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.
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.
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.
Barcelona, 24 July 2007