"The unsettling new environment guarantees that we are about to experience more than an economic slowdown, more than a mere recession. We are about to witness the deepest stock market decline and economic depression since the 1930s. But please don't misunderstand: Things will not fall straight down. The most powerful institutions and central banks in the world will do everything in their power to prop up their economies and stimulate temporary stock market rallies." (See The Great Recession, October, 2001)
The mood of optimism about the world economy that rose up during the summer months has now dissipated. The talk among many pundits in New York, or the Economist magazine in London, is that there is a real risk of the US slipping back into an economic recession, taking the rest of the world with it.
Only the official spokesmen of the Bush administration, Alan Greenspan and the Federal Reserve, and of course, all those investment banks in Wall Street who have a vested interest in spinning optimism, continue to argue that the US economy will start growing at 3-4% a year, unemployment will come down and the post-Saddam world will be a better place.
Typical of the official comments is that of Chicago Fed President Michael Moskow. He admitted that: "the road to recovery is turning out to be bumpy," but noted that "once we have worked our way through the current rough patch, the long-term prospects for the US economy appear to be good."
Well, it's been a year since the attack on the Twin Towers, the symbol of American financial and economic might. And other commentators on the world economy are much less sanguine. "For the first time since WWII, the world is in the grips of a synchronised global economic downturn," writes Dr Kurt Richebacher. "We are looking for financial turmoil in the US of a gravity without precedence in the whole post-war period."
The Economist magazine comments: "The entire world economy seems to be cooling off. Everywhere, economists are revising their targets downward. America, Europe and Japan are still growing...but barely. European GDP rose at only 1.4% annual rate in the 2nd quarter. The Japanese economy grew faster than the US - but neither gave cause for celebration. Japan is still in deflation. Wages fell 5.6% in the second quarter. In America, prices are still rising, but not by much. And prices in the business sector are actually falling for the first time since WWII...down 0.6% in the second quarter." "Before the end of 2003," adds the Economist, "the rich world's three biggest economies - America's, Japan's and Germany's - could all have negative inflation rates."
Stephen Roach, the chief economist at Morgan Stanley bank disagrees with the optimistic forecasts of his colleagues at his bank. "There's a sinking feeling in the global economy again," he says. "Country after country, region after region, growth risks now appear to be tipping back to the downside. America's double-dip scare of earlier this summer has quickly gone global...All this leaves the world economy exceedingly vulnerable. The global growth engine is sputtering again, and no new source of growth seems likely to immediately fill the void."
And all the latest data show that the only thing sustaining US economic growth has been auto sales, housing, and the hope that Fed Chairman Alan Greenspan will cut interest rates further and revitalise an ailing economy. But auto sales now seem to have peaked, mortgage delinquencies and foreclosures have hit a new record and US house prices are down 5.4% in the last two months. The great housing bubble looks to be bursting.
The key to judging whether world capitalism is going to stay in an economic recession that destroys investment and jobs and lowers the living standards of the majority is the prospect for profit. Capitalism is a system where producers (privately-owned companies) invest, employ and produce only if it is profitable.
As Marx would have explained, under capitalism, new technology may boost the productivity of labour, but it does not necessarily lead to increased profitability for all who invest in the capitalist market. Sure, those who use it first gain an advantage. But once everybody gets into the game, competition drives down prices and squeezes profits. And worse, everybody starts investing huge amounts of capital because they have to compete. The combination of innovations and massive over-investment leads to excessive borrowing and excess capacity. Profitability starts to fall. Share prices fall and companies cut back investment. As sales slow, competition drives prices down, which in turn push profits down even more. The boom turns to slump.
And the evidence in the US and Europe is clear. The great New Economy of information technology turned out to perform in the exactly the same way as the Old Economy of capitalism. Since 1997, each extra piece of investment in equipment and labour has been producing less profit. By 2001, absolute profits in the productive areas of the US economy fell sharply. Sure, profits were still made in selling consumer goods and services. But there was no profit in making anything. Manufacturing investment and production slumped and so did jobs.
This was the cause of the downturn in 2001. Everything else - the protracted plunge of stock prices, the savage cuts in business capital spending and the shrinkage of consumer income growth - is but a consequence of the profit carnage. And nothing has changed in 2002.
In the end, all questions about the US economy boil down to one: whether or not business investment will return with sufficient vigour. But for that to happen, it needs both a luring profit outlook and accommodating financial markets. Neither is in sight. Despite cutting 1.5 million American jobs in the last 18 months, US corporations have managed to raise absolute profits by just 1.4% since the huge slump in earnings in 2001. So capital spending by corporate America remains dead in the water. Bank lending to industry has ground to a halt.
And as I've argued before in this column, never before in its history have stock markets been more important to the success of capitalism. In the stock market boom of the 1990s, capitalist corporations made their profits not so much from making things or even providing services, but more from investing in other companies and hoping their share prices rise.
Of course, this is impossible indefinitely. And once share prices start falling, because of the huge modern role of the stock market, so do the profits of companies. Then the whole world starts to spiral down. And stock markets have been falling as a trend since March 2000. Last month, European stock markets fell back to levels not seen since 1997 and US share prices are not far behind.
And once stock prices plummeted all the skeletons in the corporate cupboards of companies like Bush's Enron, Cheney's Halliburton Oil, Tyco and World Com as well as France's Vivendi and Germany's MobilCom fell out. The sheer greed of the super-rich executives of these fraudulent and bankrupt companies has enraged the average American, who has lost his or her job at the company or lost a great part of their retirement income from a pension fund that invested in these companies - or both.
The latest grotesque story is that of Jack Welch, the former CEO of GE, one of America's biggest companies and the most successful. Mr Welch's retirement package has gob-smacked everybody. Not only does he take away 22m GE shares, still worth $600m, despite falling share prices. According to the Wall Street Journal, GE continues to pick up the tab for items like, "autos and electronics at several residences; many costs of a GE-owned apartment in Manhattan, from flowers to faxes to food; tickets to sporting and cultural events; and services such as country club fees, security and financial planning." The monthly value of just the GE-owned apartment on Central Park West is roughly $80,000, according to Welch's estranged wife. He also has the use of a private jet to fly anywhere in the world at the expense of GE shareholders and employees.
It is in this environment that Bush prepares for his war against Iraq. The US economy is in trouble. The world capitalist economy is too. That means that Bush's chances of being re-elected president in two years time look grim. And after all, that's what presidents do the job for - to get re-elected!
A quick victory over Saddam will restore his popularity just as it did for Thatcher with the Falklands war. Or at least, that is what he hopes. In addition, getting control of Iraq's oil supplies will allow US capitalism to keep prices down and rely less on the unreliable and corrupt House of Saud in Saudi Arabia. And then, perhaps, the US and Israeli ruling class can impose some sort of "peace settlement" on the Palestinians. Those are the real objectives of the war.
What are economic implications? Already the huge rise in government "defence" spending has helped prop up the stuttering US economy, but at the expense of reducing available funds for investing in productive sectors of the economy. The best scenario for Bush and world capitalism would be a quick victory in Iraq, with US troops in place with relatively small casualties and new regime backing the US. World stock markets are still pricing in this "good scenario".
But even if this were to happen, it would do little to turn the world economy round. It might briefly improve "confidence" but it won't get businesses out of debt and it won't create jobs. And if the Iraqi people should start to object to a puppet regime being imposed in Baghdad, the situation in Iraq could become much messier than it is in Afghanistan now, with no stable regime, no solution to poverty and no economic recovery.
And it could be much worse. The war may not go as planned. US forces could be bogged down in a long campaign against guerrilla forces and may have to stay a very long time (at huge cost) to "stabilise" Iraq. Then oil prices would rocket, stock markets would melt down and the world economic recession would speedily arrive.
Bush's Iraqi adventure is no way out for world capitalism at best, and it could be the tipping point for a world economic depression at worst.