Turner the credit crunch; housing bubbles, globalisation and the worldwide economic crisis (2008)

The Credit Crunch Turner 00 pre i 25/4/08 11:36:25 Turner 00 pre ii 25/4/08 11:36:25 The Credit Crunch Housing Bubbles, Globalisation and the Worldwide Economic Crisis GRAHAM TURNER Pluto P Press LONDON • ANN ARBOR, MI in association with GFC Economics Turner 00 pre iii 25/4/08 11:36:25 First published 2008 by Pluto Press 345 Archway Road, London N6 5AA and 839 Greene Street, Ann Arbor, MI 48106 www.plutobooks.com Copyright © Graham Turner 2008 The right of Graham Turner to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 978 7453 2811 ISBN 978 7453 2810 hardback paperback Library of Congress Cataloging in Publication Data applied for This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental standards of the country of origin 10 Designed and produced for Pluto Press by Chase Publishing Services Ltd, Fortescue, Sidmouth, EX10 9QG, England Typeset from disk by Stanford DTP Services, Northampton Printed and bound in the European Union by CPI Antony Rowe, Chippenham and Eastbourne Turner 00 pre iv 25/4/08 11:36:25 CONTENTS List of Tables and Figures Preface Glossary GFC Economics Acknowledgements vi ix xiii xvi xvii 14 26 48 84 109 135 159 188 Introduction Global Contagion Addicted to Debt ‘Free Trade’ and Asset Bubbles Dealing With the Fallout A Global Credit Bubble Japan’s Bear Market Policy Failures in a Liquidity Trap Where Are We Heading? Notes Index Turner 00 pre v 194 222 25/4/08 11:36:25 LIST OF TABLES AND FIGURES Tables 4.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7 7.1 Manufacturing job losses under New Labour South East Asia, balance of payments 1996 Foreign exchange reserves, various countries, December 2007 Turkey and South Africa, balance of payments 2006 Capital flight, South East Asia Capital flight, various countries Import cover ratios, various countries Balance of payments, year before crisis Japan property prices – the turning point 70 112 116 119 124 125 126 127 144 Figures 1.1 2.1 2.2 2.3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 US house prices US business investment/GDP, real terms US consumption deflator, durables US current account/GDP US homeownership US residential mortgages, foreclosures started US residential mortgages, delinquencies US household debt payments US personal sector debt/disposable income UK personal sector debt/disposable income UK inflation US inflation UK average earnings US average earnings US trade balance UK trade balance 21 22 24 31 32 33 34 36 37 39 39 40 41 42 42 vi Turner 00 pre vi 25/4/08 11:36:25 LIST OF TABLES AND FIGURES 3.13 3.14 3.15 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 Turner 00 pre vii US house prices UK house prices UK retail sales and mortgage approvals US wages and salaries/GDP UK real average earnings China trade balance US personal savings ratio US home equity loans China direct investment inflows/GDP US trade balance with China US trade balance with Mexico UK trade balance UK trade balance with China UK trade balance with Poland UK trade balance with Hungary UK trade balance with Czech Republic UK trade balance with India UK trade balance with Turkey UK manufacturing employment UK business and financial services jobs UK current account excluding financial services UK net external assets/GDP US manufacturing employment Developing country imports China imports from US/China imports China imports from UK/China imports China trade balance US asset-backed securities, mortgages US durables ‘inflation’, consumer price index and import price index UK retail sales deflator, non-food stores UK retail sales deflator, household goods OECD consumer prices 1971–79 OECD consumer prices 2000–08 Foreign exchange reserves Eastern Europe and UK, private domestic debt Baltic Three and UK, private domestic debt vii 43 43 46 49 49 52 56 58 61 62 63 64 65 65 66 66 67 67 68 71 72 72 74 75 76 77 78 91 93 94 95 104 105 115 118 119 25/4/08 11:36:25 viii 6.4 7.1 7.2 7.3 7.4 7.5 7.6 8.1 8.2 8.3 8.4 8.5 8.6 THE CREDIT CRUNCH CIS, private domestic debt Japan land prices, nationwide Japan land prices, six largest cities Japan money supply, M2+CDs Discount rate and yen/$ Japan domestic wholesale prices Japan velocity of circulation, M1 Japan nationwide land prices Japan savings, worker households Japan corporate bankruptcies and bond yields Japan yield curve Japan government debt US Fed funds target adjusted by core consumption deflator 8.7 Japan compensation of employees 8.8 Japan banks assets, JGBs 8.9 Japan bank lending and deposits 8.10 Japan, BoJ assets/GDP 8.11 Japan consumption deflator Turner 00 pre viii 121 143 145 145 147 148 153 160 161 163 166 167 171 173 176 177 179 184 25/4/08 11:36:25 PREFACE ‘Save Burberry jobs, save Burberry jobs’, they chanted Around 60 angry residents had travelled from the former mining town of Treorchy in South Wales, to protest outside Burberry’s flagship stores in London’s expensive New Bond Street and Regent Street On September 2006, 300 workers at the Burberry factory in the Rhondda Valley had fallen victims to ‘commercial logic’ The factory at Treorchy had been producing clothes since 1939 and had been taken over by Burberry in 1989 Now the jobs were heading to China Treorchy was no longer financially ‘viable’ the company claimed.1 It cost £11 to make one of its popular polo shirts in South Wales, but in China, it would cost £4 With the power of the Burberry brand, they would sell for £60.2 Burberry had underestimated the backlash Devastated by the closure of so many coal mines, Wales had also lost more than 46,000 manufacturing jobs since the mid 1990s.3 The workers of Treorchy vowed to fight the closure, and enlisted the backing of local hero Tom Jones, Manchester United manager Sir Alex Ferguson, and actors Ioan Gruffudd, Rhys Ifans and Emma Thompson Defiant to the last, the residents campaigned hard to keep the factory open They failed, and on 30 March 2007, the workers marched from the factory gates through the streets of Treorchy, joined by a male voice choir, for their final rally in the town And for what? Like so many others, the luxury retailer had concluded that it could raise its profits by relocating somewhere cheaper The annual cost savings of £1.5 million were less than per cent of the company’s operating profits.4 But any boost to the bottom line, however small, would in theory boost the company’s share price And it did, for a short while ix Turner 00 pre ix 25/4/08 11:36:25 .. .The Credit Crunch Turner 00 pre i 25/4/08 11:36:25 Turner 00 pre ii 25/4/08 11:36:25 The Credit Crunch Housing Bubbles, Globalisation and the Worldwide Economic Crisis GRAHAM TURNER Pluto... unravelling of the credit bubble The roots of this crisis must be understood to ensure there is no repeat of the flawed economic policies that have created the biggest credit bust since the 1930s... to understand the real cause of the credit bubble The politicians who stood by and let debt levels rise remorselessly, accepting the plaudits while the economies ostensibly boomed, are the real