Wednesday, December 16, 2009

Getting to grips with the crisis

As we prepare our Manifesto of Revolutionary Solutions, it is of the greatest importance that our analysis and the policies we put forward, are based on the most accurate and well-rounded estimation of the nature and scale of the global crisis and its impact on ordinary working people.

The McKinsey Global Institute is one organisation assembling the evidence and it has just released a review of its research results from the last year. A look at just a few of the figures from this leading business consultancy’s research arm provides sobering reading.

• World financial assets fell in value by $16 trillion to $178 trillion in 2008, marking the largest setback on record and a break in the three-decade-long expansion of global capital markets
• Financial globalisation reversed in the wake of the crisis. Capital flows fell 82% in 2008, to just $1.9 trillion from $10.5 trillion in 2007
• Declines in equity and real estate values wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009
• The 2008 stock market crash was the most severe since the Great Depression.


To get a sense of the meaning of these bare facts we need to dig a little deeper. The value of global production in 2008 was around $69 trillion. So the $28.8 trillion wipe-out of equity and property values was around 42% of global GDP. That’s bad enough. Catastrophic even.

But the figure for real estate grossly underestimates the scale of the decline because it is an estimate only of residential property values. According to McKinsey, global residential real estate values fell by $3.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009.

Replacing this wealth will require a long period of higher saving, they say. To put this in perspective, the world’s households saved about 5% of their disposable income in 2008, or $1.6 trillion: they would have to save that amount for 18 consecutive years to amass $28.8 trillion.

This illustrative measure of saving leaves out the impact of falling wages, unemployment, pensions melting into the air, and the tax increases that will be needed to service huge increases in government debt incurred by attempts to slow, let alone reverse the decline. The idea that domestic saving will continue at anything like that rate looks highly unlikely. Impossible even.

And, as the recession deepens, the impact on commercial property – the recent collapse of Dubai’s property market, for example – is only now beginning to emerge and doesn’t enter into McKinsey’s narrower residential measure.

Like many analysts, McKinsey is pinning its muted hopes for a recovery on increased consumption in China, but that will require “a more aggressive” programme of “comprehensive reform”, by which they mean the privatisation of huge swathes of state-owned enterprises and generally thrifty Chinese people becoming bloated consumers.

But China's consumption-to-national income ratio is still the lowest of the world's major economies, and it has fallen by nearly 15% since 1990, despite robust economic growth.
Put another way, as China’s economy expanded, funded by capital flows which have now shrunk by 82%, its workers, employed by the global corporations on 50 pence a day, spent proportionately less of the country’s increasing value.

That’s hardly surprising, because a great deal of that increased national wealth was lent to the USA so that its population could borrow the money needed to consume the products made in China’s now largely silent sweatshops. Now they’re earning nothing in China, and unemployment in the US exceeds 10%.

A “return to growth” and global “economic recovery”? Nowhere on the horizon.

Gerry Gold
Economics editor

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