The International Situation and Perspectives 2007

This speech was delivered at a meeting of the leadership of the International Marxist Tendency in Barcelona on 24 July 2007. The recent turbulence on world stock markets fully confirms the perspectives outlined in it.

Part One: World economy

Lenin explained that politics is concentrated economics. The general instability finds its expression in world stock markets. The nervousness of investors is manifested in periodic crises of the stock market.

The US economy is still the main motor-force of the world economy. It recovered after the 2000 collapse of the stock market bubble. But economists are now talking of slower growth or a recession. So far, the US economy has avoided a recession, but there is a slowdown in growth. It only grew by 0.6% in first quarter.

On 29th June The Economist wrote: "There are plenty of ominous signs. The housing market, long the mainstay of America's economic boom, is sagging. Defaults in the subprime lending market grow ever more worrisome. The core inflation rate, which excludes food and energy, is not exactly subdued: consumer prices were up by 2.2% in May from a year ago. Add in the tepid GDP growth and the mix is making consumers nervous."

 The investors are concerned, among other things, by the rise in interest rates, which is also associated with the peak of a boom. However, it is impossible to be precise about the timing of the economic cycle. All we can say is that an eventual recession in the US is inevitable. Economics is not an exact science, and the capitalist economy is a chaotic system, which is impossible to precisely predict.

There is much perplexity among the bourgeois economists, who are expressing contradictory views about the situation. One moment they talk of deflation, then they warn of the danger of inflation. The re-emergence of inflation is a fact in all the main countries. This a typical phenomenon associated with the peak of a boom, together with a sharp rise in profits and also in wages. In the present cycle only the last-named aspect is missing.

Consumer debt

It is true that for the last 20 years there has been no severe recession, only two relatively mild ones. This is part of problem for the bourgeois. The mistake of the bourgeois economists is that they assume that the tendencies observed in the past period can be projected into the future. They have not learned the elementary truth: that in economics the past is no guide to the future. They have all been lulled into false sense of security. They imagine that a worldwide slump is out of the question. That is entirely false.

There has been relative stability of inflation over the past 15 years. This is due to a combination of circumstances, in the first place globalisation itself, which exercises a downward pressure on wages and prices. As a result the capitalists and economists had become blasé about inflation. The central banks have allowed monetary policy to become extremely lax, building up problems for the future in the form of a credit bubble. In the future all the chickens will come home to roost. We will see a global crisis of overproduction aggravated by a sharp contraction of credit and a collapse of house and stock market prices.

US consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit. Even as the housing market slows, Americans are still spending. This cannot be sustained.

For the present, however, the capitalists and their pet economists are acting like a bunch of drunks at a wild party: they are having a lot of fun and in their intoxicated state they imagine that the party will go on forever. Such people will invariably wake up with a bad head. Ten years ago, Alan Greenspan warned against the "irrational exuberance" on the stock market, but then encouraged it, throwing in a little irrational exuberance of his own.

In the last period the bourgeois have thrown all caution to the wind. They have acted irresponsibly from a capitalist point of view. The Republicans used to be the party of balanced budgets, a strong dollar and solid fiscal responsibility. This is no longer the case. The Republicans have presided over a consumer boom, a falling dollar and huge deficits. When George Bush took office government spending was 18.5% of GDP; by 2006 it was 20.3%.

Most of the extra has been discretionary spending, with military costs up by a third. Then there are the lavish handouts to American farmers, Medicare and Social Security to be paid for. All this is creating structural deficits and saddling future generations of Americans with a huge burden of debt. It is also undermining the mechanisms that the bourgeoisie used in the past to get out of a recession.

America's place in the world

America is still the strongest economy in the world. Therefore a recession there will have profound effects everywhere else. It is true that the USA has lost some ground relative to other countries. America used to be the world's biggest exporter. First it was overtaken by Germany and now it has been outclassed by China, where merchandise exports exceeded America's in the second half of last year.

The dollar is losing its dominant position in global finance. There are now more euro notes and coins in circulation than there are dollars. In the international bond market, the euro has displaced the dollar as the main currency. And, according to the Financial Times, Wall Street's stock market capitalization has now been eclipsed by Europe (including Russia).

The world's biggest company is still American, according to Fortune, which put Exxon Mobil in top position in 2006. In fact, Saudi Aramco, though not a listed company, has bigger revenues. Toyota is about to overtake GM as the world's biggest car firm. In 2006, for the first time, China overtook the United States in the production of cars. The Japanese firm Toyota is on the point of producing more cars than GM. More importantly, China is growing three times as fast as the U.S.

These data have led many to predict that the USA will be overtaken by China. Goldman Sachs predicts that China's GDP (at market exchange rates) will overtake America's by 2027. On a purchasing-power parity basis, some predict that this will occur China in just four years. However, such predictions lack a scientific basis. The same things were said about Japan before but the Japanese economy collapsed and took 20 years to recover.

Long before China could overtake the USA, the Chinese economy will experience a serious crisis - just as Japan did. The massive amounts of investment in manufacturing cannot be absorbed by the domestic market in China (although that is also expanding rapidly). China is heading for a classical crisis of overproduction in the coming period, which will prepare explosive developments in China.

At present China is the only major country that's really developing. But this strengthens the mighty Chinese proletariat. A recession in the USA - or even a prolonged slowdown there - will precipitate a slump in China that will have serious knock-on effects in Asia and on a global scale.

Can Asia save the world?

Some bourgeois economists console themselves with the hope that the revival of economic growth in Europe, China and Japan will counterbalance effects of US crisis. But China depends on the U.S. market, and the rest of Asia depends on China. Thus, in the last analysis, the entire world depends on the consumer boom in U.S. This is unsustainable. Faced with the prospect of a downturn in the USA the economists try to inject a note of optimism by claiming that a recession in the American economy could be offset by the growth of demand in Asia, which on some estimates has accounted for over half of the world's growth since 2001.

However, this overlooks the fact that Asia's growth has been based largely on exporting to America, whereas domestic demand in the region has lagged behind. Asia is running a combined current-account surplus of over $400 billion, which indicates that it is contributing much more to world supply than to demand. If America's demand falls, the growth in Asia's exports and output would slow sharply, and this in turn would seriously affect China.

Exports account for 40% of China's GDP, although lately China's GDP growth has come mainly from domestic demand, which has been growing by an annual 9% in recent years. Real consumer spending in China has been growing at an average annual pace of 10% over the past decade-the fastest in the world and much faster than in America (see chart 2).

It is true that the Japanese economy is reviving. Big Japanese manufacturers now report insufficient production capacity for the first time since 1991 and plan to increase capital spending by 17% in the year to March. Although America takes only 23% of Japan's exports, down from almost 40% in the late 1980s, this understates Japan's total exposure. Japanese firms (like those in South Korea and Taiwan) send a lot of components to China for assembly into goods, which are then exported to America as finished products. On top of this, if a sinking American economy pulled the dollar down with it, this would further squeeze Asian exporters.

Moreover, Japan has a massive public debt and therefore is not in a position to "spend its way out of a crisis" by deficit financing. Taiwan, where domestic demand is weak, is also constrained by a large budget deficit.

There are therefore no serious grounds for believing that Asian economies can "decouple" from an American downturn. Although China's exports to America have fallen from 34% of its total exports in 1999 to 25% now (adjusting for the re-exports which are made through Hong Kong), a sharp fall in demand in the USA would still have serious consequences for China. .

Slower American growth will hurt China, India and Japan, but it will hit the smaller Asian economies, such as Singapore, Taiwan and Hong Kong, that are more dependent on foreign demand, still harder. But all Asia is interconnected and the crash of 1997 showed how once a crisis starts it will leapfrog from one country to another.

Dominance of world market

The idea that you can compartmentalize the world economy, so that a recession in the USA will not have important effects is absurd. The bourgeois economists who defend this thesis are contradicting everything they wrote yesterday on the subject of globalisation. In fact, the world economy is more interdependent than ever. The international economic order is in fact very fragile. The chain of capitalist production can be interrupted at any number of points and one factor will inevitably affect all the others. This is the reason for the present nervousness on the stock markets of the world.

The next crisis could begin in the U.S. or China. It might be precipitated by a stock market crisis or a sudden increase in oil prices triggered by events in the Middle East. When the critical point is reached the whole process will go into reverse. At this point all the factors that made for the upswing will turn into their opposite. The massive credit that has been injected into the US economy to prolong the consumer boom will become a huge and unsustainable burden, dragging the economy down. Once the downward slide begins there will be no stopping it.

Ten years ago, on July 2nd 1997, Thailand's central bank floated the baht after failing to protect the currency from speculative attack. The move triggered a financial and economic collapse that quickly spread to other economies in the region, causing GDP growth rates to contract sharply, bankrupting companies, and causing mass layoffs. That precipitated the Asian financial crisis of 1997-98, which later affected countries like Poland, Turkey, Brazil and Argentina. They are now congratulating themselves on coming out of that crisis but it can easily be repeated on an even bigger scale.

Speculative bubble

In every capitalist boom there is an element of speculation, but in the present boom the speculative element surpasses anything seen before. The so-called private equity firms are involved in a speculative orgy of takeovers that do not entail any productive activity but closures, sackings and the hollowing out of industry for the sake of profiteering.

The sums spent on so-called leveraged buy-outs are enormous. For $32.6 billion in cash and the transfer of $15.9 billion in debt, Bell Canada Enterprises (BCE), owner of the largest telephone company in Canada, has agreed to be taken over by an Ontario pension fund and two American private equity firms. If it is completed, the takeover would not only be the largest in Canada's history but the biggest leveraged buyout anywhere. It puts into the shade the news in Britain that a private-equity firm may buy Virgin Media, a pay-TV, internet and telephony group, for a mere $11 billion or so.

Equity investors made a lot of money in 2007. The FTSE World index rose 8.7% in dollar terms over the first six months of the year. The leading markets (America, Britain, Europe and Japan) all produced returns within three percentage points of this figure. But now the mood has changed. There is extreme nervousness and volatility.

A related trend that has been evident recently has been the weakness of property stocks. Japan was one of the hardest-hit markets with its J-REIT (real estate investment trust) index falling by 12% in June alone. Investors are worried about the possibility of bad loans in the banking sector. But the main question is the US economy.

Weakness of US economy

The US bourgeoisie, in the relentless pursuit of short-term gain at the expense of long-term stability, has created the biggest speculative boom in history. True, the American economy has enjoyed the fastest pace of growth in the developed world. But this only reflects the sluggish growth elsewhere, notably in Europe and Japan. The American economy has so far avoided a slump. But it is slowing down. The economy grew at an annual rate of 0.6% in the first quarter of 2007, less than half the initial estimate. House prices are still increasing, though at the slowest quarterly rate for ten years, according to the Office of Federal Housing Enterprise Oversight.

The U.S.A. may have lost the lead in many fields, but it is still a world leader in one field: debt. Consumer, government, corporate debt has reached record figures in the recent past. In fact, the US economy is defying the laws of economic gravity. It has serious deficits at many levels. There is a new speculative boom in house prices. This in turn has maintained the boom in consumer demand. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Despite the reassuring words of George W Bush, it is not sound at all. It is based in huge debts and deficits. And, as we all know, debt must be repaid.

So far, consumers have managed to keep financing their lifestyles by borrowing. As Marx explained, credit expands the market beyond its natural limits. But this is bread today and hunger tomorrow. Eventually, it must lead to a global crisis of over-production. Already higher interest rates are making credit too expensive. The relative weakness of consumer stocks is making investors move into commodities like metals that used to be considered "old fashioned".

Over the past few years the boom in the housing sector contributed enormously to the economy, but it is now slowing down. Consumers can no longer use their home equity to keep spending and property-development profits have vanished. The government estimates that the housing slump lopped nearly a percentage point off GDP in the first quarter of 2007.

A slowing housing market must have an effect on the mountain of debt and debt-related instruments that were issued to finance the boom. The huge speculation must be squeezed out at a certain point. The Economist (29th June) stated: "The most frightening aspect of the problems at two hedge funds run by Bear Stearns, both heavily exposed to the subprime-mortgage market, was not that a big bank had been plunging into risky assets; it was the revelation of how little anyone knew about the risks involved. The market was so leveraged, and the instruments so complicated, that no one seemed to understand what would happen if it all began to unwind."

This perplexity and growing anxiety of the bourgeois is significant. They are drifting into unchartered waters. At some point a downturn is inevitable, when dialectically all the elements that made for an upswing will turn into their opposite. For the last 20 years there have only been two relatively mild recessions, but in economics the past is no guide to the future. The bourgeois economists have been lulled into a false sense of security by their tendency to extrapolate from past trends. When it comes, the next global recession is likely to be a severe one.

The US economy is like the character in the cartoon movie, who runs over the edge of a cliff, and keeps on running until, he suddenly notices that there is nothing to keep him up, at which point he takes a plunge. What is sustaining it? Colossal amounts of foreign capital are flowing into the USA to finance these debts. If any other country had figures like this, it would be forced by the IMF to make deep cuts and introduce an austerity policy. But this is not just any country, but the USA, and the USA controls the IMF!

This foreign money is the only thing holding it up. Now the dollar is falling, and continues to fall. This is a de facto devaluation, and it is a protectionist measure that damages other countries (making imports more expensive and US exports relatively cheaper). This will have adverse effects in Europe and Asia, whose exports to the USA will be hit. But it will not solve America's problems. In order to be really effective, the dollar will have to fall a lot more. Moreover, devaluation will eventually be reflected in higher prices in the USA and a further rise in interest rates, threatening either a further slowdown or a recession.

The flow of money into the USA can flow out just as fast as it came in, as we saw in Asia in 1997. All the factors are present for a severe slump, which will be aggravated by the enormous distortions in the system: excessive credit, debt etc. These distortions are not the cause of the crisis, of course. The cause is same as what it was in Marx's day. And he explained very clearly that the ultimate cause of all real capitalist crises is overproduction, as we will see in China. But by attempting to avoid a slump by artificially expanding the market through credit, they merely postpone the outcome by making it worse when the slump eventually arrives.

A boom at the workers' expense

One of the peculiarities of the present boom is that wages in all countries have hardly been rising. The proportion of the national income dedicated to wages is at a record low everywhere, while the proportion dedicated to profits is at a record high. This is very nice for the capitalists, but not so nice for the workers! Everywhere there is huge and increasing inequality and the concentration of capital is reaching unprecedented levels. Eventually, however, demand must suffer from such a scenario.

Some comrades talk a lot about the tendency for the rate of profit to fall. But this is only a tendency - not an absolute law like the law of gravity. It does not apply under all circumstances. In the third volume of Capital Marx explained that there are countervailing factors that could cancel out the falling rate of profit for a period. Among these is the increased participation in world trade. We must take this into account.

In the last period we have witnessed a colossal expansion of the world market, and a massive increase in the world division of labour. It stands to reason that if two billion people enter the world capitalist economy, as has happened in the last two decades, this must have an effect. The entry of China, India, Eastern Europe and Russia into the capitalist world economy signifies new markets and new and highly profitable fields of investment for the capitalists. This has undoubtedly provided them with oxygen that has sustained them for the last period.

It has also had important side effects. The emergence of a vast new labour force based on extremely low wages exercises a downward pressure on wages everywhere. There is brutal pressure to keep wages down while relentlessly increasing absolute and relative surplus value - lengthening the hours of work and increasing the intensity of labour. This increases the share of profits at the expense of the worker. There has been an enormous increase in exploitation in all countries. But this is now reaching its limits.

The other effect has been a general cheapening of commodities: yet another of the countervailing elements on the tendency of rate of profit to fall outlined by Marx. This has the effect of boosting profits but also, to a lesser effect, benefits the workers. The average worker can now buy hi-tech products that earlier they could only dream about: large screen televisions, DVDs, cars, mobile phones - all have fallen in price and are accessible to most people (albeit on credit). This cheapening of commodities also helps to keep wages in check. But this cannot last forever. As the cycle advances, inflation and interest rates tend to rise: mortgages, rents, interest repayments, petrol, indirect taxes etc. cut into wages, creating conditions for a revival of the economic struggle.

In the last period we have seen waves of strikes and general strikes in France, Italy, Greece, Belgium and Canada. In the last few months there have been strikes and general strikes in Iceland, Peru, South Africa, Nigeria, Egypt and Israel. Even in Switzerland the workers are preparing to take action this autumn. This is an anticipation of developments that will occur in one country after another in the future.

Have these factors had an effect? Yes, of course they have. They have lengthened the booms and cushioned the recessions for the last twenty years. But has it solved fundamental problems of capitalism? The answer is emphatically, no. Marx explained that by expanding credit and participating in world markets, all that the capitalists succeed in doing is to postpone the slump at the cost of producing an even bigger crisis in the future.

The bourgeois are preparing way for a massive slump on a world scale. But it is impossible to predict either when this will occur. What we can say is that the massive speculation that has been taking place in every country will ensure that when it comes it will be a serious affair. The housing bubble is actually the biggest speculative boom in history - far bigger than that which preceded the 1929 crash.

All the indications are that foreigners' enthusiasm for American assets is already cooling. The cost of the war in Iraq is ruinous. It is currently costing at least two billion dollars a week. The slogan of the present administration is that of Goehring: "guns before butter". The only solution will be cuts and more cuts. Since the military budget cannot be touched, these cuts will fall on things like pensions and health care. The enthusiastic response to Michael Moore's latest film shows that this will be resisted. The scene is set for huge social conflict in the USA and in every other country.

All the elements are building up for a serious social crisis in the U.S. People are seething with discontent. We tend to quote a lot of figures. But sometimes you can often learn more from a telling anecdote. Michael Moore's latest film Sicko has had a powerful effect in the USA. When it was shown in a Texas movie theatre, the audience was so moved that they held an improvised meeting afterwards, on the initiative of an Afro-American man who insisted: "we must do something about this".

A tremendous reaction against all of this is being prepared. And some of the most backward areas can be the first to join the revolutionary movement. The Bible tells us: "the first shall be last and the last shall be first". In the last period there has been a movement of industry in the USA from the North-East to the South and West: many formerly backward and reactionary areas are being industrialised and unionised. They can quickly become radicalised because they are new and fresh layers of the working class.

The world situation does not present a nice, calm, picture. On the contrary, there is a very explosive situation everywhere. Big possibilities will open up for the Marxist tendency on a world scale. We can go forward with complete confidence on the basis of the ideas, which have been shown time and again to be correct. We must go forward with a sense of urgency, full of confidence in the ideas of Marxism, in the working class, in the international, and in ourselves.

Introductory note:

The bloodshed in Iraq took a new turn last week with the brutal attack on one of Iraq's smaller minorities, killing at least 400 people and wounding hundreds more in areas populated mostly by adherents of the Yazidi religion in the remote north-west region of Sinjar. Four co-coordinated blasts together constituted the deadliest single attack of the whole war.

Yazidis, most of whom are Kurds, practice a pre-Islamic religion. Because they venerate an angel many Muslims associate with Satan, they are sometimes accused of being devil-worshippers. As part of his notorious Arabisation campaign, Saddam Hussein uprooted Yazidis from their ancestral land, herding them into new "towns" that were initially more like concentration camps. One of those was targeted by the suicide-bombers this week.

The madness of religious sectarianism and communal slaughter has spread to Kurdistan, which, as I predicted in my speech to a meeting of the IMT in Barcelona (published below) will be far worse than anywhere else. As I pointed out, the insurgents displaced by the American "surge" in central Iraq have moved elsewhere - to Kurdistan. An earlier bombing in the north killed 150 in the town of Emerli.

Ethnic tensions have also been sharpened by the coming referendum on the disputed province of Kirkuk and neighbouring districts. Sunni Arabs and others are nervous about a vote that might result in large swathes of the region joining an autonomous Kurdistan.

Nuri al-Maliki, Iraq's prime minister, is struggling to put together his national-unity government in response to American pressure. But in the past four months three big blocks have left it: the radical Shias associated with Muqtada al-Sadr; the secular-leaning Iraqi List of Iyad Allawi, a former Shia prime minister; and the main Sunni coalition, the Iraqi Consensus Front. In other words, the "surge" has failed and the coalition is collapsing before our eyes.

Alan Woods 

[London 21/8/07]

The International Situation and Perspectives (Part 2)

The most important thing to note is the enormous interdependence of everything on a world scale. That's why we always start with a discussion on World Perspectives. It is impossible to understand perspectives in Mexico, Spain, Brazil, Venezuela, etc. without understanding the larger context.

Marxists are not economic determinists but dialectical materialists. The economic cycle is important, but it does not exhaust the question of class consciousness or revolutionary perspectives. It is also a political question. For example, the effects of the instability in the Middle East, the invasions of Afghanistan and Iraq, have had a big political impact in Italy, Spain. Also in the USA there is a serious political crisis over Iraq. At the other end of the world Pakistan (where we have a strong section) has been totally destabilized by events in Afghanistan.

We are not meeting here for academic purposes. Our purpose is to analyze the general crisis of capitalism in order to intervene. And in order to intervene we require the forces. We must build those forces. In the past we were often mostly spectators. For example, during the Allende period in Chile we had an absolutely correct analysis but we were only onlookers, not active participants in events. Today in Pakistan we are a force. In Venezuela we have a growing force that has built important points of support. In Mexico we have an outstanding group that is intervening very effectively in the mass movement. This affects the whole nature of our discussions.

Afghanistan

US imperialism is behaving, not like a bull in a china shop but like an elephant in a china shop. Afghanistan is in a complete a mess and as a result Pakistan finds itself in a major crisis, which we have covered in articles on our website. There was the lawyers' crisis, then there was the Red Mosque crisis, etc. It is clear that Musharraf is hanging by a thread and they are preparing for Bhutto's return to Pakistan. Important developments are on the order of the day and our comrades are in a good position to take advantage of them.

The war in Afghanistan drags on and Western casualties are mounting. The US plan to rely on air power in Afghanistan in order to avoid American casualties has failed. Instead the bombing has caused heavy civilian casualties Afghan aid groups estimate that foreign and Afghan forces killed 230 civilians in the first six months of 2007-as many as in the whole of last year. Since the start of 2006, some 6,000 people are believed to have died, perhaps 1,500 of them civilians.

Most are caused by America's Operation Enduring Freedom (OEF), which is separate from the NATO-led stabilization mission, known as the International Security Assistance Force (ISAF). This is the Pentagon's version of the gentle art of winning friends and influencing people.

British-led troops are fighting on the ground in Helmand province, advancing along the Sangin valley in the hope of reopening the road to the Kajaki dam, to allow the refurbishment of its hydroelectric plant. But they are taking a lot of casualties in a war they cannot win.

The Taliban avoid head-on battles and are now resorting to more suicide attacks and roadside blasts. These "asymmetrical" (i.e. guerrilla) tactics are very effective and are used even in Kabul. A suicide-bombing on June 17th killed 22 police-academy instructors and 13 bystanders. A similar attack almost killed Dick Cheney.

The former ISAF commander, the British general, David Richards, is said to have warned colleagues in London this month that NATO was making "the best of a bad job"; it was short of troops and had to compensate with heavy firepower. This means even more civilian casualties.

However, they cannot get more soldiers. If anything, allies could start to drop out. Some, such as Britain, Denmark and Poland are increasing their forces. But others are not keen to lose more lives. The Germans are present but their troops are confined to the north (where there is little or no fighting) and are forbidden to leave barracks at night. The Afghan mission is unpopular in Germany, and almost brought down the Italian government in February. The Netherlands are also shaky and will decide in August whether to extend its operation in Uruzgan after 2008. And Sarkozy has said he would also like to leave ISAF though officials say no such move is imminent.

The Taliban, by contrast, have plenty of money, men and arms, financed by the Afghan poppy crop. The opium economy and the insurgency are mutually reinforcing; drugs finance the Taliban, while the fighting encourages poppy cultivation, especially in Helmand, which is set to harvest another record crop this year, producing more opium (and from it heroin and other illegal drugs) than the rest of Afghanistan put together.

The drugs business is highly profitable, earning some $320 billion annually. The opium trade is worth about $3.1 billion (less than a quarter of this is earned by farmers), the equivalent of about a third of Afghanistan's total economy. The Afghan opium trade is worth around $60 billion at street prices in consuming countries- and is out of control. Afghanistan last year produced the equivalent of 6,100 tons of opium, about 92% of the world total. At least the Taliban exercised some control, now there is none. These days Taliban commanders and drug smugglers are one and the same.

Some of the biggest drug barons are reputedly members of the national and provincial governments, even figures close to Hamid Karzai. The Economist (28/6/07) wrote: "The whole chain of government that is supposed to impose the rule of law, from the ministry of interior to ordinary policemen, has been subverted. Poorly paid policemen are bribed to facilitate the trade. Some pay their superiors to get particularly ‘lucrative' jobs like border control."

Iraq

In Iraq, despite the presence of over 160,000 troops the Americans have lost the war. This has produced a crisis of the regime. The ruling class has lost confidence in Bush. As with Nixon, it was easy to put him in office, but much harder to get him out. The Iraq Study Group headed by James Baker, a trusted representative of ruling class, gave quite sound advice from the perspective of the U.S. bourgeoisie. They said: "We've lost - let's get out as quickly as possible; do a deal with Syria and Iran, let them sort out the mess." Instead GW sends in more troops and threatens Iran.

His slogan is: "One last push and we will win". This is like the generals in World War I, who were always ordering their soldiers over the top for one last time. Now the "Surge" is in place. An extra 21,000 of them are now there, bringing their tally in Baghdad up to 31,000-plus and nationwide to 155,000, the highest troop level since late 2005. Senior American officers say that a third of Baghdad now has a degree of "normalcy"; a third, especially those districts with a sectarian fault-line running through them, is still very violent; and a third is in flux.

Once the Americans have secured Baghdad, so the theory goes, they hope to tackle the so-called "belts" just outside Baghdad, in particular the nearby mainly Sunni towns to the south-Mahmudiya, Latifiya and Yusufiya. But this has resolved nothing. Pushed out of Baghdad, the guerillas just move to other areas. Some 2.2m Iraqis out of a population of 27m are now reckoned to have fled Iraq, while the UN estimates that another 2m have been internally displaced.

In theory, the Americans are putting faith in Iraq's own police and army to take over as soon as possible. Of 188,000 police trained by the Americans, no less than 32,000 have been lost-through death (8,000-10,000), injury (similar numbers), desertion (5,000-plus) and other reasons. The 137,000-strong army is said to be better and less obviously sectarian. But it is useless against the insurgents.

The government of national unity is no such thing. It is a group of factions, each grabbing a share of the spoils. Even the chief American general Petraeus has warned that "counter-insurgency operations can last nine to ten years." That is completely crazy. They do not have nine to ten years. Public opinion in the USA is now overwhelmingly against the war. Even the Republicans have had enough.

Whatever the Americans do now will be wrong. If they remain it will mean more casualties and solve nothing. But if they leave it will be even worse. There is a bloody sectarian civil war in Iraq. The government and the Americans can't solve the problem. The Americans demand that the Iraqis build a broad based national government, state, police, etc. But they can't do it. U.S. imperialism is responsible for this nightmare. They stoked the flames of sectarian conflict when they based themselves on the Kurds and Shiahs against Saddam Hussein, who had based himself on the Sunnis. Now the situation is out of control.

General Petraeus candidly admits that the surge will be in vain unless the breathing space his troops are trying to create is used by the Shia-led government to embrace a wider range of Sunnis. Last week America's defence secretary, Robert Gates, was in Baghdad, assessing the surge. "Our troops are buying them [the Iraqi government] time to pursue reconciliation," he said. "Frankly, we are disappointed with the progress so far." General Petraeus's masters in Washington know that if the puppet Maliki cannot do better, America's surge-and the increased loss of American life that it is already entailing-is doomed to fail.

They try to take comfort from the fact that until recently Kurdistan was relatively quiet. "The North is OK," they used to say. But the worst bloodshed and violence will take place in the North. Kurdistan is ethnically mixed. The national question cannot be resolved under capitalism, either in Iraq or anywhere else. Now there is conflict between Sunnis, Shias, Kurds, Turkmens and other groups. And Turkey is looking threateningly at Iraq. Ankara will never accept an independent Kurdistan on its borders. The PKK has recommenced its guerilla war inside Turkey and has bases inside Kurdish Iraq. The Turkish army will move to crush them. It is already massing its forces on the border, just looking for an excuse to invade.

Imperialists don't wage war for fun, but for plunder, markets. But they are not getting money out of Iraq - it is costing them a colossal amount - at least two billion dollars a week and thousands of dead and wounded. Iraq has the world's third-largest reserves but they are of little use as long as the crude remains mostly beneath the ground. The oil infrastructure is in parlous condition after 17 years of war and sanctions. Output remains well below the (depressed) pre-war peak of 2.5m barrels a day.

In addition, the war has had unforeseen consequences. By destroying the Iraqi army, they removed the only power in the region that could counter-balance Iran, which is a regional power. There is also a big revolutionary potential in Iran. Ahmedinejad is playing at anti-Americanism as means of diverting the attention of the masses. The Iranians are undoubtedly intervening in Iraq and the balance of forces in the region has been upset. The whole area is destabilized. The Saudi monarchy is now hanging by a thread, and the Saudis and the other Gulf states fear the growing power of Iran and the Shias. As a result the Americans are secretly supporting the formation of an anti-Shia front in the region.

Israel and Palestine

At the centre of the crisis in the Middle East are Israel and the Palestinian question. The crisis in Gaza is a civil war between Hamas and the PLO under Abbas. Israel's withdrawal from Gaza was a tactical move intended to strengthen its stranglehold on the West Bank. We see the cynicism of the imperialists (not only the Americans but also the EU) when they immediately suspended funds for the Hamas government, which, say what you will, was democratically elected.

As soon as the clash between Abbas and Hamas occurred, they restored funds to W. Bank and the stooge Abu Mazen. They want to use one side to split the Palestinians and thus ensure the continuation of Israeli dominance. The fact that they have chosen Tony Blair as Middle East emissary is itself a recognition that the Americans have no interest in solving it.  

No solution to the Palestinian question is possible on this basis. The only possible solution is to divide Israel along class lines: to break the stranglehold of reactionary Zionism. But this demands a class position. It is difficult to put forward this position in the given circumstances, but events will provide us with openings as the masses come to realize the futility of the old methods. In the meantime it is necessary to patiently explain our ideas to the most advanced elements. In future our ideas will find a mass echo.

Latin America

In world revolution as a whole, Latin America remains at the front line. This is the final answer to all reformists, cowards before imperialism, etc. In the past, the Marines would have landed long ago. Today this is impossible, politically and even physically. They are tied down in Iraq. This is not to say they won't attack - they are attacking - but they can't invade openly and must resort to indirect methods, diplomatic pressure, economic pressure, intrigues, above all within Venezuela and within the Bolivarian movement.

The imperialists understand what we understand: there is a revolutionary process in Venezuela, and the masses are moving to change society. In the old days, all socialists were "communists" as far as Washington was concerned, but now US imperialism needs to deal with "good" socialists like Lula and Kirchner to isolate Chavez. They are trying to draw in Morales also. That is the meaning of Bush's tour of Latin America and the attempt to sign bilateral trade agreements with Brazil and other countries in the region.

Revolutions do not respect frontiers and the revolutionary ferment is spreading to countries like Ecuador, Bolivia, etc. That is why they are trying to isolate Venezuela. U.S. imperialism can't tolerate the Venezuelan Revolution. But as happened in Cuba, U.S. imperialism could push Chavez beyond the limits of capitalism. If this occurs, its effects will be felt throughout the continent and beyond.

That explains the campaign of hysteria around the RCTV issue. The imperialists want to maintain the pressure on Chavez in order to halt the Revolution. They are basing themselves on the right wing of the Bolivarian leadership and the counterrevolutionary bureaucracy. But the workers and peasants are pressing from below. The result of this struggle will determine the fate of the Revolution - one way or another.

Marxists must base themselves on the fundamentals, as Ted Grant always said, not this or that accidental feature. There are no schemas that explain everything. We must set out from the world as it is, and the class struggle and workers' movement as it is. We always approach things dialectically. We see things as they are, as they were, and do best to see how they will develop. The class struggle has a certain rhythm. Lulls in the class struggle are inevitable. We cannot be empiricists. Moreover, it is not always to our advantage that masses are in constant action.

There are many analogies between class struggle and war. Wars do not consist of constant battles. Any soldier who has seen action will tell you that battles are the exception and between battles there are long periods of inactivity. Such periods must be used to clean weapons, dig trenches, drill and make new recruits: in short to prepare for the next battle, which will come sooner than we expect. We must think like good soldiers. We must use the pauses in the class struggle to build our forces and perfect our organization.

The workers are not always ready for struggle, it is true. But let us take Bolivia, where the working class staged two general strikes and two uprisings, and overthrew two governments in the space of 18 months. I ask: what more do you want from the working class? The failure to seize power was not due to the low consciousness of the masses (as Heinz Dietrich says) but to the absence of leadership.

In all countries the situation can change very rapidly. We must be prepared so as not to be taken by surprise. Something seemingly trivial can provoke a movement that can take us by surprise. Under certain conditions formerly backward elements can become the most militant, as we know from dialectics and from history. In Russia in 1905, the workers staged a peaceful march to the tsar (the Little Father) to petition for reforms. At the head of this peaceful demonstration was a priest - Father Gapon. The Marxists were in a tiny minority and completely isolated from the working class. Then there was the massacre of 9 January and the consciousness of the masses was transformed in the space of 24 hours.

What is the lesson of Venezuela? How can one explain the rapid rise of Chavez? It cannot be explained by magical powers. The process of discontent was already present among the masses, but had no vehicle through which to express itself. Once they found a means of expression, they poured onto streets in an unstoppable movement that has lasted for almost 10 years. It is really astonishing that the movement has lasted so long. The December 2006 elections showed that 63% supported Chavez after nine years of the process. This shows a very high level of revolutionary consciousness!

Class consciousness is not only measured through strikes. If the workers are checked on the industrial front, they will look for an outlet on the political front, and vice versa, etc. But they will only do this through their traditional mass organizations, because the masses do not understand small groups, even if they have correct ideas - which the sects do not in any case.

In the turbulent period that is opening up we will see big crises in all the traditional mass organizations at a certain stage. Look at Britain. You couldn't imagine a more rotten leadership than that of the Labour Party. Over the last ten years, all the sects have been busy setting up all kinds of electoral blocs and alliances to stand against the Labour Party. But they have gone nowhere.

Mexico is a good example of the way in which the masses move. We've said many times that there is not a single stable country in Latin America from Tierra del Fuego to Alaska. Not long ago Mexico seemed stable. But our perspectives were fully confirmed by the events of last year. The sects understand nothing. They accused us of supporting a bourgeois party. The PRD can be considered a bourgeois party - from the point of view of its leadership and policies. But the masses don't understand that - as we saw last year.

Millions came onto the streets to protest against electoral fraud and support Lopez Obrador. Were these all bourgeois? I don't suppose there are that many bourgeois in the world. No! These were ordinary people: workers and peasants. Our comrades fought side by side with the masses, while simultaneously explaining our programme and policies and trying to take the movement forward. That was the only correct thing to do!

This gave rise to a crisis of leadership. Lopez Obrador was like the Sorcerer's Apprentice - unable to control forces he conjured up. We must understand how the working class moves - through its traditional mass organizations, not through tiny sects. But the masses cannot always be on the streets putting up barricades, as the ultra-lefts imagine. If they see no change, the movement dies down for a time. This is normal.

On the surface, it seems Calderon has won, but it's not finished yet. The Calderon government is weak and split. It is a government of crisis. The Mexican ruling class is too weak to crush the mass movement at this stage, but the working class is unable to finish the job, due to the leadership. This results in a stalemate. But this unstable equilibrium will not last long. The Mexican revolution has begun. Calderon is trying to reinforce the state, using drug war as an excuse for repression. Lopez Obrador may win next election. The masses will go through the school of reformism and they will learn from their experience. Meanwhile, like good soldiers, we must prepare our forces!

Everywhere the process is prolonged. This was not the case in the past, when a pre-Revolutionary situation would very quickly move either to revolution or counterrevolution. Now we have a kind of slow motion revolution in Venezuela. It has lasted nearly 10 years now. Why? There is a very favorable class balance of forces. The workers could relatively easily take power but they lack leadership. Chavez is honest and courageous but he is not a Marxist and therefore inclines to vacillate. As for the official leaders of the workers' movement (the UNT), they have played a most negative and pernicious role.

As in Mexico and elsewhere, the bourgeoisie is not strong enough to crush the revolutionary movement, but the workers are being prevented from taking power by the leadership. This explains the prolonged nature of the process. But sooner or later this must be settled one way or another. The imperialists understand what we understand. They know that the present unstable correlation of forces cannot be maintained. And they are preparing.

There is sabotage of the Venezuelan economy. There are serious shortages and inflation of 19%. The masses are loyal to the Revolution but they will not permanently accept this situation. Sooner or later it must be settled. Chavez has taken important steps forward but he is still hesitating on fundamental questions like the army. The outcome is still not clear.

We have a special session on Venezuela - and this is an extremely important discussion. We must follow the revolution concretely through all its stages, we must have all the facts and figures, we must participate actively in all the debates, and play a leading role in the establishment of the new socialist party - the PSUV. But we must do so as the Marxist wing, we must organize our intervention as a clearly delineated tendency.

We have some time, but not indefinite time. We must build our own forces. The comrades in Venezuela have done marvellous work, but we are lagging behind the movement. The key to the Revolution is the building of a powerful revolutionary cadre organization in the shortest possible time.