As the world economy continues to slow down, giving rise to fears of a deflationary spiral, the US Federal Reserve has been forced once again to cut its interest rates. Greenspan has slashed rates, down from 6.5 per cent at the end of 2000, to just one per cent today, the lowest for more than four decades. This is the thirteenth cut in three years,
"Nothing could better show the depressed state of the post-bubble US economy", states the Financial Times. "The appetite for still more aggressive policy action reflects the widespread fear of deflation. This is not an unreasonable worry. The world and the US economies are well into their third year of a 'growth recession' - a time when the economy grows well below trend and inflation is already very low, wise people should worry that the US will follow Japan into deflation." (FT, 28/29 June)
With the British economy also in the doldrums, there is increased speculation that the Bank of England will follow suit and cut interest rates in July and August. Gordon Brown's strategy, based on growth of 2-2.5 per cent, is coming apart at the seams. After all, annual growth over the last two years averaged 1.8 per cent, and the prospects are bleak. Recent figures show that Britain's economy is in its worst state since the early 1990s recession. Growth figures have almost ground to a halt in the first three months of this year - a mere 0.1 per cent. The news was "an unambiguous warning that the economic outlook is darkening."
Consumer spending growth slipped to a quarterly growth rate of 0.2 per cent - the weakest for more than five years - as households prune back spending. "It is not a question of being close to the precipice. We are already over it and are desperately trying to claw our way back", stated a leading retailer. The slowdown in the housing market has added to the gloom. The building society Bradford and Bingley saw a 20 per cent drop in its housing transactions, which is certain to dent its first-half profits. Record household debt now stands at 125 per cent of household incomes.
Business investment, which is the only real basis of a sustained recovery in the economy, is at rock bottom. It is 6.1 per cent lower than in the same quarter a year ago. Without the spending on new plant, machines and fixed capital, there is no basis on which the economy can grow. However, with excess capacity, there is little incentive for the capitalists to spend money on increasing it, even if the cost of borrowing is lowered still further. Lower interest rates might not lead to investment but could they prop up consumer spending?
Consumer spending, which has taken up the slack and sustained growth over the last few years, cannot last indefinitely. Six per cent of last year's consumer spending came from equity raised from re-mortgaging homes. "Growth was achieved by encouraging unsustainable rises in consumer expenditure", reports the Financial Times. In fact, it is rapidly slowing down already. And government expenditure, which increased by 2.5 per cent over the previous quarter, failed to offset the effects of the consumer retrenchment.
Boom and bust
Gordon Brown, our master financial wizard, has repeatedly claimed that he has done away with the cycle of 'boom and bust'. But as with all those who suffer from illusions in the capitalist system, they can never see further than the booms of capitalism. They have never understood that the boom and slump cycle is an integral part of the capitalist system, just as inhaling and exhaling is part and parcel of our lives. The long period of boom during the 1990s is turning to bust. The only reason why the boom has lasted so long is that it has been artificially extended by the enormous amounts of credit being pumped into the system. But like all excess bingeing, there will be an almighty hangover.
However, whatever the short-term changes to the British economy, the economic climate looks bleak. Not only is America slowing down but so is Europe. The German economy, the most powerful in Europe, is stagnant and there are predictions of five million unemployed by the winter. The Japanese economy, the second in the world, has been in the grip of a deflationary spiral for the last decade. It is this example that terrifies the serious American economists.
The world economy is hanging by a thread. If the US economy fails, then the world economy will collapse with it. Tinkering with interest rates will not solve the problem of over-production, or excess capacity, that has become endemic. "Working for deflation are the rising excess capacity, the high levels of consumption in GDP, the ongoing financial deficits of the household sector, the high debt burdens of the private sector and the weak demand abroad", states the FT.
Despite this scenario, the Blair government is still full of praise for the market economy. It hopes it can run capitalism better than the Tories. But it will come unstuck, as the economy is dragged down by the world contraction.
Tinkering with capitalism will solve nothing. Crises and the problems workers face are endemic to the system. That was the reason for the labour movement adopting the aim of socialism.
In the words of RH Tawney - and fondly quoted by Neil Kinnock in the distant past - "It is improbable that a third Labour government would be guilty of the same follies as ruined its two predecessors… It must be prepared to live dangerously - it must on no account remain in power merely on sufferance… Either it means a decisive break with the whole policy of capitalist governments, or it means nothing at all."