News in brief N°2

A summary of select international news: An interpretation of stock market crashes, the burden of household debt, massive hikes in military spending, war planes shot down, conflict between powerful countries.

There has been a route in stock exchange markets around the world with large sell-offs at decreasing prices. It began at the start of February in the US. A number of reasons are feeding this drop, among them has been a growing rate of employment in the US coupled with the possibility of some rise in wages among workers who have seen over a decade of struggle in otherwise dismal levels of income. It should be good news for people if workers’ real wages do increase and unemployment does see a meaningful decrease. There are many factors in national and international economies that have resulted in today’s fragile environment, including rapid geographic shifts in production, concentrations of finance capital, a massive expansion speculative activity, overproduction, and worsening employment contracts in most countries over the long term. News of higher wages in the US is simply one factor that has tipped over a sector of an already generally feeble economy. The stock markets are in a panic, however, because higher wages can mean increased inflation as prices of basic and necessary goods, like food, rise while sellers hike their own prices in order to capture a greater share of money in people’s private budgets as profit, and producers increase prices to compensate for higher employment costs. For workers, this is an obvious problem, especially if prices increase at a greater rate than their wages do. It should be noted that there’s more at play in determining inflation than wages, but this is a common perception and worry that’s helping to fuel the market drop. To be clear, you can have dropping wages and little to no decrease in costs, and vice versa. This is why you can have an overall drop or gain in real wages and wealth among most workers in a given period. The wealth of US workers has shrunk over the past generation. There’s no magic equilibrium in the recorded history of industrial capitalism. You can live like paupers as people did during England’s infamous industrial revolution or have the relative employee security many Western countries did in the short decades after the Second World War. The latest historic period has been marked by a drop in labour’s share of the national income in almost all of the largest 20 economies (the G20).

Back to stock markets. Their concerns are different: they fear that a rise in inflation will result in a rise in interest rates on borrowed money (credit). Higher interest rates mean there’s less cheap money to go around to buy equity or speculate on stocks as the cost of borrowing money to do so risks to outweigh the profits. Meanwhile, there’s anticipation that yields or returns from government and central banks bonds will go up as they collect more on interest, making bonds a more secure investment than the falling price of stocks or equity. These bonds will then be more attractive to big buyers relative to the stocks that are themselves inflated by the past availability of cheap credit, credit that may not be as cheap in the near future. This is one of the common theories of our time; anticipation of such a risk for those who have the means to make the investments is what’s triggered the current crisis. However, and in contrast to this theory, there’s a possibility that bonds and equity are sold off, pushing the price of both down as the owners of such assets try to minimise their overall losses and sell what they have in order to balance their books. If bonds are sold off then liquidity or the banks’ supply and access to money will shrink. For so-called fragile banks, like those of Italy, this will be a problem because they simply may not have enough money in reserve to handle all transactions and cover customer withdrawals. What a strange economic system we have, where more jobs and more pay for otherwise battered workers can lead to a crisis.

On top of the current drop in stock markets, China has had a significant transformation in its housing market: housing prices have been rising, and private loans have become more common in order to cover the cost of purchases as well as costs of living and rents. Housing is of course for living in, however, it has a second function; just like stocks, they can be used by investors who speculate that prices will increase after their purchase, so they can flip property and make a profit. But, various segments of the Chinese government have been warning that they intend to increase relevant interest rates (the cost of borrowing) and introduce a stricter quota on the number of loans that are available. Simultaneously, the government may construct more public housing and rental units, undercutting private investors. This could reduce profits for investors who may then see both stocks and real estate as too risky. Another thing to keep an eye out for is a possible shift in the distribution in the types of property ownership, such as an increase in property that’s jointly owned by households and the state (a type of public housing) or the sales of real estate that’s currently owned by state owned enterprises. Here, again, we have an odd situation that’s sadly indicative of poor logic in existing economic systems: declining housing prices, which should be a good thing for affordability, may result in an economic crisis.

The share of household debt to gross domestic product has risen in China: from about 10% in 2007 to a little under 50% in 2017. That of the US dropped in the same period, and its debt to GDP was about 80% in 2017. Germany’s was a little over 50% (decreasing), France’s was just under 60% (increasing), Canada’s was about 100% (increasing), the United Kingdom’s was around 87% (decreasing), and Spain’s was roughly 63% (decreasing). Now, that ratio measures loans relative to each country’s total value of production. The individual and household is another thing. The burden of debt can feel very different for the households themselves. For example, Canadian household debt was 171% that of household disposable income in the third quarter of 2017.

Another sector that’s experiencing growth is the military of some key countries. The US Senate is debating a budget that would result in a 13% increase in the military budget of 2019. The French president has promised steady increases over the next years, by spending an extra €295 billion ($360 billion) between 2019 and 2025, for a 35% increase over six years. Spain plans a 73% increase by the year 2024. Canada also intends to increase its military budget by 73% over a ten year period.

The Syrian war is continues to unfold. Israel has conducted more bombings in that country and had one of its war planes, an F-16, shot down by Syrian air defence. About a week prior to that, a Russian Su-25 war plane was shot down, an attack claimed by Hayat Tahrir al-Sham, a group affiliated with al-Qaeda. The Israeli air force struck one or more air bases and other military targets in central Syria’s Homs province. Syrian surface-to-air defences are made and supplied by Russia, including upgraded S-200 systems and mobile Buk missile systems. The last time an an Israeli jet was shot down was in the 1980s, over Lebanon. None of Israel’s previous bombardments of Syria resulted in a loss for them. This could well be a warning that the rules of war have changed as the Syrian government and its allies have gained in territory and strength. The US, in the meantime, has limited capacity for an effective response in support of Israel since it’s tied up with growing strife with Turkey. The two governments are at odds over the future of Syria and the means of warfare, so much so that there’s a risk that diplomatic conflict between them could be aggravated by military confrontation. Turkey and the US are both NATO members.

Global geopolitical tension, alliances, and enmities are developing at a fast pace all around. They are rather more visible in the wide conflicts that are being waged across the Middle East. Syria is a curcial stage of competition between great powers as they war over the balance of power between them. As the pace of competition has picked up, so has the breadth and depth of battle in that country. This is one important fight in the wider struggle to determine the shape of the emergent international order.

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