Friday, June 27, 2003

In times like these, it's tough to remember that the real economy and the financial economy are almost always at loggerheads. Lest we forget, look at what is happening in Brazil today. Despite his left-wing credentials, Lula bows to whatever the financial markets demand:
the central bank has raised its pivotal interest rate to a dizzying 26.5 percent, and the government has committed itself to raise its budget surplus to 4.25 percent of gross domestic product
So Brazil is "rewarded" with exceptionally low inflation and an 800 basis point spread over US Treasury bonds.

Trouble is, by making finance capital happy the real economy gets strangled.
Industrial production in April was down 4 percent from a year earlier. The economy contracted 0.1 percent in the first quarter, and most economists predict that it will have shrunk in the second quarter as well, theoretically pushing Brazil into recession. Retail sales have slumped, and unemployment rose to 12.8 percent in May � its highest level in 14 months. Here in S?o Paulo, Brazil's economic powerhouse, the jobless rate has topped 20 percent, further fueling the already alarming upward spiral of crime and violence. Even for those with work, the news is bad, as average wages in May fell to 841 reais ($290), 15 percent lower than a year earlier.
This is the same old sorry tale told throughout the world. How does the United States resist it? How is it that finance capital in the US is seemingly taking it on the chin, with interest rates now at near-50 year lows?

First, finance capital needs to make profits now by volume and the refi market suits that need well. Also, the US alone needs to worry very little about the value of its currency. Ultra-low interest rates just can't knock the dollar down, whereas it will crush any other currency. Finally, deep financial markets in the US attract the world's capital, keeping Wall Street well lubricated.

This is an unusual set of conditions, however, particularly since the return of finance capital to power in the early 1980s. If the amazing volume of lending driven by the housing market begins to slacken, look for finance capital to grow restless indeed.

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