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How Osborne’s ‘recovery’ evaporated in a puff of smoke within 24 hours

osborne in a puff of smokeTwenty-four hours is a long time in politics, let alone a week. Dressed in his best City garb Osborne informed the assembled banking grandees in the Mansion House last Wednesday that: “We are moving from rescue to recovery. Britain has left intensive care”. Really? On Thursday words from Ben Bernanke, head of the US Federal Reserve, to the effect that he was slowing the pace of QE3 and might conclude it by mid-2014, blew Osborne away and with him most of the stockmarkets across the world.

The FTSE-100 index suffered the biggest fall for nearly 2 years with £48bn knocked off UK shares, with similar falls in France, Germany and the US, and commodity prices in gold, silver and oil all tumbling. Some ‘recovery’. It has exposed just how far the global economy, particularly the UK, has been hooked for too long like some demented addict on enormous injections of public subsidies just to keep going. Leaving aside Osborne’s whimsical fantasies, there are several deeply worrying implications in all this.

  1. The biggest one is that if this enormous wall of cheap money, with the Fed buying up $85bn (£55bn) of bonds every month, is removed or even just ‘tapered’, then neither the huge continued liquidity injection on the Abenomics Japanese model nor the previous injection of £375bn (equal to a quarter of the entire UK GDP) into the UK economy will be enough to keep the party going once the US has pulled away the punchbowl. This gives new meaning to ‘the Great Recession’, the slowest and most long-drawn-out ‘recovery’ of the international economy for more than a century. It marks the point of growing realisation that if neoliberal finance capitalism is not artificially stimulated by constant injections of public money, it has no inherent organic source of adequate demand and simply deflates like a punctured balloon.
  2. There is the severely damaging ricochet effect across the world which once again impact most severely on developing countries. Not only will bank balance sheets weaken in response to falling bond prices if liquidity declines, but emerging economy markets will take an even bigger hit. Having temporarily gained from mobile money seeking out riskier markets with higher yields when negative real interest rates made US Treasuries unpalatable, they are now finding, as so often in the past, that once the trend reverses mobile and fickle capital departs as quickly as it arrived.
  3. Third, there is of course the very real and open question of whether the Fed’s scenario – that the US economy is pulling out of recession and that US growth should reach 3% next year – is right. There have been many false dawns before, and this one looks no more promising as a string of new data points to a further slowdown in the Chinese economy and a further significant fall in world commodity prices as Chinese demand steadily weakens.

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