With record low interest rates and rising inflation, capitalists are searching for good returns on their money. Capitalism has been propped up by state borrowing and Quantitative Easing, causing governments to run up large budget deficits. Capitalists and governments own the government debt and they want a return on that investment, thus they are forcing up the interest rates for this debt, starting with countries they think will be less able to repay.
Governments gave capitalists money which they then invested in government bonds, seen as a safe haven, along with gold, in times of crisis. The capitalists want a return on their investment so governments are paying banks and financial institutions interest on the money they leant the capitalists to bail them out.
In order to service their debts, and please the capitalists, governments are implementing programmes of tax rises and cuts to services. Governments that issue their own currencies have further flexibility in their programmes because they can create new money. This is effectively a tax on everything that is imported from areas using stronger currencies because the home currency is devalued. It boosts companies that export to areas trading in other currencies because their goods suddenly become cheaper for these countries to buy.
All major developed economies are following the same programme of spending cuts, tax rises and Quantitative Easing simultaneously, negating the benefits but also ameliorating the downsides. Will any major economy break the stalemate and issue more money, risking higher inflation but potentially boosting exports?
The state possesses many levers in this situation: it can regulate, legislate, set taxes, pay benefits, print money and hire or fire workers. Due to the global reach of big businesses, however, the powers of individual countries acting alone are diminished. Any country that imposes too much regulation or sets taxes too high risks losing businesses, and their tax revenues, to neighbouring states. This downward pressure means only joint action by major economic powers can reign in the demands of global businesses.
Economic leaders like George Osborne in Britain have implemented stringent austerity measures to please the markets and keep the interest payments on government debt low. In the US, Barack Obama agreed to implement only half the spending cuts demanded by the credit-rating agency Standard & Poor's with his Republican opponents. Standard & Poor's subsequently downgraded the US AAA credit rating. However interest rates on US Treasury Bonds continued to decline, with investors ignoring the ratings advice.
Individuals, and society in general, face wage freezes, rising prices, increased taxation, reduced services, reduced benefits, increased retirement age. Debtors, such as mortgage holders benefit from the low rate of interest. Growth will only arrive when banks have rebuilt their balance sheets and begin lending money, individuals feel wealthy enough to start spending or governments relax their austerity measures.
