As the bombs rained down on Afghanistan and political leaders in Washington closed down the Senate because of scares about anthrax, the Organisation for Economic Cooperation and Development (OECD), the body representing the world's richest 30 countries, predicted that this year economic growth would be as low as 1% and would be only 1.2% next year. At the same time, capitalist economists forecast that global economic growth this year and next would be the worst for 30 years. The great economic recession of the early 21st century is under way.
Given that the OECD and other capitalist forecasters have always been late in predicting downturns and are always far too optimistic, we can only assume that it's going to be even worse than they now predict. Only last May, the OECD was predicting near 3% growth for 2002.
This capitalist slump means even more hell for the world's poor. The World Bank notes that the downturn in growth is likely to push thousands of very poor people over the brink. As many as 40,000 children under the age of 5 will die, it estimates.
It is the powerhouse of capitalist prosperity in the 1990s, the US, which is leading the world into recession, and probably even long-term depression. America's job losses in September were up 77% over August and are now four times the level of a year ago. Recession is a "done deal", as the chief economist of the IMF put it. Warren Buffett, the billionaire US investor, predicts that it will be like winter... longer and deeper than most people can imagine.
What is the cause of this calamity? The single most important feature of economic development in the US over the past few years has been the steep drop in profits. Profitability started to fall at the pinnacle of the economic boom in 1997. Profits as a share of business turnover in America reached 13% in 1997. Now it is down to 8%. Now, not just the profit per unit of investment is falling, but the mass of profits too. Indeed, the latest figures for the third-quarter of this year show US company profits falling 25% from this time last year.
It's the downturn's one key cause. Everything else - the protracted plunge of stock prices, the savage cuts in business capital spending and the shrinkage of consumer income growth - is but a consequence of the profit carnage.
The great hi-tech revolution of the 1990s, that supposedly created a New Economy incapable of developing boom and bust cycles as in the past, has been exposed as a fraud. In a startling new report, the management consultants, McKinsey, found that the great economic boom of 1995-2000 did lead to a shift up in US productivity growth, but that new technology played a minor role in achieving that. Nearly all the post-1995 jump in productivity was in just six sectors - retail, wholesale, securities, telecoms, semiconductors and industrial machinery and equipment (mainly computers), representing about 31% of the non-farm private sector economy. In these six sectors, a number of factors contributed to the improvement - of which information technology was just one. In most sectors of the economy large increases in IT investment did not produce any improvement in productivity. 53 sectors, representing 69% of the economy, contributed just 0.3% productivity growth. Yet these 53 sectors accounted for 62% of the acceleration in IT spending. Many of them actually experienced productivity deceleration!
As Marx would have explained, under capitalism, new technology may boost the productivity of labour, but it does not necessarily lead to increased profitability for all who invest in the capitalist market. Sure, those who use it first gain an advantage. But once everybody gets into the game, competition drives down prices and squeezes profits. And worse, everybody starts investing huge amounts of capital because they have to compete. The combination of innovations and massive over-investment leads to excessive borrowing and excess capacity. Profitability starts to fall. Share prices fall and companies cut back investment. As sales slow, competition drives prices down, which in turn pushes profits down even more. The boom turns to slump.
The great recession of 2001 onwards is a product of the desperate efforts of capitalists and their banks to keep the boom going even though profitability was falling. That has produced a huge credit bubble that is now bursting. Indeed, there are four bubbles. The first was hi-tech investment in dot.com and internet companies. That has well and truly burst.
The second was the collapse of the stock market that financed all those internet start-up companies. Share prices around the world are now down 30-60% from their peaks in March 2000. But there's more to come.
The third bubble is still expanding: namely, the property market. American and British households, in particular, having had their fingers badly burnt by investing in the stock market continue to push cash and borrow more to buy bricks and mortar - the safe investment. That bubble has still to burst.
And further down the road is the bubble of paper currencies, in particular, the dollar. The dollar reigns supreme still. But its days are numbered. Once it collapses, the world will spiral into deeper depression.
This unsettling new environment guarantees that we are about to experience more than an economic slowdown, more than a mere recession. We are about to witness the deepest stock market crash and depression since the 1930s. Please don't misunderstand: Things will not fall straight down. The most powerful institutions and central banks in the world will do everything in their power to prop up their economies and stimulate temporary stock market rallies.
But there is one big difference between this bust and previous busts of capitalism in the last 100 years. In the 19th century capitalism had agriculture as its dominant sector, with movements in farm prices being key to boom and slump. During most of the 20th century, it was manufacturing that was the engine of capitalist expansion. But now, capitalism has exhausted its productive capabilities. It depends on financial markets and transactions for its health. As I've argued before in this column, never before in the history of capitalism have stock markets been more important.
Take the US. When the crash of 1929 began, the value of shares in the US stock market had reached 81% of annual production. In March 2000, the peak for share prices, the US stock market was valued at 183% of annual output - truly a massive bubble, wildly overvaluing the productive potential of capitalist production. Today it is still valued at 130% of GDP, or nearly three times the average of the last 75 years.
In 1975, the technology sector accounted for 10% of all capitalist profits in the US, while financial services generated 5%. Now the financial sector generates 25%, while technology's share is unchanged. Corporate America is no longer General Motors but more like the Bank of America. Increasingly, US companies have made their profits not from making things or even providing services, but from investing in other companies and hoping their share prices rise.
Of course, this is impossible indefinitely. Even worse, once share prices start falling, because of the huge modern role of the stock market, so do the profits of companies. Then the whole world starts to spiral down.
The American consumer has been living in an increasingly smaller and more lonely world, shielded from reality by credit cards, home equity loans, a couple of SUVs, and the nearest shopping malls. Until late August, consumers were still spending freely despite the bad economic news. Home sales were holding firm. Retail sales were still okay. But all that ended when the Twin Towers collapsed. The thin thread of consumer confidence was cut, irreversibly and irretrievably severed. Everywhere in America today, consumer confidence is gone.
Above all, most Americans have no cash. In the past, whenever they needed cash, they just grabbed the nearest credit card or took out still another loan on their home. No more. Indeed, defaults on debt are at a 29-year high. One out of 10 mortgage loans have late payments. Providian, the fifth largest credit card issuer in the US, announced that more and more people are defaulting. Even though GM and Ford are offering zero-percent financing for new cars, the dealers are getting no takers.
And don't forget the mass selling still coming in the stock market. In September, the average American stock market punter withdrew a record $32bn from their investments. Many investors called their brokers to sell. They didn't want to seem "unpatriotic." So they mumbled sheepishly that they were doing it "only because they had to". This is just the beginning of the forced liquidations in the stock market to raise desperately needed cash.
America's 10 largest great corporations, before the Crash of 1929, used to keep as much as $2 in cash on hand for every dollar of current liabilities (bills and debts coming due within 12 months). Now many of those same companies are down to a dime on the dollar.
Burning through cash
US corporations are quickly burning through cash. Nervous lenders have already cut back sharply on lending to upstart companies and those with heavy debt loads. Companies are sinking in their own debt.
The leading airlines in America were equally cashless. They were estimating losses of $2.5 billion for the year before the September 11 tragedy. Now, they say their losses in 2001 will be many times larger. They asked Mr. Bush and Congress for close to $25 billion; they're getting "only" $15 billion. But giving them money is like throwing salt into the sea. Even after 115,000 layoffs and even after flight bookings begin to pick up, they'll still be running way below capacity. The $15 billion will be gone like a puff of smoke.
But don't panic, says the US government and Chairman Greenspan of the US Federal Reserve. Help is at hand. The government plans to spend hugely on arms and on tax cuts, while Mr Greenspan continues to cut interest rates to all-time lows.
After 1929, the Fed cut interest rates rapidly from 6% to 2% by early 1930. Greenspan has been pushing on a string too. Rates have been cut from 6.5% to 2.5%, with results comparable to those of 1929. The bottom line throughout 300 years of capitalism is that economic expansion, no matter how handled, is, at the end of the day, like a balloon. When production has filled warehouses with unsold goods, when credit is at its limit, when the consumer is mired in debt, when big media advertising can no longer con or beat the consumer into spending more money, and the most ambitious marketing plans (at home and abroad) have gone awry, the balloon bursts or is rapidly deflated. Usually, the greater the expansion, the more severe the contraction.
President Franklin Roosevelt's WPA and deficit financing policies proved in the end to be just as futile. In 1940, the economy was still in depression. Only Pearl Harbor saved the economic day with the need for massive war production.
Many hope for a repeat of Pearl Harbor on the economy. Those who urged Japan to build bridges to stimulate its economy seem to believe that destroying bridges will be just as good. And where once they looked with pride on a budget surplus, they now cast their eyes appreciatively upon deficits and an open Congressional cheque book. If the taxpayers won't spend their own money, they reason, government will spend it for them. And those who never saw an economic downturn approaching now see it going away, thanks to the stimulus provided by the Fed and Congress.
But this time such is the size of the bubbles created by capitalism in the last ten years, the bursting is going to last a long time. Nature, in her magisterial simplicity, suggests the next phase: the huge wave will be followed by a huge trough.