We’re in the midst of two enormous news stories.
First the London burning story: three nights of rioting (and counting) in the capital, spreading from borough to borough and, now, to other cities (Birmingham). What a finance type might describe as a serious case of contagion.
Second, financial meltdown 2. Plummeting share prices, a deepening of the eurozone crisis and the downgrading by a notch of US government debt (for the first time ever) from the highest ‘triple A’ rating to AA+. (The credits ratings system is quite arcane – Wikipedia’s explanation is here.)
Most of the reporting on and analysis of the riots has been (predictably) poor. Comparisons have been made with the series of inner-city riots of the early 1980s. However most of the discussion is couched in terms of ‘criminality’; few commentators have bothered to mention the economic backdrop. But it’s no coincidence that that series of riots happened during the period when neoliberalism was being imposed on Britain’s population by Thatcher’s first government, when class antagonism was most naked and when Thatcherism/neoliberalism was arguably most fragile. Now, three decades later, neoliberalism is in crisis (as we’ve argued in Turbulence, a zombie — or here for our Comment in The Guardian) and we’re seeing more riots and more unrest. A great exception is Nina Power’s piece in The Guardian.
In fact, a year or so ago, parts of Britain’s Establishment were making the connections, e.g. an ACPO spokesperson in April 2009, Nick Clegg just before the election. Of course, now their predictions have come to pass they (the ruling class) have to pull together. Restoring order is the priority.
So that’s the riots then. Now let’s move on to consider the financial maelstrom…
In fact, the turmoil in the financial markets is all part of the same, much broader story.
What the commenters say is that there are doubts whether governments can repay their debts. Exactly. Those who trade in the financial markets, particularly those who buy and sell so-called sovereign debt — basically the IOUs, known as bonds or bills, that governments issue –think that there’s a risk that governments won’t actually be able to honour these IOUs. They fear default. And because they think there’s a risk of default they’re less willing to lend to governments. To persuade the people and institutions who lend to governments to overcome their reluctance, governments must offer a little extra compensation, a higher reward. In other words governments must pay a higher rate of interest, the lenders receive a higher yield. That’s why the yields on Greek and Spanish and Portuguese and Irish (the so-called PIGS) government debt, and now Italian and Cypriot government debt, have gone sky-high. Because financial investors think there’s a high chance these governments will default and they want additional reward for taking on that risk. Yields on US government debt haven’t reached Mediterranean levels, but nevertheless, they believe there’s a slightly higher risk — the reason why on Friday Standard and Poor’s (one of the three rating agencies) downgraded US government bonds from AAA to AA+.
So far so orthodox. But why the doubts? Why do ‘the markets’ fear that governments won’t be able to repay their debts? Because, to do so, governments must either increase their revenue (raise taxes) or reduce spending (make cuts). As we know, most governments are ruling out meaningful tax increases on the wealthy (individual rich people) and on capital (corporations), preferring instead to attempt to impose austerity. But this is where they’re running into trouble, particularly in southern Europe. Essentially governments aren’t able to impose as much austerity as ‘the markets would like’. And that’s because of class struggle — the occupations, the demonstrations, the social unrest, that we’ve been witnessing over the past couple of years.
And from here, we can travel north again, to this weekend’s rioting in London. Nick Clegg today claimed that ‘the international debt crisis vindicates the coalition government’s decision to prioritise cutting Britain’s budget deficit’:
Clegg insisted the crisis showed why the government was right to introduce sweeping spending cuts in a bid to eliminate the UK’s structural deficit by 2015.
“All governments around the world need to get to grips with their public finances and, at the same time, to put in place the long-term reforms that create growth and prosperity for millions of people around the world,” he said.
“If anyone had any doubt about the need for this coalition government first to come together in the national interest in times of great economic uncertainty and then to get on top of our public finances, I think that recent events should demonstrate the necessity of the steps that we took last year.”
Clegg is saying here that the British government has done — or is attempting to do — what the governments of the PIGS (and more) haven’t managed. The ‘recent events’ he’s referring to are the financial crises. But the recent — and ongoing — events on the streets of Britain’s capital may demonstrate that Clegg’s hubris may be premature.
At the moment, financial investors are betting that ‘the U.K. will remain insulated from the fiscal crises roiling the U.S. and the euro region‘ — yields on British government debt (known as ‘gilts’) have fallen over the past few days, indicating that ‘the markets’ do not currently fear British default. But over the next days, weeks and months, we should keep as close an eye on these indicators as on the ‘street’. The City is not apart from the city.