The rally in equity markets has come to a sudden stop with global markets down 5% in two days after a sharp rally off the low for this bear market on 8/3/2009.
In the 1929 crash the Dow Jones fell 48% in two months only to recoup 50% of these losses in the following five months. However, over the next two and a quarter years the market fell almost continuously to be worth little over 10% of its all time high value.
This time round markets took 17 months to lose over 50% of their value and the sucker depression rally seems to be over in a much shorter time than in 12930. If we repeat the prolonged depression of the 1930s we would see the Dow Jones fall to 1500 with the FT-SE 100 dropping to 700.
Over the last two days the memories of the that great summit of 1933 resurfaced when the leading capitalist countries could not agree a common route out of the depression and they then all set off on there own routes to protect their own economies.
This time the cracks are appearing with everyone from Mervyn King, the governor of thebe bank of England, to Merkel and Kevin Rudd the Australian telling Brown and Obama that there is not enough money for anymore stimulus packages. That is why the G20 is split. Obama believes the US will be able to fund this spending in the short-term through issuing US government bonds because investors believe because of the size of the economy that the US will not be a credit risk. Brown is pushing this policy as tries to repair his image and portray himself as a global statesman in the hope that his and Labour’s poll ratings will improve.
The main reason for this is the amount of money governments are have spent or will have to spend bailing out the financial system and now key industries. Merkel ‘s government will need to hoard money to bail out both European banks and countries.
This will leave little for genuine job creation programmes.
The scale of the financial; losses – realised and potential – are simply too great. In the UK we have spent 20% of GDP in the last year bailing out the banks and the quantitative easing programme could cost up to a further 10%. The money to pay for this can be raised in two ways through issuing government bonds or tax increases. But failed government bond sales show the amount that needs to be borrowed cannot be done this way. Investors are wary about they very solvency not just of the banks but the governments themselves. This means that the only alternative is tax increases or public sector cuts both of which will slow the economy down.
Governments are caught behind a rock and hard place. As long as the recession continues the financial system will loose money because of their exposure to it to loans, assets and derivatives.
The only solution to their ills is to nullify this is by turning residential property loans into social rents, commercial loans into social projects and to cancel all derivative contracts. In the real world most banks would now be bankrupt and the holders of the derivatives contract would receive very little of the value of the contracts.
Such a move would allow the governments to tackle climate change and world poverty. It is a radical revolutionary approach to the crisis but one that will not be pursued by the global elite.
It will be up to the mass of humanity to put forward and implement such a solution.