An extract from the updated edition of Meltdown: The End of the Age of Greed, Paul Mason's account of the 2008 financial collapse, anticipating the social fall-out of the crisis. His exploration of the global wave of social revolt since 2008, Why It's Kicking Off Everywhere: The New Global Revolutions, will be published in January 2012.
In the summer of 2010, any attempt to predict the future would be pointless. However, the fault-lines of the global recovery are clear. In the space of twenty-four months the risk has moved from housing to banking to states and now, in southern Europe, to social cohesion.
In searching for a metaphor to illustrate what's happened, I am drawn to the image of tank armour. When a depleted-uranium dart hits the armour of a tank its energy is diffused into layer-upon-layer of complex materials: metals, fabrics, ceramics. If you are lucky, the round never penetrates the final layer and the crew survives. But take a look at the armour plate: it is mangled, defabricated, and can never be used again. What you need to avoid at all costs is being hit by a second shot.
The anti-crisis measures improvised by the political elites during 2009 always fell short of being decisive but somehow worked: the sheer complexity of the tarp as implemented; the chutzpah of Chancellor Alistair Darling in underwriting stricken loans the size of Britain's gdp; the Mao-era heroism of the Chinese government, instructing banks to create money on the basis of a state guarantee. Only the eurozone's armour failed, making it the clear target now for the next shell.
Yet at a macro level nobody is completely out of the mire. A second stimulus in the United States is politically impossible; the stimulus in China has stored up massive problems for the banks there; Britain and Spain stand too close to the Greek contagion for comfort; Japan stands condemned to the prospect of a 250 per cent debt-to-GDP ratio by mid-decade and is destined to remain a stagnant economy until long after today's manga comics turn up in on the vintage shelves.
If the recovery fails to become self-sustaining into 2011, it is hard to see how the world can avoid a double-dip recession. In that situation, the massive over hang of debt — in the banks, among states, among consumers — would pull the weakest economies towards the deflation whirlpool. Once started, this second downturn could no longer be stopped by monetary and fiscal stimulus at the levels already achieved. It would have to be stopped by measures involving direct competition with rival states or economic blocs.
The options include, first, the conversion of the q QE strategies of 2009 into outright`monetization' — that is, where the central bank simply prints money to finance the government debt. Second, the acceleration of exchange-rate rivalry into outright trade rivalry, with import quotas and devaluations used to boost exports. Third — the inevitable result of both these policies — the active encouragement of domestic inflation. High and sustained inflation — not seen in the developed world on any scale since the early 1990s — has the advantage of imposing silent wage cuts on the workforce while whittling away at the value of the national debt.
Once you are into a combination of any of these three — monetization, trade rivalry and inflation— you are into the final phase for the meltdown that started on 15 September 2008.
Long before you get there, however, you are into the realm of social unrest and class conflict — but social unrest is also a pressure that can be relieved by competition between states. One obvious option for Greece and other eurozone members that come under pressure is to leave the euro and/or default on their debts. There are serious market commentators who believe Greece will be forced to do both.
What the world's rulers cling to, as they move from summit to summit, is the idea of global solidarity, the belief that the spectre of the 1930s will prevent a slide into rival exit strategies. In the best-case scenario, the Chinese recovery does not falter but pulls Asia into a more consumption-led and stable pattern of growth. America's banks survive any second global downturn, while the eurozone hits the bottom of its austerity drive sometime around 2013 and bounces back, writing off €230billion of outstanding toxic subprime loans in an orderly rather than chaotic way.
The stakes are massive, because many of the givens of the global situation militate against this best-case outcome. China's one-party dictatorship is determined to unleash the new model of consumption-driven growth at a pace commensurate with maintaining its own power and privilege — that is,slowly. America's banking elite will cling on to the hard-fought dominance it attained during the Clinton—Bush era. And Europe's working class, swelled by a new generation of disgruntled graduate youth, will not lightly give up the social gains that brought peace after the downfall of dictatorships.
Above all, any orderly rebalancing of the economy and re-regulation of the banking system must come through the multi-lateral forums. Once we are into serious unilateral re-regulation we are well down the route towards the breakup of the globalised economy. The danger is not, as the bank lobbyists often put it, that such action drives financial services elsewhere; it is that capital itself retreats to national and continental pools, permanently limiting the dynamism of the global economy.
The future, then, depends on the complex interplay between the interests of die-hard political elites and the interests of the salariat,the urban youth,the manual working class and the elderly.
For me, the abiding images of the months between Lehman and the euro crisis involve the forbearance shown by these plebeian social groups. The Chinese workers patiently transferring from factory to building site on the orders of macro-economic policy makers; the finance director of the Midlands component factory thin with worry; the autoworkers in Elkhart, Indiana; the dockers of Piraeus, Greece, who told me — despite the bloodcurdling Communist slogans on their canteen wall — 'We're family men, we don't do social explosions.'
They have been patient. The question is, how long will their patience hold out?