Events are moving at lightening speed. Stock markets are in freefall around the world. Some days bring temporary relief only to be followed by greater convulsions. The whole situation is reminiscent of 2008, or more correctly the 1930s.
World Bank chief Robert Zoellick warned of a "new and more dangerous" time in the global economy, as Europe struggles to resolve its debt crisis. Zoellick said the eurozone's sovereign debt issues were more troubling than the "medium and long-term" problems which saw the United States downgraded by Standard and Poor's, sending global markets into panic. "We are in the early moments of a new and different storm, it's not the same as 2008," said Zoellick. "In the past couple of weeks the world has moved … to a new and more dangerous phase," he said in an interview with an Australian newspaper.
Following the collapse of the world economy three years ago this September, the bourgeois economists declared the crisis over in the summer of 2009. As always, they were looking at the surface and ignoring the underlying contradictions. All their talk of “green shoots” has completely vanished. For most of Europe, the United States and Japan, there is no recovery. They are staring at an unprecedented situation. They are moving from one crisis to another.
“The new phase of the crisis”, states Satyajit Das, author of ‘Extreme Money’, “is different to 2008 and that Lehman moment. Then, governments had the financial capacity to backstop the private sector, especially financial institutions. The crisis now involves nations.” (FT, 11/8/11)
In other words, the crisis of capitalism has not been resolved by the bailout amounting to trillions of dollars but has got far worse. There is widespread panic at developments in Europe and America, where the fear of a stagnant economy could push things over the edge. In the last six months, the US economy has only grown by an annualized 0.8%. With a fiscal contraction of some 2% of GDP next year – the biggest of any large economy – it could be enough to drag the economy into a double-dip recession.
Confidence
The bourgeois economists say the recent turmoil is to do with a crisis of confidence. However, the crisis is not a subjective thing but is rooted in the objective situation. The dangers in the US, where output has yet to retain its 2007 peak, are provoking panic. “America is six years into a lost decade”, states the Economist (6/8/11) It is this crisis, arising out of the contradictions of capitalism, which results in a loss of confidence and not the other way around. Of course, the fall in confidence can then reflect back and contribute to a deepening of the economic crisis.
The downgrade of the US economy by S&P reflects the growing malaise of world capitalism. The US economy is barely growing and unemployment remains at 9%. This becomes a drag on the world economy at a time when Europe is in a state of deepening crisis. The ruling class is staring over an abyss, paralysed by their impotence.
The fear that contagion will spread from Greece to the other European economies is being borne out in practise. Italy and now France are feeling the heat, with banking shares under attack. There are rumors of a French downgrade. Only the intervention of the European Central Bank in buying Italian and Spanish debt has served to delay the collapse, at least for the moment. In effect, it has become lender of the last resort but this is a short-term palliative. The bailout of Greece only gains time. Greece is essentially bankrupt and cannot afford to pay back its debts. It will inevitably default in the coming period, with massive consequences throughout Europe. While the ECB and IMF can bailout Greece and Portugal, they do not have the resources to bailout Spain or Italy.
Even Guilio Tremonti, Italy’s finance minister, likened the eurozone crisis to the sinking of the Titanic, where “not even first-class passengers can save themselves.”
The break-up of the eurozone may have a similar impact to the break-up of the rouble area after 1993, where countries of the former Soviet Union were forced to fund their deficits by printing their own money. This resulted in hyper-inflation and a collapse in living standards. Other parallels can be made with Germany in 1923.
Saving Greece, Ireland, and Portugal is one thing. Attempting to save Spain and Italy is another. Some have estimated this could cost at least 5,000bn euros but this is a guess and only guaranteed by Germany. However, Angela Merkel is facing a revolt not only from her own party but from her junior coalition partner, support for which has collapsed in the polls. German taxpayers do not want to pay for the crisis in other countries. However, without support from the Germans, the whole thing will fall apart and German manufacturing is already slowing down. That is the dilemma. Heads they lose, tails they lose.
Spectre
The spectre of a currency war is also looming again as capitalists seek a safe haven from the financial storms. The likelihood of new quantitative easing in the US has driven the dollar lower and encouraged speculative capital flows into emerging markets. Not only has gold rocketed in price but the Swiss franc has gone through the roof, up a massive 6% in a single trading. The Swiss National Bank, in an attempt to protect manufacturing, has been almost powerless to prevent this happening even with the pouring of large amounts of cash into the system and cutting interest rates to zero.
The best the capitalists can look forward to is not economic recovery – this is not on the cards – but decades of stagnation. The world economy is facing a similar situation to the Japanese after the property bubble collapsed in 1989, pushing their economy into a slump lasting nearly two decades. However, when the eurozone implodes, the effects will be worldwide and will make 2008 look like a tea party by comparison.
Freefall
After the crisis of 1929 we did not see a continual freefall on the US stock market. There were periods up until 1933 when there were certain rallies and recoveries but each such rally was followed by a fall.
After 1933, the US economy recovered partially albeit slowly, although unemployment remained high, until a new slump in 1937. These were still the years of the Great Depression. There was no real recovery until the outbreak of the Second World War, based upon rearmament and war production.
Although one period of capitalist development is different from another, we could be facing a very similar situation today. The Roaring Twenties prepared the way for the collapse of 1929 just as the credit boom and speculation led to the 2008-9 slump. Just as there was very little recovery in the 1930s, so we are facing years of stagnation and austerity today. The fundamental difference is that today world war is ruled out. American imperialism cannot even pacify Afghanistan, let alone go to war with China or Europe! In the Second World War, the capitalist system was able to purge itself of the crisis of over-production. Today, that is not an option. As a result, all the contractions will be internalized and reflect themselves in a ferocious struggle between the classes. The period opening up will be the stormiest period in world history.
Limits
The reality is the capitalist system has reached its limits. In the past, it was able to develop the productive forces at a colossal pace. The recent period of globalization and intensification of world trade reflects the latest efforts of the system to overcome its contradictions. Credit was used to extend the market beyond the limits of capitalism but this has now reached its limits also. Every country is deleveraging. Austerity and debt reduction is on top of all the agendas.
The problem with credit is that it has to be paid back with interest. As a result, consumer spending, which makes up two-thirds of US economic activity, is stagnant or shrinking.
While corporations are flush with cash, they are not prepared to invest given the lack of markets but without investment there can be no recovery. This, in turn, adds to a collapse in demand. It is a vicious circle.
The bourgeois commentators recognize these problems but do not understand them. “By far the main problem is a huge overhang of debt that creates headwinds to faster normalization of post-war growth – that is why post-financial crisis growth is typically very slow”, states Kenneth Rogoff, professor of economics at Harvard. “It is better to think of the global economy as going through a ‘Second Great Contraction’ (the Great Depression being the first) involving credit and housing, and not just output and unemployment.” (FT, 9/8/11)
Profit
Marx analysed capitalism long ago. He explained the contradictions of a system based upon the drive for profit. The capitalists employ workers in order to squeeze surplus value from their labour. This surplus value is then reinvested by the capitalists to make more money which serves to develop the productive forces. However, the barrier to capitalism is capital itself. The outpouring of commodities seeking new markets reaches a crescendo at the height of the boom. However, there comes a point where the limits of the market come into collision with the unlimited production of commodities. This leads to an inevitable crisis of over-production, as witnessed in 2008-9. Everything comes to a complete standstill. The capitalist system is paralyzed, not because people do not want things, but because of a shortage of effective demand, i.e. money to buy the products.
As Marx himself explained, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them.” (Capital, vol.3, p.615)
Credit can overcome this contradiction for a period, but not indefinitely. Sooner or later, the market reaches its limits and a crisis ensues. “At first glance, therefore, the entire crisis presents itself as simply a credit and monetary crisis”, explained Marx (Capital, vo.3, p.621) But this is not the case says Marx. It is the crisis that causes a shortage of credit and not the shortage of credit that causes the crisis.
Decline
Some on the left have tried to explain the crisis exclusively by reference to profitability but this is a very mechanical approach. There is an attempt to equate the level of profits as an indication of the health of capitalism, but once again this is very simplistic. The mass of profit slumped in 2009 after the massive collapse of world trade. Profits have recovered since then. Even if you exclude the banks, the profits of the S&P 500 companies were up by 18.7% last year, according to Morgan Stanley. Profits in the US have jumped by $528bn. However to conclude that US capitalism is relatively healthy is fundamentally wrong, as can be seen from the sluggish growth, continuing high unemployment, and declining productivity.
This “recovery” is at the expense of the working class. Despite the boost in profits, US real wages have only risen by $68bn since the recovery began. While profits in Germany have increased by 113bn euros, workers’ pay has only increased by 36bn euros.
In Britain, the picture is far worse, where profits have risen by £14bn, but real aggregate wages have fallen by £2bn. Labour’s share of the national income has been in decline across the OECD since 1980, which explains to a large extend the rise in the rate of profit during this period.
More importantly, capitalism could be in the grip of a downward spiral. “We are talking of a game-changer and a systemic crisis,” explained Willem Buiter, Citigroup’s chief economist. Faced with another slump, the world’s central banks and governments do not have the ammunition to deal with another crisis.
The capitalist system is being buffeted by a whole series of shocks. The contradictions of private ownership and the nation states have come to the surface. It is not this or that problem that determines the crisis, but the general organic malaise of the system. In the past, the world economy would have rebounded. For instance, after the 1982 recession, the US economy leapt forward by 5.6%, as opposed to 1.6% today. The capitalist system finds itself in a complete impasse. No amount of “stimulation” will do any good. The drugs don’t work any longer.
As for the working class, they are faced with unparalleled austerity. All the gains of the past can no longer be afforded by capitalism. Only with the overthrow of the system can the nightmare of capitalism be put behind us. On this basis, a socialist plan of production can be organized which would allow the resources of society to be fully utilized in the interests of the majority, and with it an expansion of the productive forces to an undreamed of level.
Poverty, squalor, unemployment, homelessness and the other evils of capitalism can be abolished once and for all. The alternatives of ‘Socialism or Barbarism’ explained by Rosa Luxemburg, are now more relevant than ever. For us, the only choice is socialism.
London, August 18, 2011.