In the past week, the mood of the global financial markets has once again turned sour. The disastrous position in the Eurozone, coupled with a slow-down in China and poor figures from the United States has led to a new sell-off. All the indicators are now pointing at that we are entering into a new down-turn.
Economy in the doldrums
In the latest (October) World Economic Outlook, the IMF has revised down its growth forecast for the world economy by 0.2 points for this year and 0.3 points for next. Spain and Italy have had their growth forecasts further reduced and are now to remain in recession throughout this year and next. The Euro area as a whole is predicted to contract by 0.4% this year and only grow by 0.2% next year.
As if this wasn’t bad enough, the IMF now considers the situation to be much more volatile. In April, it thought world growth for 2013 would be at least 2% and possibly as high as 6% but now it puts the lower mark at 1%. Predictions are of course only predictions, but they give an indication of the increased anxiety of global capital at economic prospects.
Their predictions are not plucked out of thin air. Recent data show a decreased confidence of the capitalists in the prospects for the world economy. The Purchasing Managers’ Index, which gives an indication of how demand is developing, is now negative in both advanced economies and what the IMF terms “emerging markets”. Germany, which was considered the powerhouse of the Eurozone, has seen its index fallen from 49.2 to 48.1 (anything below 50 indicates a contraction). For manufacturing the figures were as low as 45.7 in October whereas they were 47.4 in September. This is driven by the car industry, which is suffering from chronic overcapacity. The index has now been below 50 since February.
The car industry in trouble
The car industry plays a particular role in the world. Not only are nine million people directly employed in this industry but it is estimated that each of these workers supports five other workers in other industries and the service sector. This makes over 50 million jobs across the world that depend on car production. In the largest economies in the world – Japan, USA and Germany, the car industry plays a particularly important role.
The car market has now been contracting in Europe for 12 months. September saw a year-on-year decline of 10.8% in new car registrations. All major markets, other than Britain, are contracting. This is on top of an already existing excess capacity which has been estimated at 33%, which equals around 10 million cars or 26 car plants. With no end to the recession in sight, car companies are now announcing one closure after another. Ford, which is expecting to lose $1.5bn on its European operations this year, has already announced closures of three plants. Peugeot Citroën and General Motors have announced the closure of one plant each.
Thousands of workers are set to lose their jobs. Aside from the personal difficulties for these thousands of workers, it will deal further blows to the European economy. In Japan, car manufacturers are in trouble after the recent dispute with China has made their sales drop between 36 and 49 per cent, compared to a year ago. Here the economic crisis has fuelled political instability which in turn has served to further deepen the crisis.
The lack of confidence in the future has now led a number of large US companies outside the car industry to start to lay off workers. DuPont, Xerox, UPS and 3M all reported poor conditions and warned of bad results. They cite not only conditions in the Eurozone but also in the US and Asia. Dow Chemical announced that they were shutting 20 plants, sacking 2,400 workers to save $500m and are going to save another $500m by cutting capital spending (investment). DuPont is planning to sack 1,500 workers. They all cite lack of demand as the reason.
The debt mountain
What is the source of this “lack of demand”? Basically, this is the poor purchasing power of the working class, which has seen its income under attack ever since the early 1980s. The effect is multiplied by the huge amount of debt that has been accumulated over the same period in order to counteract the effects of the former.
A fact that is rarely discussed in bourgeois media is that in the 1990s and 2000s households, companies and the state accumulated unprecedented levels of debt. McKinsey Global Institute produced a report in January 2010 (and an update in January 2012) which gives some idea of the scale of the problem. Generally, US total debt levels (including government, corporations and households), over time, has been around or below 140% of GDP. Even during the so called roaring twenties total debt never exceeded 160%. However, in the mid-1980s the total debt was already above that level. By 2000, the total debt had reached 227% of GDP and then by 2008, it had reached 296%. At the height of the great depression total debt reached 258% (1933). That means that even before this crisis hit, debt in the US had reached the level it had at the height of the crisis of the 1930s.
The debt is distributed unevenly in different countries. Spain, for example, has extremely high non-financial corporate debt (140% of GDP), Japan has very high government debt (200% of GDP), the UK has very high financial institution debt (200% of GDP) and the US has very high household debt (100% of GDP). The point is that for a whole period, credit was increased as a means of putting off the crisis. Partly this comes as a natural tendency within capitalism, and partly it was a conscious effort by politicians and central banks to put off the crisis. Interest rates were kept excessively low and a huge number of regulations that were put in place after the 1929 crash were abolished.
Household debt has doubled in many countries. In the US, for example, it increased from 48% of GDP in 1980 to 98% in 2008. In Spain it increased from 30% in 1980 to 85% in 2008. Even prudent Germany managed to increase its household debt from 51% in 1991 to 71% in 2000, although it subsequently reduced it to around 64% in 2009. Mortgage rates were very low and the requirements to take out a mortgage were non-existent, even to the point of lending money to people who obviously couldn’t pay it back – the so called sub-prime mortgages.
Corporate debt also exploded, mainly in finance, but also in non-financial companies. Even whilst state and household debt in Germany was decreasing in the second half of the 2000s, corporate debt was still increasing. Over the period 1991 to 2009, financial institutions increased their debt from 33% of GDP to 80% of GDP and other companies from 48% to 69%. In Spain, the construction sector fuelled a boom in corporate credit, rising from 49% for non-financial corporations in 1990 to 137% in 2008. The Spanish banks which are now being bailed out by the state increased their debt from 12% to 68% in the same period.
This massive explosion fuelled the past 20 years of boom but now the hangover is coming.
A lender of last resort
As mortgage holders are defaulting on their mortgages and companies are failing to make their payments, the banks take the hit. Because all the banks in the world have bought debt from each other in an impenetrable web of obligations, it is impossible to tell really who owes who what. No one actually knows, not even the heads of the banks, what mortgages and corporate debt they have on their balance sheets. In order to refinance their debt to each other, the banks had to turn to the government, who graciously supplied them with ample funds. Thus, the state and the tax payer became the lender and borrower of last resort.
It is worth briefly looking at the effects that the recession of 1929 had on debt levels. After the crisis US debt levels increased rapidly from 160% of GDP in 1929 to 260% in 1932 as the economy went into free fall and contracted 26%. As the economy rebounded in the mid-1930s with 10% growth per year, debt levels went back to 180%. This was done at the cost of a lost decade in terms of growth. Between 1929 and 1938 the economy grew a measly 3% and if it wasn’t for the rearmament programme in 1939 and the Second World War, the recession that started in 1938 probably would have continued.
Governments in the present crisis have pursued a quite different policy to that of the US in the 1930s. Whereas the US pursued a harsh austerity policy in the immediate aftermath to 1929, between 2008 and 2011, governments across the world were adding bank debt to their own balance sheets and letting budget deficits increase massively. This was partly inevitable and partly a conscious decision. The G20 summit in London in April 2009, for example, agreed on a $1.1tn stimulus. With the Greek crisis of 2010, this policy was thrown into reverse but even after the last couple of year’s austerity, the budget deficit in the US is 8.7% of GDP. In the Euro Area the deficit is 4.1% of GDP, in China it is 1.1% and in Japan it’s 9.7%.
The Maastricht treaty stipulated that no government should exceed a 3% deficit and that the government debt should not exceed 60%, in order to ensure financial stability. This kind of prudence wasn’t adhered to before the crisis (even by Germany), in spite of monetarism being in fashion and after the crisis it has been completely thrown overboard. Out of the G8 countries that together represent half the world economy, only China would today fulfil those criteria, with most governments running over 4% deficits and having debts of over 80% of GDP. Out of the G20, which represent 80% of the world economy, only eight would pass.
What this means is that government spending is keeping the world economy afloat by borrowing massively on the credit markets.
Measures running out
The Greek crisis was the first major obstacle on the stimulus road to get out of the crisis. What it showed was that the markets are not willing to lend money to governments indefinitely in the hope that the economy will recover at some point so that the government can repay the debt. Once the investors started to look into what real possibilities existed for the Greek government to repay its debts, they quickly drew the conclusion that lending to Greece was very risky business. So, in order to cover themselves, they quickly started demanding impossibly high interest rates. In April 2010 they started rising fast and reached 12%. That made it impossible for Greece to borrow money on the markets. The European Union and the IMF stepped in to bail the government out. In rapid succession thereafter followed Ireland and Portugal, who also had no chance of repaying the debt they had accumulated.
For the last two and a half years, the EU governments have been fire fighting. They are desperately trying to prevent the markets to draw the same conclusions about Italy and Spain as they have drawn about Greece, Ireland and Portugal. The governments are now looking for “credibility”. They must prove to the markets that they are willing, and able, to take serious measures against the working class. That means savage cuts to the yearly budget but also long-term cuts to future pension liabilities. They must also prove themselves competitive on the international market, so they must attack trade union rights and wages in the private sector. All this is done in order to placate the markets and keep the lines of credit going. It is misleading to say that the governments are doing it for “ideological reasons” as has become fashionable on the left.
The problem for the bourgeois governments is that the effect of the sharp austerity programmes has been to immediately plunge countries deeper into recession. Greece has been in permanent recession since mid-2008 and the economy has shrunk by 14%. The Irish economy has shrunk by 15% and the Portuguese by around 3%. All these countries are now on a rapid downwards slope and Spain and Italy are joining them.
Another line of attack has been the printing of money. The British, US and Japanese governments have all been engaging in what they euphemistically termed “quantitative easing”. After reducing interest rates to zero, this was the main policy they could work out to stimulate the credit markets. Effectively this means printing money. Five years ago, this would have been seen as sheer madness and completely unfeasible to bourgeois economists. Today, it is the only measure they can think of.
For the last three years, the US Federal Reserves has created $2tn of new money, the Bank of England has created $600bn, and the bank of Japan around $830bn. Although this money did not directly wound up in anyone’s pockets, it brought down interest rates for companies and governments. The ECB has been conducting its own version of quantitative easing and provided €1tn of cheap credit to companies and governments at the beginning of this year. In spite of these enormous interventions, there is no sign of a recovery. Rather, everything is pointing in the opposite direction.
The situation is becoming increasingly desperate. The stimulus way out of the recession failed in 2010 and austerity is proving disastrous at the moment. Quantitative easing is no miracle cure. Politicians and central bankers are now clutching at straws, attempting to find some kind of easy way out.
Normally, printing money would lead to inflation but with the economy in a depressed state, inflation has been kept at bay. Also, the central banks attempted to keep the newly created money a few steps removed from the real economy. The banks, for example, have used this cheap line of credit to try to improve their balance sheets, preventing it from entering into circulation. Now, however, they are throwing caution into the wind.
Over the last couple of weeks, the central banks have explained how their policies are not working. The Bank of Japan recently announced yet another quantitative easing programme, as the Japanese government can’t seem to agree on a new budget. Mervyn King, the governor of the Bank of England, says that their policies are reaching their limits. One of the main candidates to replace him, Lord Turner, said that the Bank of England needs to tear up the rule book on monetary policy and imply that it should cancel the debt that is owed to it by the British government. In plain terms, he is proposing that the bank prints money to finance government expenditure. They have even invented a new word for it “helicopter drops”. That is taking quantitative easing to a new level and is, as the FT points out, “the ultimate heresy”.
What does it mean?
The economy is in a bad state and it’s not getting better. Governments around the world have no idea of how to get out of the situation. We are facing years of austerity, sluggish growth and recessions. Debts have to be brought in line and excess capacity in industry has to be brought down. Mervyn King is one of the more outspoken of the bourgeois economists. On 24 October he said that younger generations might have to live under the shadow of the crisis “for a long time to come”.
The rosy calculations of the IMF of return to growth in 2013 have nothing to do with reality. The crisis will continue for years to come. Capitalism which only produces for profit, can no longer find any profit in satisfying people’s needs because people have no money. Across the globe “demand” is falling or at least no longer increasing. Protectionism is rising, as can be seen in the recent China-Japan dispute as well as the wrangling in the European Union. All the attempts to reflate the bubble are failing.
For the working class this means only one thing. We cannot turn back the clock. The boom of the last 20 years was built on sand. All attempts to find a solution to the present crisis within the confines of Capitalism are doomed to fail as the system itself is failing.
Today humanity is richer than we have ever been before in history. The world production is today 150% greater per person than it was in 1960 in spite of world population more than doubling. We have tremendous resources at our fingertips. Under Capitalism, however, this potential remains inaccessible. If resources were planned rationally there would be no need to close factories and sack workers. These resources would be put to use to the benefit of humanity. Under Capitalism, however, they will be squandered.
In any rational society, more wealth and more productive potential would mean that we get better schools, better hospitals, better pensions and better housing. Under Capitalism, it is quite clear, it means the opposite. The anarchy of the markets and the chronic inability of workers to buy all the things they produce have led the system into its most serious crisis ever. Yet, across the board the leaderships of all parties of the left as well as the trade union leaders are clinging to the system.
The labour movement needs to urgently prepare to organise a serious struggle against this crisis. This means first of all to fight against the austerity measures that the capitalists are imposing on the mass of the population in one country after another. But even this struggle would not be sufficient if capitalism – the cause of the crisis – is not overthrown. Only by nationalising the banks and the big monopolies under a rational plan can a new socialist society arise from the collapse of the old.