In the case of commodity markets, well question your pension fund manager…. who probably works in a big bay street firm, he’s wielding your power !

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