At the end of last year the Federal Reserve started scaling down its massive $85 billion monthly asset purchase programme (commonly referred to as quantitative easing) by $10 billion a month for as long as the US economy continues to improve. The plan is to eliminate it by the end of 2014. So far that plan is on track and on 29 January the Fed reduced the asset purchase programme for the second consecutive month to $65 billion. The end of quantitative easing is a big deal not just for the United States and the mature economies of the global north, but for everybody. On 23 January, the Argentinian peso lost 15 per cent in one day. ‘The worst sell-off in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus,’ Bloomberg reported.
Five days later Barack Obama’s sixth State of the Union address coincided with Ben Bernanke’s final open market committee meeting as head of the Federal Reserve. It is Bernanke’s successor, Janet Yellen, more than Obama, who has to deal with the following problems: de facto unemployment remains high and the earnings of American workers are stagnant or in decline; labour force participation has fallen significantly; and the misalignment between aggregate growth and daily life is so great that interest rates are likely to go up before most Americans feel the ‘recovery’. The general impression is that the executive can do relatively little on all of these points.
The Bank of England has behaved similarly to the Federal Reserve since the crisis of 2008. Last year the UK, like the US, recorded growth of 1.9 per cent while real wages have been falling, according to the Office for National Statistics, for five years, ‘the longest sustained period since at least 1964’. That trend seems unlikely to change soon: 1300 people applied for six jobs at a Nottingham branch of Costa coffee that opened this month, and last week the Financial Times reported that while ‘UK factories have seen production of motor vehicles increase by 45 per cent in the past four years… over the same period, average salaries in real terms have risen just 2.3 per cent, and the wages of the lowest paid 30 per cent have fallen 7.5 per cent.’ Even the much lionised – and growing – UK automotive industry is seeing an increase in zero hours contracts, outsourcing and, for much of the workforce, declining pay.
Either this year or next the Bank of England will, like the Fed, put up interest rates. Late last year the bank reported that average outstanding mortgage debt remains high, at £87,000, and that any rate rise not accompanied by an increase in real wages would cause serious problems. The number of households ‘most at risk of financial distress’ would double to nearly one in six if their mortgage rates went up by 2.5 per cent and their incomes did not improve. The bet presently being made by the chancellor and the governor of the Bank of England, Mark Carney, is that wages will start to go up before interest rates do.
Growth in 2013 came primarily from household consumption – fuelled by credit and emptying savings accounts – rather than major increases in exports or productivity. Services make up 78 per cent of the UK economy, more than ever before. The growth is fragile, in other words, and unlikely to survive an interest rate rise.
In the US, there are signs of a shift to the left in both the Democratic Party and the country at large. Public attitudes – driven by changing demographics – have transformed on a host of issues over the last five years. That will mean new political formations in and beyond the two major parties, and the recent landslide victory of Bill De Blasio as mayor of New York is suggestive here rather than conclusive.
Over the next few years the UK economy is going to face similar problems to the US. Yet so far the only institutional expressions of grievance this side of the Atlantic since the crisis of 2008 have been the rise of the SNP and UKIP. The likely success of the latter in May’s European elections will represent something of a nadir for the left in the United Kingdom but opportunities for a radical, egalitarian economic populism look increasingly evident – especially if the alternative is becoming a North Korea of the North Atlantic.