For providers of services in Australia, particularly service providers in Tasmania, a stalled economy is likely to hurt those who need support most. Tasmania and the wider Australian political economy will be influenced by macro economic conditions in the integrated global markets. Governments, federal and state, are winding back the services that should be expected in communities of civil society that provide public goods and services to citizens.
A Roy Morgan Research survey commissioned by the Salvation Army revealed that over 60 per cent of respondents considered the gap between rich and poor had widened. An Australian Council of Trade Union study revealed that the richest 20 per cent of the population controlled 60 per cent of the nation’s wealth whilst the poorest 20 per cent shared just 1 per cent of the wealth. In the United States and the United Kingdom the concentration of wealth is even more profound.
In Tasmania the immediate effects of redundancies in the public service have literally stalled an economy that although small, had carried a certain confidence through the after-shocks of the global economic crisis. That confidence is now lost in a political deficit that threatens long term economic recovery. To understand how abruptly the downturn in Tasmania’s political economy is likely to affect long term strategies we must investigate global macro-economic scenarios to provide a framework for discussion.
Three distinct strategic circumstances provide a scenario to the most dangerous global economic conditions in recent times. The political economies of developed nation states have reached crisis point and there may be no going back in what could be described as black ice economic events across continents. Black ice, as a metaphor/descriptor, for the unique global political, economic and social dysfunction now playing out in countries across the developed world. Sets of extremely hazardous conditions,sight unseen.
The first strategic circumstance is a political and economic contest between western developed nation states and the emerging dynamic Eastern economies of Japan, South Korea, China, India, and including Russia. Emerging South American economies are also located in the latter grouping of nation states playing a more dominant role in the global affairs of political economy. This contest pits philosophical, social and economic forces at high levels.
In China and developing nation states, savings, manufacturing and industrial production is diametrically opposed to the United States model of recent times as essentially a consumer of goods and credit with successive governments acceding to the hollowing out of industrial and manufacturing in the US whilst off-shoring jobs and technology to China and other Eastern hubs. Whilst this dynamic is hardly new or un-noticed it is becoming a critical issue in the United States’ desperate attempt to re-employ, re-stimulate a stalled economy, and to provide a semblance of growth amongst a background of unsustainable debt.
Peter Coy wrote in Bloomberg Businessweek “An honest assessment of the country’s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured up by both Democrats and Republicans during the debt ceiling debate. It would be much worse”. On this theme David Rosenberg argues that “this is a country (US) with a US$15 trillion national income stream, a US$50 trillion capital stock and US$80 trillion net worth in its household and business sector. The ability is there (to pay our debts) including the off-balance sheet liabilities. This is not some banana republic; it is not Greece, Argentina or Mexico”.
´´influenced by capital elites and disengaged with issues´´
Rosenberg goes on to point out the heart of the problem as “a political deficit right now that is blowing the fiscal issue out of proportion”. Many argue that there is a profound political deficit, apparent in the United States, Europe and Australia. Politicians who have lost touch with electorates. Politicians influenced by capital elites and disengaged with issues in the real economy.
The power of financial markets and their sponsors appear to have a tight grip on economic and social conditions in developed nation states. Political leaders appear to have failed abysmally to protect civil society constituents against the known detrimental effects of unregulated financial markets.At the same time financial market players have become stronger, and very politically influential.
The second strategic circumstanceemerging from the current sovereign–debt crises being experienced across Europe,and the United States is the recent transfer of debt, from private banking and finance entities, to nation states’ public account. This debt transfer has radically altered the ability of nation states to provide immediate, and sustainable, public fiscal policy settings. These transfers began in the Lehman Brothers and Bear Stearns investment banking crisis days of 2008. The United States Federal Reserve made tax payers funds of over $1.2 trillion available in emergency loans to dozens of international banks, financial firms, and even a few industrial conglomerates over a period of three years. Over 29,000 pages of documents obtained by Bloomberg reveal the details.
Further national corporate rescue packages in the United States (QE1 and QE2), Australia (Nation Building Economic Stimulus Package), and similar in the United Kingdom and Europe, have been government responses,essentially enabled with public funds. The consequential ability of nation states to provide public goods and services is diminished accordingly. In the United States taxpayers effectively funded struggling banks located across the globe with national based taxpayer funds. Funds that would be most appropriate at this time to fund desperately needed services and programs for an ailing civil society. These are examples of disproportionate responses at macro levels.
Meanwhile economic instability and fiscal dysfunction within theEuropean and US economies is real and getting worse by the minute. In June 2011 the US Federal Reserve released statistical data quantifying the credit market debt liability outstanding in all sectors of credit market instruments as US$52.6 trillion. Global market international Credit Default Swaps (CDS) outstanding positions are currently US$603 trillion . A third of all European debt is speculative capital market instruments (Collateral Debt Obligations and CDS) most originating from the US. Thus the risk of European default contagion or the default of any of the European countries could see a call on United States (CDS) issuers of proportions (and repercussions) hitherto unseen.
The potential for a major collapse is very real. Markets inability to fund defaults could trigger the next phase of the current global financial crisis. At an international level the stakes are high. To emphasise this point in regard to market exposure to speculative financial instruments at play in Europe the scenario of default is dire. If Greece were to default, approximately 94% of the direct losses would fall on European creditors. However United States banks and insurance companies have high level exposure covering debt in Europe through issuance of Credit Default Swaps. US banks would have to make 56% of all default insurance payouts for a Greek default and 28% and 44% in the case of defaults in Ireland and Portugal respectively.
´´the shadow economy with profit and risk´´
These figures demonstrate the eagerness of US banks and finance entities to sell default insurance (CDS) and increase the international exposures and risks undertaken by financial institutions, many of whom were recipients of rescue packages during the first phase of this global correction: a correction that is cutting deeply into real nation state economies in developed countries but in tandem supplies the shadow economy with profit and risk. The political risks for nation states acquiescing control to markets is a critical factor.
At a national level the stakes are even higher in both social and political economy terms as developed nation states wrestle with the intractable problems of public debt, fiscal policy settings within depleted reserve opportunities, with concomitant inability to provide services to civil society. The transfer of private debt to the public account is a monumental political policy setting error made worse by the fact that it has benefitted private firms, corporations, and capital elites that should never have been considered as worthy recipients of rescue packages.
The crisis in service provision is likely to impact severely on those most vulnerable members of civil society who played no role in the global dysfunction of high finance. The problem is exacerbated by the rapid growth and influence of elites.
Whilst the resultant fiscal stimulus transferusing taxpayer based public funds produced an immediate steadying effect at the time of financial crisis,(post meltdown of Bear Stearns (March 2008) then Lehman Brothers, Merrill Lynch and AIG (September/October 2008), the continuing stimuli havesevere and profoundly unequal social consequences. Governments across the world have responded with unprecedented injections of public funds to “pump prime” nation state economies but public monies directed to banks and investment entities have been used to accelerate windfalls for speculative advantage; very little trickles through to consumers. Public funds have essentially stimulated shadow economy speculative activity to keep international market afloat.
Thus “two-speed economies” are evident across most developed nation sates. The ‘shadow’ banking sector is back to its pre Lehman Brothers glory years with daily speculative trades of over US$3trillion in currency markets bets alone. Domestic economies are squeezed of funds in the ‘real’ economies.“Real” economies used to provide public goods to civil society are now substantially weakened through stimulus fund transfer to the opaque shadow systems. Players in the shadow systems are deriving huge profits in a greedy display of profit never before seen in the Western world. Hedge fund managers in the United States for example often take home a billion dollars in yearly pay, whilst services for the poor and underprivileged are continually rolled back.The top ten hedge fund managers are rewarded with more than half a billion a year.
The third and perhaps the most important strategic issuesare locatedwith the political challenge to leaders in the developed nations to influencebalanced long term fiscal strategies. Leaders fail to acknowledge the disruptive and divisive layers of social disorientations being wrought on nation states and their citizens by secretive and dysfunctional international capital market elites, their representatives (lobbyists), and the growing conservative orientation of wealth and power. Political and economic elites have a disproportionate influence on the governance of fiscal policy in the United States and Europe, including the United Kingdom, where the alliance of political and corporate favour was recently clearly demonstrated by Prime Minister David Cameron’s close personal relationship with Rupert Murdoch and his operatives. Downing Street and Fleet Street collude in much the same way as the revolving door operates between Wall Street and Washington. The United States will require immediate and strong solutions to avoid rapid deterioration similar to the fate of European countries that have permitted the power of economic and political elites to dominate policy, and economic direction.
The position of the United States appears weakened by the intransience of the Obama Administration to distance its policy settings from the intense influence of lobbyists in Wall Street, and in Washington. Politicians and lobbyists (12,000 in Washington alone) seem increasingly focused on their close elite clients who feed concentration of wealth regimes, to the detriment of the nation.
Open collusion between policymakers and capital playmakers in financial markets is obvious and rarely questioned. All this spells troubled times ahead for all Western economies. Developed nation states sit side by side to offshore tax havens, offshore entities and tax-less domains, providing the base for high net worth individuals and corporations. A review of donations to the conservative political parties in Europe and the US clearly defines why politicians remain fearful of questioning the power, influence and relevance of high level financial market elites.
´´Time is of the essence´´
Open, highly leveraged positions in derivatives markets mean global citizens will remain on red alert until control of dysfunctional markets is sanitised and the gross economic incontinence affecting this current phase of global finance comes under scrutiny and more balanced judgement. It should be, and still, could be so different. Time is of the essence.
The correction is taking its toll across America where banks have over two million foreclosed houses in stock and nearly eleven million families are at risk of default. Standard and Poors the rating agency that placed high risk home mortgage loans at AAA ratings to feed the insatiable demand of financial markets rolling loans into collateralised debt obligations as investment instruments on international markets, has now downgraded the whole US economy to AA plus.
Meanwhile unemployment in the United States is at near Depression levels. Fourteen million are jobless half of them out of work more than six months with a wilting will and food stamps. Unemployment across Europe is heading the same way. Given the three year span between Lehman Brothers collapse and now, the overall state of nations has deteriorated with public accounts weekened.
Thus three distinct contests areat play. Two have been won. The first contest has been won by the new breed of capital elites, their dominance of the political economies of western societies flowing through to lax governance over speculative financial market players, and their interests (which caused the GFC). The second, highly contentious, but lightly queried contest is the outrageous transfer of public funds to bail out private firms (which now translates to weakened public accounts). Global citizens are able to follow their own (superannuation/savings/cost of living), and their countries,daily demise through a vast array of privately owned news networks. Networks interconnected and intimately attached to capital elites.
The last, and most important, contest is that between the growing influence of China, Russia, India and East Asia as they pit dynamic developing political economies against the developed West, now in deep decline. This contest effectively engulfs the other latter two. As the euro zone crisis rapidly spreads from Greece to Italy there is a growing danger that if Italy, whose economy is five time larger that Greece, defaults, the European continent will fall back into recession. The United Kingdom and the United States will be further implicated.
One proposal that has been mooted over three decades following its initial discussion is that of an international tax on global and local speculative financial transactions. Whilst this is by no means a panacea to the dangers posed by the power of financial markets it is never-the-less one well tested model that should be investigated.
The most continuous aspect of financial transaction tax proposals has been its erudition by conservative capital elites and their political interests. At the last G20 meeting in Washington the Australian Treasurer Wayne Swan was a very vocal lobbying force talking down any thoughts of a FTT in Australia or any other international proposal. Treasurer Swan and Prime Minister Gillard believe that Australia should be a leading financial hub and a FTT should not be seen as positive by potential capital players being lured to this country. Many world leaders, however, see FTT’s as the correct political response in these increasingly demanding times.
´´the FTT is blocked by the people who have essentially brought the global economy to its knees´´
Although seen as an economic and socially progressive proposal by global leaders such as Angela Markel (Chancellor of Germany), Nicolas Sarkosy of France, David Cameron (United Kingdom Prime Minister) financial leaders such as Lord Adair Turner (Head of Britain’s Financial Services Authority, and a host of European political parties, the FTT is blocked by the people who have essentially brought the global economy to its knees.
The very people who have engineered financial services to provide a massive concentration of wealth and elite political persuasion stand opposed to a miniscule tax (0.05%) on all transactions in and out of sovereign nation states.
This is because their transactions will be recorded, their entities registered, and their global betting activities made accountable. Prominent German economist Stefan Schulmeister , a recognised expert on FTT modelling, suggests that globally up to US$266 billion per annum could be reinstated into nation states economies to ameliorate the harmful and socially unacceptable transfer of public funds to bail out the corporate sector in their times of crisis.
The time of crisis is already demonstrated by the amazing depletion of public accounts. An investigation of a FTT is critical at this time. Many other informative studies exist on this proposal. Most positively conclude the feasibility and desirability of an FTT including a matrix of likely revenues from a study recently concluded by the Chicago Political Economy Group.
Summarising the current turmoil in financial markets is complex and beyond the scope of this paper. However there are consistencies and themes that would indicate that the current downturn in financial markets will have a profound and long-term effect on the ability of nation states to provide public goods and services.
A financial transaction tax in Australia would provide a new considerable revenue source of upwards of AU$ 10 billion to ameliorate the undesirable effects of market downturns. For Australian policymakers an additional resource could be used to counter those public funds used to implement the Economic Stimulus Package following the GFC. Or it could be used for a specific purpose. In times of economic stress in Australia’s real economy a reliable source of funding in the social housing sector would assist not only welfare recipients but the many thousands of Australians who are now defaulting on mortgages through a variety of reasons in a contracting economy.
The political ask of politicians in Australia is concerned with the wider debate about the willingness of politicians to actually show they are elected to show bipartisan leadership.
1 Peter Coy “It Gets Worse” Bloomberg Businessweek August 1, 2011. P6 quoted in The Credit Strategist Volume 11, No 8 available at http://www.thecreditstrategist.com
2 David Rosenberg as quoted in The Credit Strategist August 1 2011.
3 Bank for International Settlements End of December 2010.
4 Bank for International Settlements Statistical Annex June 2011
5 Stephan Schulmeister, Austrian Institute of Economic Research (WIFO) “A General Financial Transaction Tax: Enhancing Stability and Fiscal Consolidation” in “After the Crisis: Toward a Sustainable Growth Model” 2009
6 International Monetary Fund Working Paper March 2011. Thornton Matheson. “Taxing Financial Transactions: Issues and Evidence” Fiscal Affairs Department