The economy shrank by 0.5% in the last quarter of 2010. If that continues into the next quarter, then the feared 'double dip' recession is on. So, what does the government do? They blame the weather. As Chris Dillow points out, the implication is that the bad weather stopped service sector workers from getting to work, but didn't inhibit industrial workers on their commutes. It's bollocks, in other words. The fall in the construction industry was particularly bad, but I wonder if, rather than being due to very bad weather, this wasn't in part because of 1) the cancellation of major public works by the government and local councils, and 2) the slump in the housing market resulting in a decline in house-building? The Federation of Master Builders, representing small-to-medium sized construction firms, puts it like this:

The construction sector has still not reached the bottom of the most savage recession for the industry in living memory. Cuts in government expenditure are making matters worse with more than half of building companies reporting falling levels of work in public repair and maintenance work. Our survey shows a sharp increase in those expecting workloads to contract once again in the first quarter of 2011.

The Government is pinning its hopes of economic recovery on the creation of new jobs in the private sector but its policies are having exactly the opposite effect in the building sector. The increase in the rate of VAT earlier this month will cost the construction sector nearly 7,500 jobs this year alone. Cuts in public sector spending on social housing are having a particularly adverse impact with nearly half of building companies reporting that work in this sector had fallen.

The construction sector has the potential to build Britain out of recession and we know that for every £1 spent on construction output generates a total of £2.84 in total economic activity. If this could be coupled with expenditure on infrastructure projects as well as tackling the growing housing crisis the Government would be building the real foundations for a sustained economic recovery.

There are some in the ruling class who aren't very happy. Though the CBI has generally been approving of the government's 'austerity' programme, its outgoing chief has said that: "It's not enough just to slam on the spending brakes. Measures that cut spending but killed demand would actually make matters worse." Like many of the bosses, he seems to want some sort of magical remedy whereby the government could cut spending and stimulate growth at the same time. Finance capital is also gravely murmuring about the "stunningly bad" GDP data - but they fucking asked for this, and it can't be long before they'll be demanding more money from the public purse, then pushing for another austerity budget to pay off the bankers and keep the financial assets of the rich afloat for another few months before the whole thing collapses again.

Despite the denials and the absurd, utterly feeble attempt to pin this on the weather, these figures represent a political problem for the government - especially if they're starting to lose sections of business and the petit bourgoisie on account of it. I expect the medium term effect might be to see more businesses swing behind Labour and its quasi-Keynesian remedies. For its part, Labour, in a bid to remain in capital's orbit, will constantly feel a gravitational pull to the right. Unless, of course, the student rebellions and the strike ballots being prepared in the public sector become a much more power countervailing force.

The global financial crisis that began in 2007 was clearly about money, credit and finance. For mainstream economists and politicians, from neoliberals like John B. Taylor at Stanford, and Australian opposition leader Tony Abbott, through pragmatists like Barack Obama and Australian Labor prime minister Kevin Rudd to Keynesians and social democrats like Paul Krugman at Princeton and John Quiggin at the University of Queensland, this was the full story.

They debate whether the nature of markets or the inadequacies of government regulation led to the hysterical speculation of the mid 2000s and then the breakdown of the global credit system. The notion that the causes of the crisis may lie in the way in which capitalist production is structured by class relations doesn’t cross their minds.

The mainstream accounts of the crisis are wrong, but they seem to make sense in three ways. First, they offer more or less plausible explanations of movements in prices, supply, demand and economic indicators. Out of these they spin happy-ever-after stories about what needs to be done to overcome the problems that led to the crisis.

They operate, secondly, in the interests of the capitalist class by justifying practical steps to sustain profit rates. This may be by preventing rapid economic collapse, through government stimulus spending. Or, on the other hand, they may urge governments to reduce their deficits, by cutting back on public spending, employment and living standards, in order to restore profits.

Although rival schools of mainstream economics don’t acknowledge it, the differences between these approaches are mainly questions of timing: when the necessary cutbacks will lead to minimum pain for bosses.

Finally, plausible, but superficial explanations of the crisis also serve ruling class interests by concealing how capitalist exploitation necessarily leads to economic breakdowns like that of 2007-2009, when the capitalist system cannot even maintain working class living standards. As the Communist Manifesto put it, the ruling class ‘is unfit to rule’ because it cannot even guarantee the survival of the wage slaves it exploits.

Profits are only restored through a crisis when large numbers of people are thrown out of work as production is ‘rationalised’, productive resources lie idle and working class living standards are slashed by employers and governments.


Commodities

Capitalism is an impressive building; its impressive outer surface is money and movements of prices on markets. But the vital structures of capitalist production make that façade possible and keep it in place. The link between them is the commodity form, the way most of the things we need, food, clothing, shelter, transport etc have a price and are bought and sold.

For millennia, money has been an aspect of economic activity. Societies which consistently make commodities need money. Commodities are things produced for sale rather than to satisfy the immediate needs of producers or those who exploit them by taking what they have made. In class societies before capitalism, the producers were generally peasants, occasionally slaves. The main exploiters were the senior officials of states which imposed taxes, feudal lords who extracted rent, or slave owners.

Money arose as the producers themselves or their exploiters traded commodities. It performed vital functions that were impossible if trade was only based on barter. Initially money took the form of a special commodity, particularly gold, that had value itself because, like other commodities it was the product of human labour. The money commodity served as a ready standard for measuring the prices of all other commodities. And, under capitalism, price ultimately derives from the amount of labour time that goes, on average, into producing commodities. It was the ‘universal equivalent’ that could also be used to buy any other commodity, that is, it was a means of exchange.

Under capitalism, most production takes the form of creating commodities and the commodity form is a feature of the production process itself. People sell their ability to work, their labour power, as a commodity to bosses. The distinction between labour power and labour is important here. Employers extract as much labour as they can out of the labour power whose control they have purchased, by making sure that workers don’t slack off by taking long breaks, going slow or otherwise wasting time that belongs to the boss.

Labour power is a commodity like all others in that its value is the amount of labour that went into making it, in the form of the effort to make the commodities necessary for the reproduction of human beings. Not only food, childcare etc but also the costs of learning specific skills used at work.

But labour power is also different from other commodities. It is human creativity for sale, capable of generating more value than it took to produce it in the first place.

When it is set to work, bosses owns the right to direct that labour power as well as the tools and raw materials it uses to produce new commodities. The new commodities, and the additional value embodied in them, created by human labour, likewise belong to the bosses. That’s where profits come from.

In class societies before capitalism, exploitation was pretty obvious: lords, state officials or slave owners simply took away things you produced or what they were worth in money. There was no exchange of equivalents; just a rip-off, ultimately backed up by the threat of violence. Under capitalism, exploitation is concealed by the sale of labour power. The exploitation happens through the exchange of commodities at their value for money rather than because exploiters get commodities or money for nothing.

The commodity form and money are capitalism’s self-camouflage. Economics seems to be all about them, but they conceal the exploitation of wage labour, that is class relations, in the production process.

The owners of wealth do not always immediately reinvest the value that they have accumulated. They may be saving up for a new project, or repetition of an old one, or holding off for better conditions before they invest again. In these circumstances, money serves as a convenient store of value. This was straightforward when there was a special, durable money commodity.


Money

States’ regulation of money was, from long ago, an aspect of managing the commodity-based economy of their territories and also of funding their own activities. Developed capitalism has progressively dispensed with the money commodity. Initially states supplemented the money commodity with symbols for it. Eventually, the coins and notes that we are used to keeping in our pockets and purses, became the only valid form of money within each state’s boundaries. When such symbolic money can no longer be converted into the monye commodity it is ‘fiat money’. The money we use today is fiat money; gold no longer plays a role in the monetary system.

When there are credit arrangements, under which commodities can change hands at a different time from the payment for them, money is a means of payment. This creates credit money, promises to pay that are distinct from cash which might only be needed when contracts are finally settled. As economic activity grew in scale and complexity, banking emerged and credit money became increasingly important. Credit money was created by those involved in trade and banks, which held otherwise idle reserves of those who were not themselves using the value they had accumulated, as deposits and lent them out.

Internationally, the money commodity facilitated trade across the boundaries of states. Just as states eventually replaced commodity money with fiat money, financial institutions and states have accepted some national currencies as the means to settle international accounts. They are known as ‘reserve currencies’. Since World War II, the most important has been the US dollar, even after the link between it and gold was severed in 1971.

But the acceptability of a reserve currency can change. The rise of the Euro as a reserve currency to rival the US dollar, for example, has recently been undermined by economic crisis in the Euro zone. The weakness of the economies of Greece and other European Union countries with very high levels of government debt have led to worries about stability of the Euro.

While money pre-dates the dominance of the capitalist mode of production, the transactions, planning and allocation of resources of capitalism are impossible without money, credit and finance (the activities of banks and similar institutions in directing funds to where they will earn the greatest return).

Although indispensable for capitalism, credit and financial activities do not create new value. Interest and financial profits derive from new value created in the productive sector of the economy. Capitalists in the productive sector who borrow have to hand over a share of their profits to lenders in the form of interest for the right to use the lender’s capital. States which borrow have to pay interest out of their revenue which ultimately comes from the productive sector. And workers have to shell out some of their wages to keep up with payments on mortgages and other loans.

With the transition away from reliance on the money commodity at home or in international transactions, the stability of currencies and consequently credit and financial arrangements more than ever relies on the confidence capitalists have in them. This trust is based on the strength of the economies with which the currency is associated and especially on the power of the state that backs it to ensure that it can be exchanged for a predictable quantity of real value embodied in commodities, even though it has no intrinsic value itself.

So, even though the United States was at the centre of the global crisis of 2007-2009, during the periods of greatest uncertainty the US dollar was bought up as a ‘safe-haven’ currency. The unparalleled killing power of the armed forces of the USA guarantees the value of the dollar.


Credit and finance

The complications of credit and financial systems mean that there can be all kinds of glitches. The failure or even worries about a single corporation can trigger a contraction of credit. Lenders may be reluctant to provide funds until they can work out whether the failure exposes potential borrowers, as creditors or customers, to problems. In a similar way, problems in one financial institution can ripple out to others. Contractions in credit can slow down or stop growth in the production of real commodities, or even lead to less being produced.

The net of businesses exposed to such problems has been spread wider by new mechanisms to spread the risk that credit and other contracts won’t be met, in the form of insurance and hedge funds. When problems are small and their dimensions easy to determine, this cushions their impact. If the failures are large and both their scale and implications are unclear, these efforts to spread risk end up spreading the crisis.

In the United States, financial institutions during the early and mid 2000s gambled that housing prices would rise for ever. They made ‘sub-prime’ loans to people who would never be able to pay them back. Then, to spread the risk, the loans were bundled together and sold off as securities. People with mortgaged houses had to pay interest and repayments to the owners of the securities who were also entitled to the revenue from sale of the home if mortgage payments weren’t made.

Such securities are a form of ‘fictitious capital’, traded as though they are real commodities with an intrinsic value. In fact they are only the right to an income stream that arises from a financial arrangement rather than from the use of the money to directly generate new value in a real production process. Not only mortgage backed securities, but also shares and government bonds are forms of fictitious capital.

Financial instruments can be even more complicated. ‘Collateralised debt obligations’ are bonds, promises to pay interest at a specified rate, issued by companies whose assets are holdings of other loans, bonds or securities. This is not to mention derivatives. They can be futures or options: contracts to buy or sell, or the rights to sell or buy at specified prices real commodities, amounts of particular currencies, shares, bonds etc at a specific point in the future. Or they can be swaps: agreements to exchange the income steams from different financial assets.

Shares were initially designed to raise money for productive investment; bonds as a form of readily tradeable loan; and more arcane instruments as, perhaps, means of spreading risk. But most of the trading in fictitious capital today is speculative: gambling in the hope of making gains at the expense of other players in the market. It does not create new value and just shuffles around existing value, held by other speculators or by productive capitalists.
The rapid growth of financial speculation has meant that the implications of problems in one geographical area or economic sector for the rest of the economy are ever harder to work out before the crisis hits.

But the healthier the real economy which underpins the tower of financial activity, the more rapidly will local and sector specific problems be sorted out. Extensive new avenues for highly profitable productive investment can offset the jitters and losses caused by the failure of expectations in credit and financial markets.


Economic crisis

The rate of profit in the advanced capitalist economies has been trending downwards for more than four decades. The scale of speculative financial activity in the lead up to the current crisis was itself is a consequence of limited outlets for profitable productive investments.

During the first phase of the crisis, from 2007 to 2009, the problems began in the US housing market and spread throughout the global financial system, leading to recessions and the economic contractions in most countries.

Credit froze up across the planet as banks stopped lending to each other, or anyone else, out of fear that borrowers might hold toxic assets like mortgage-backed securities and therefore be unable to pay back loans. Lack of credit and worries about the future led businesses to suspend investments, individuals to put off spending that could be delayed.

Governments which could afford to spent big to keep their economies, so reliant on credit money, going. In the USA, Australia, Japan, Germany, Britain, China and other countries, governments borrowed, created more fiat money in the form of central bank funds or dipped into reserves to shore up, bail out or take over banks and other financial institutions. To promote consumption, they encouraged borrowing by cutting interest rates, gave cash handouts to citizens and spent up big themselves. The Chinese regime set lending quotas for banks.

Only poorer governments, of necessity, did not engage in stimulus spending. This was the approach extreme neoliberals recommended everywhere. That approach certainly sent less efficient businesses to the wall and put pressure on working class living standards. But it risked killing off so many firms that the remainder would not be able to drive an economy-wide recovery for many years.

If real economies are fundamentally sound, then stimulus policies should jump start robust economic growth. Both state revenues and real estate prices would rise. Governments would use their increased tax income to pay off debt. Public and private financial institutions would sell off real estate without making phenomenal losses. The Keynesians would proclaim the truth of their dogma, the pragmatists the wisdom of their policies.

Instead, a second phase of the crisis became more obvious this year. As the Greek economy crumbled under the weight of public debt, the social democratic government began to attack working class living standards by cutting wages in the public sector, pensions and spending on health, education and welfare.

Now there is a growing consensus that cutting government deficits is the key to maintaining financial stability and thus restoring prosperity.

Spain, likewise under a social democratic government, but also conservative regimes in Germany, Britain, Italy and France are inspired by this dogma.

Rudd has promised to do the same; Abbott to do it harder and faster. Obama is moving in the same direction.

Financial austerity measures did not begin in 2010. In countries particularly hard hit by the crisis or with weak economies, the cuts began much earlier, for example in Iceland, Ireland and the Baltic states.

A return to financial stability won’t solve the basic problems that led to the crisis: you can’t eat a collateralised debt obligation. Its fundamental causes lie in the displacement of living labour by machinery and equipment the key to raising productivity under capitalism driven by competition among capitals and hence a lower average rate of profit across the economy. But efforts to cut public spending are part of a solution to the crisis in the interests of bosses and at workers’ expense.

The other elements of this solution are squeezing more profits out of workers and allowing more relatively unprofitable businesses to go bankrupt. Even as some governments engaged in stimulus spending during the early stages of the crisis, employers across the world used uncertainty about jobs and rising unemployment to hold or push down wages and increase workloads.

As governments economise on their spending they will be less able to bail-out weak capitals. This means their assets can be bought up cheap and set in motion again but risks more widespread of corporate collapses and the possibility that idle machinery, equipment and buildings will just be allowed to rust and rot alongside unemployed workers.

The alternative solution, workers’ revolution, is not risk free either. But it holds out the promise that we can get off the deadly, profit driven ferris wheel with its booms and slumps, and start producing to satisfy human needs.

The Sunday Times' latest poll has the Tory lead down to 2% which, even if not reproduced uniformly in a general election, would produce a Labour minority government. The change is produced by a drop in the Tories' support from 39% to 37%, and a rise for Labour from 33% to 35%, thus cutting a six point lead to a 2 point lead. The change in each party's standing is in the margin of error (this is how it works, right?), so this probably an outlier. But it does fit into a broader trend of Labour recovery, and it does add to the indications that the Tories' lead was always fragile, and their support reluctant. Polls have shown that 82% of voters want 'change' in the government, but just over a third of voters think the Tories are that change. Some commentators had wondered if the entertaining pseudo-revelations of Blairite gossip columnist Andrew Rawnsley would land a fatal blow on the Brown government. This is possibly because of a natural tendency to overestimate the prestige in which the public hold their profession. But Brown's alleged personality defects probably only register in the public mind as the first vaguely interesting thing that has ever been known about him. And I can't help thinking that it helps Brown to remind people of his long overdue coup against his emetic predecessor.

Another thing to bear in mind is that Yougov has consistently given Labour a better rating than other polls such as Angus Reid and ICM in the recent period. On the other hand, Yougov also has a reputation for accuracy as a result of more closely predicting election results than other agencies, so my suspicion is that the Tory leads have been exaggerated in other polls. Also of interest is the fact that on several important indicators, particularly the economy, the Tories have lost a hard-won advantage. The attacks on Tories as spending slashers, upper class scum, millionaires out to reduce taxes on the rich, etc., is working. 'Class war', though denounced by the Tories, some Blairites, and every respectable newspaper columnist and leader-writer in the land, is an effective electoral strategy.

Interestingly, the Tories may have been following the advice of MigrationWatch in pushing some dog-whistling about immigration, despite strenuous denials that the issue is a central theme of theirs. Essentially, they want to allow the grass-roots to use the issue as much as possible, without tarnishing the national campaign with racism in the way that the disastrous 2005 campaign was. Previous polling shows that this is the one issue on which a plurality trusts the Tories to do what the majority want. They don't trust them to fix schools, look after the NHS or represent all groups in society equitably (whatever that would mean). But they trust them to smack black people around. All these years, all those Cameronite cries of 'change', all the soft focus touchy-feely hug-a-hoody compassionate conservatism sales pitches, and the Tories are still the nasty party. That's not just their Unique Selling Point, it's their only selling point, and they just can't seem to shake it off.

Polls are now consistently showing a reduction in the poll lead enjoyed by the Tories from double digits to single digits, now at about 7%. That's still a big lead, but the assumption of the newspaper headline writers is that the Tories need a bigger swing to win an outright majority. Thus, the spectre of a 'hung parliament' has been raised. Martin Wolf of the FT would be happy to see a coalition government, perhaps styled on Germany's recent experience with the 'Grand Alliance'. One can certainly see why: it would enable the political class to consolidate their minority consensus in favour of some form of fiscal contraction, thus edging out all signs of popular dissensus on the question. But it isn't going to happen, and here's why.

Labour's recovery is based substantially on the germinal economic recovery, which is the number one issue concerning voters - 56% say it's one of their top three issues (see figures). But issue number two is - disgracefully, and entirely New Labour's fault - asylum and immigration, with 43% saying it's a top three issue. That issue will almost certaily be prominently pushed in the marginals, where it might actually trump the economy with some middle class voters. And the marginal constituencies are where the Tories need to make gains, not in Labour 'heartlands' where its support is slightly hardening in response to the naked class aggression in Tory policies. The reactionary think-tank MigrationWatch UK got Yougov to carry out a push-poll in the key marginals for Labour and Liberals in the coming election, and it basically found that most of those voters are hysterical over the issue of immigration, trust the Tories most to handle the issue, and would be more likely to vote for any party that promised severe crackdowns. We will undoubtedly see cack-handed attempts by Liberals and Labour to pander to such bigotry, but only the right-wing parties can benefit from this game, and in the marginals the beneficiaries will be the Tories.

Of course, a lot can happen between now and election day. The Greek general strikes may presage a broader European labour insurgency against austerity measures being pushed through by mainstream parties, as the Indie claims today. Anything that pushes the economy and public opposition to spending cuts to the top of the agenda can damage the Tories - unless, of course, that 'thing' is a speculative attack or a new lurch into negative growth. But at the moment, the figures still point to a Tory majority come 6 May.

One doesn't want to collapse into an instrumentalist reading of the state as a mere 'executive' of the bourgeoisie. It is not as if state personnel canvas the capitalist class through referenda on every policy issue and then adopt the majority view. On the contrary, divisions among the owners give state planners more room for manouevre, for pioneering alternative strategies and for pursuing social goals not necessarily best suited for the purposes of capital accumulation. This is why there has been such intense ideological warfare against even moderate forms of social democracy, and why the capitulation represented by New Labour was so welcomed by the bosses. This is also why it is so important to capital that, according to one study (cited in Harman's Zombie Capitalism), 72% of economics students attend a university without one single economist dissenting from neoclassical and neoliberal orthodoxies.

However, the CBI is an executive body of the ruling class, and its views count for more than yours. All three party leaders are making their case before its annual conference, and listening out for signals as to what policy mix business is likely to prefer. If the keynote dissertation of the present head of the CBI, Richard Lambert, is any guide, then the age of full-blown neoliberalism focused on financial innovation, is considered to be at an end. Instead, an era of manufacturing revival headed by infrastructural investment is indicated. This is not a restoration of Keynesianism, before anyone gets too excited. (Though it can only be a matter of time before Socialist Unity has a post congratulating the CBI for its enlightened posture). Lambert, a former editor of the FT, also served on the Monetary Policy Committee for three years. He is a man of conventional persuasions as far as economic theory is concerned, a zealous advocate of 'globalisation' and 'free trade', and a supporter of the opposition's plans to slash spending sooner rather than later. Nonetheless, the speech does signal that the ruling class no longer has faith in the old strategies of accumulation.

Given the CBI boss's statements on the deficit and public spending, and his express wish that Osborne would be even more aggressive in his proposed spending cuts, the conference is likely to provide a genial experience for the Tory leader. But note the blackmail inherent in the Tory position, currently being expounded to the converted captains of British industry. The Tories aver that a failure to reduce the deficit will result in a collapse of sterling and a bond crisis, and a downgrading of Britain's credit rating. This could be true. The credit ratings are conferred by a major financial corporation, Fitch Ratings Ltd which is part of the Fitch Group. If the major financial corporations which have benefited from government largesse protest against the deficit which the bailout has produced, they may well downgrade Britain from its current AAA credit rating. If they downgrade, as they have been threatening, then currency traders will undoubtedly unload sterling faster than they can flush a bag of the devil's dandruff, and bonds will drop like [insert amusing simile here]. Not that speculators necessarily need Fitch's permission to carry out a run on the pound - this tactic has been a key lever over government policy possessed by finance capital for some time, creating a virtual parliament of investors who can vote instaneously and powerfully on any government policy they dislike. No, it's just that the threat of downgrading on the pretext of a totally fabricated fiscal crisis itself amounts to a form of blackmail by a sector of the ruling class.

On the other hand, the CBI position is not supported by the IMF, a body every bit as consequential for British policymakers. This is because the sudden collapse in credit available to households holding up consumption in the richer countries has to be met with countercyclical spending. Now, the IMF has a pathetic record on predicting world economic events. Its prescriptions for 'developing' and 'transitional' economies have been based on unsophisticated neoclassical precepts that have failed on their own indices (though they have not necessarily failed the interests of those dictating said solutions). It has long since ceased to be a creditor of choice for poor countries. It certainly didn't foresee any of the problems of the 'subprime' collapse, nor does its basic approach to development appear to have altered. Its most recent World Economic Outlook, for example, proposes macroeconomic stimulus for the advanced capitalist countries, but still proposes monetary tightening and fiscal austerity for the poorest countries. Thus, while Obama plies the Pakistani state with aid as a bonus for assisting with regional US geopolitical goals, another wing of Washington power insists that the state should cut spending and raise interest rates. So, there is no reason to think the IMF is defending a more progressive agenda (though it can surely only be a matter of time before...). It is not that this particular vector of US capital is at all concerned about the expropriation of the public treasury by finance capital. It is just that it has a different perspective on where the crisis is heading, and thus supports Brown's tactic of spend now, cut later.

But you see the pattern here: the debate is taking place more or less within the strategic and tactical coordinates of a split within the capitalist class, globally and nationally. What does the ruling class do when it rules? It, well, it rules.

The crisis is over, and you may resume the seatedness of your posture. After all, you will have heard that Germany and France have officially pulled out of recession. Even Japan, which has been in terrible shape, is managing a recovery. Well, what else could Britain do but join in? Somehow it must be shown that the UK, too, is surging back to rude health. Today, a survey of business professionals reveals a sudden leap in 'confidence', thus proving that Britain's recession is "at an end". While there can be no doubt that various stimulus packages have pulled national economies back from the brink of outright catastrophe, it is difficult to take this air-punching, air-kissing jubilance seriously. Simon Basketter gives some good reasons to be sceptical of this optimism, pointing out much of the statistical boost arises because the collapse in exports was slower than the collapse in imports, thus boosting national income. Further, he notes, unemployment continues to rise and wages are still falling, (particularly in Japan).

Nouriel Roubini gives even more reasons to be cheerless:

Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

As for the UK, the Bank of England has pumped £175bn into the economy, and kept interest rates at historic lows of 0.5%. The total amount of money released into the economy under the policy of 'quantitative easing' is equivalent to about 12% of the UK GDP. The total spent on fighting the recession, including bail-outs, is £350bn, or approximately 25% of the UK GDP. Even with that, it is expected that they won't keep to the target inflation rate of 2% - prices will remain low because demand will remain weak. Despite an uptick in spending, borrowing has hardly increased. The reason for this is that banks are hoarding the money dished out by the Bank of England to protect themselves against future losses, rather than increasing lending. As Paul Mason points out, to save the City, economic recovery has been delayed. And when the recovery does come, it will be weak and fragile. (The Left Banker has a really splendid analysis of the figures).

There is also the additional complication of elections. The current state of UK public finances is, thanks to the bail-outs, very poor. The Tories propose, in the very likely event that they win the elections, to immediately embark on public spending cuts of at least 10%. Their more 'radical' councils are leading the way in this, with Barnet council slashing spending on sheltered housing, parks, libraries, welfare advice, etc. Both New Labour and the Liberal Democrats are also committed to cuts, even if the government faces some limited pressure from the unions on this point. But the Tories want to be very aggressive about this once in office. They want to start the cuts much earlier, go much deeper, and I suspect that they want to take on the public sector unions in a major way. To attack public spending at a time in which unemployment continues to rise, and in which demand remains weak is, as the MPC's David Blanchflower argued, a sure way to scupper any potential recovery. But it wouldn't be the first time that the Conservatives have preferred a deep and painful recession in order to weaken and attack the labour movement.

How to respond to such a serenade? Even as his colleague Jack Straw is busily pandering to our primitive passion for punishment, and while Blears is patronising the 'white working class', Chancellor Darling promises he will cut taxes for the poor and raise them for the rich. VAT will supposedly be cut from 17.5% to 15% and income tax on those earning £150k or more will be raised from 40% to 45%. These are not huge shifts, but I must advise the Chancellor that he risks being associated with the dread word, 'redistribution'. It is, as Nick Robinson of the BBC says, of "huge symbolic importance". Listen to me, Darling. New Labour's pact with the rich was that it would not touch their property. For a decade, it has stuck with that promise, freezing higher rate incomes taxes, slashing corporation taxes and cutting inheritance taxes. It has contained trade union pressure and implemented a public sector pay freeze. It threw tens of billions at Northern Rock in a desperate bid to maintain the institution as the private property of rich investors. Even when the government nationalised the bank, it appointed business managers to run it down, cut jobs and prepare it to be returned to the private sector. And now you tell us that you intend to cast prudence aside and embrace a minimal meliorist agenda comparable to that of, say, the Liberal Democrats or Barack Obama. What could possibly be motivating this minute shift away from kapitalist realism?

One thing this government appears to have lacked for the last year was the elemental instinct for survival. It seemed there was not a challenge it could not fluff, not a 'heartland' it could not lose, and no limit to its prevarication and deer-caught-in-the-headlights inaction in response to the economic crisis. Yet, of late, it has been rising in the polls. Labour appears to have recovered at least 5% of its vote since the Summer, and the Tory lead is no longer in double figures [pdf]. Compared to September, when the Tory lead was a whopping 24%, today's 5% looks manageable (see tracker poll [pdf]). In a recent poll taken just before Cameron abandoned his promise to match Labour's spending commitments, Mori put the Tories just 3 points ahead. Brown's personal rating has increased from 17% in May to 41% today [pdf]. And they managed to retain Glenrothes, in part because the collapse of Scottish banks necessitated a bail-out for London, which rather undermined Salmond's claim that Scotland could be part of an arc of prosperity alongside (whoops) Iceland. The government's psephological advisors have presumably recognised that the economic crisis that was killing the them last year is now redounding to their benefit. The hopeless flailing that characterised the initial response to the crisis, and the desperate clinging to neoliberal orthodoxies that even a right-wing Republican administration discarded without hesitation, were replaced after the collapse of Lehman Brothers by what looked like a far more decisive set of interventions including part-nationalisations and some curbs on the City's extravagant pay and bonuses. These were still basically pro-business policies, and they still transferred money from the public sector to the rich, but it looked far better than the Northern Jelly episode. And unlike in the US bail-out, the government insisted on voting rights in exchange for the money invested. Meanwhile, David Cameron's promises of tax cuts for businesses and big public spending cuts are probably not resonating far beyond the rabid Tory base.

Whatever is announced today is unlikely to be equal to the crisis. It will be a heavily politicised budget, however, sending out signals in advance of a 2009/10 election. A few tax cuts targeted at the poor will not substantially improve consumer spending ahead of Christmas, and the tax increases proposed for the wealthy will not raise much money, but an overall package of moderate wealth redistribution means that Darling is betting on a political realignment. And that is an interesting story in itself: it shows that the government, in its weakened state, is highly susceptible to public pressure. It shows that now is no time to relent on struggles for decent public sector pay, for better pensions, for an emergency house-building and debt-relief programe, and for public investment to protect jobs. Now is the time to push aggressively and confidently for a radical alternative programme.