Capitalist crisis deepens – no recovery in sight as economy heads for depression

Which deserves priority? Financial or humanitarian crisis? Illustration: Carlos LatuffWorld
stock markets continue to plunge as August witnessed the worst sell-off
since the collapse of Lehman Brothers. Many are asking themselves
whether the recent anaemic recovery is at all durable given the massive
global slowdown. Debt markets are in chaos as the cost of borrowing in a
number of eurozone countries continues to escalate. Italy and Spain are
being placed under intolerable pressure as bond yields jump. And all
this despite the intervention of the European Central Bank in buying
Italian and Spanish bonds in a desperate attempt to prevent the crisis
from spreading. In addition, Greek officials failed to reach an
agreement with the IMF and European Union over austerity measures linked
to the second Greek bailout, adding a further twist to the turmoil. RBS
now believes that Greece will default in December, as the cost of debt
has soared to record levels. When this happens, be it in December or
whenever, all bets are off.

This turmoil is taking place in face
of fears that the global economic slowdown will turn into a new slump.
The scramble for safe havens, such as gold and the Swiss franc, has
created renewed fears of a currency war as governments take unilateral
measures to safeguard their economies. The Swiss central bank, in a
shock announcement, said it was pegging its burgeoning currency to the
euro in an attempt to prevent its rise, and give its hard-pressed
exporters a breathing space. The bank was prepared to buy foreign
currencies in “unlimited quantities”, but reigniting fears of “currency
war” style reprisals by other central banks in the process.

However,
this is only the tip of the iceberg. The rest of the world is slowing
down dramatically at a time it should normally be expanding. Many fear a
“Japanisation” of the situation, with the United States already trapped
in a lost decade of low growth.

“The global economic slowdown is hammering factories throughout most major western economies”, explains the business paper CityAM.

“Manufacturing
survey scores declined in all but one of the G7 countries last month,
with factory sectors actually contracting in the UK and the eurozone.

“Manufacturing growth in the UK plummeted to a 26-month low in August, according to the latest purchasing managers’ index (PMI).

“New
export orders suffered the most devastating collapse since May 2009,
with companies reporting weaker demand from the US and the rest of
Europe The British sector had been expanding healthily until early this
year, with analysts hoping it could drive the recovery forwards.

“Yet
since January the index has shed 12 points. The only steeper drop in
its 20-year history was in the aftermath of the Lehman Brothers
collapse.” (2/9/11)

Recent months have witnessed a
steep deterioration in growth of key overseas markets, especially in
Europe and America. Manufacturing declined to a PMI score of 49, down
from 49.4 in July. All scores under 50 signal economic decline.
Manufacturing also contracted in France (49.1) and Italy (47), their
lowest reading for over two years, while the shrinkage was even more
severe in Spain (45.3) and Greece (43.3). In the US and Germany,
manufacturing ground to a halt, slipping to 50.6 and 50.9 respectively.

“The
speed with which the growth has slowed since the start of the year is
really quite alarming,” said Chris Williamson, chief economist at
Markit, which gathers the PMI data.

With the fall in demand,
over-production has reappeared in manufacturing, which reported a rise
in stocks of finished goods. This was the first rise in more than three
years, at the height of the slump. “In August, the rise in stocks
combined with the fall in orders suggests manufacturers will need to cut
production further in the coming months”, stated the Financial Times.

Photo: Melingo WagamamaNew
export orders from the eurozone plummeted at their sharpest rate since
January 2009, while new orders have shrunk for two straight months in
the US, boding ill for the world’s largest economy. The weakness of the
US economy was further illustrated by the slump in sales at Walmart, the
world’s biggest retailer, which posted nine consecutive quarters of
falling sales. In the eurozone, consumer confidence plummeted last month
at the fastest rate for 20 years, to minus 16.6%. This was a larger
monthly fall than was seen in October 2008 after the collapse of Lehman
Brothers. Meanwhile, unemployment in the eurozone has also risen and
stands at officially at 15.7m or 10% of the workforce.

Growth has
practically vanished across the developed world. Annualised growth rates
for gross domestic product, based on the second quarter, were 1.3% for
the US, 0.8% for the eurozone and Britain, 0.5% for Germany, zero for
France, and minus 1.2% for Japan.

“This stagnation looks worse in historical context”, explains the Financial Times.
“A deep recession should be followed by a strong recovery as the labour
and capital that lay fallow during the bad years are put to work. That
is not happening. Four years without economic growth qualify as a sort
of Lesser Depression.” (FT, 17/8/11)

In Britain, August was the
worst month for spending in the High Street in more than two years.
Total sales fell back by 2.2% compared to the same month a year ago, the
worst year-on-year fall since 2009, according to the BDO High Street
Sales Tracker. Orders in construction are at the lowest levels for 30
years. Orders for public housing and other public sector projects fell
by one third between the first and second quarters of 2011.

As a
consequence of the crisis, the Office of Budgetary Responsibility warns
of decades of austerity in Britain. “The problem will take, I think, a
number of years before we will find our way through it,” states Mervyn
King, governor of the Bank of England.

This highlights the real
picture of economic crisis affecting capitalism. All talk of “green
shoots” has completely withered away. Confidence has crashed and is
being replaced by fears of a new slump. Every day seems to herald a new
stage in the European crisis, with European and American capitalism
falling further into the doldrums.

The economic crisis has
produced political crisis as governments attempt to grapple with the
decline. In the United States, the sharp disagreements over the
debt-ceiling have produced a deal requiring escalating budget cuts. This
climate means that further stimulus spending is becoming inconceivable.
This in turn raises the spectre of 1937, when the rush to tackle the
budget deficits plunged the economy back into recession. History is
tending to repeat itself but on a higher level.

Sometimes, the
conclusions of the serious strategists of capital coincide with those of
the Marxists, but from opposite class point of view. We have warned
that capitalism has entered an insoluble crisis following the slump of
2008-9. Now the apologists of capitalism have woken up to this fact.

Recently,
Joseph Stiglitz, the Nobel Prize winner for economics, stated that “A
long malaise now seems like the optimistic scenario.”

More significantly were the comments of Martin Wolf, chief economic strategist at the Financial Times,
who doesn’t mince his words about the crisis. In reply to the question
as to whether there is going to be a double dip recession, he answers no
“because the first one did not end.” He continues, “The question is,
rather, how much deeper and longer this recession or ‘contraction’ might
become. The point is that, by the second quarter of 2011, none of the
six largest high-income economies had surpassed output levels reached
before the crisis hit in 2008. The US and Germany, are close to their
starting points, with France a little way behind. The UK, Italy and
Japan are languishing far behind.”

Wolf goes on to explain that,
“this recession is not normal. When economies suffer such steep
collapses, as they did during the worst of the crisis (the peak to
trough fall on gross domestic product having varied between 3.9% in
France and 9.9% in Japan), an expansion that fails to return output to
the starting point will not feel like a recovery. This is especially
true if unemployment remains high, employment low and spare capacity
elevated. In the US, unemployment is still double its pre-crisis rates.”
He concludes, given that the central banks have used up their
ammunition, “Another downturn now would surely be a disaster.” (FT,
31/8/11)

A few days later, he concentrates his analysis on the
British economy. Again, he makes no bones about the depth of the crisis:
we are in a depression. We quote it at length to give our readers an
accurate picture of what this bourgeois strategist says.

“The
current UK depression will be the longest since at least the first
world war. Without a dramatic surge in growth, it is also quite likely
to generate a bigger cumulative loss of output than the ‘great
depression’. All this is disturbing enough. What is even more disturbing
is the near universal view that almost nothing can be done to change
the prognosis.

“A recession is a period of economic decline (from
the Latin word for ‘retreat’). A depression may be defined as the period
while output is below its initial level. Recently, three researchers
have analysed such UK depressions, using a constructed set of monthly
estimates of gross domestic product. This allows the authors, among them
Martin Weale, now on the Bank of England’s monetary policy committee,
to analyse the size and duration of UK depressions, starting with the
one of 1920-24 and ending with today’s.

“Hitherto, the longest
depressions of the past century were those from June 1979 to June 1983
(under Margaret Thatcher) and from January 1930 to December 1933 (the
great depression). For the present depression to be shorter than its
longest predecessor, it must end not later than April 2012. But output
is close to 4 per cent below its starting point, with eight months to
go. Even if growth now jumped to a 4 per cent annual rate, it would take
another year for it to end. If growth were to be 1.5 per cent a year,
the depression would last 72 months, making it some 50 per cent longer
than its longest predecessor in a century.

“One can assess the
depth of a depression by the steepness of the decline or by the
cumulative losses, relative to the starting point. The depression of
1920-24 was the steepest, followed by the great depression, whose
largest reduction in GDP was 7.1 per cent. But the present depression is
only a little behind, with a fall of 6.5 per cent. The cumulative loss
of GDP is likely to be worse this time even than in the 1930s. It was
17.7 per cent of GDP back then, against 14.5 per cent, this time, so
far. But this depression is not over. If growth were to be 2 per cent a
year, the cumulative loss would be over 18 per cent of GDP. This then is
a huge depression by UK standards.”

In his conclusion, Martin Wolf states:

“The
UK is in the midst of what is set to be the longest – and among the
most costly – of its depressions in over a century. The characteristic
of this depression, compared with its predecessors, is the frightening
weakness of the recovery phase. It is far more plausible that this is
due to weakness in demand than a collapse in potential supply. Yet the
conventional view is that nothing much can be done. Beware such
prophecies of doom. They can so easily become self-fulfilling.” (FT,
2/9/11)

This is an unprecedented situation for
Britain and the world. The crisis of capitalism has in many ways
deepened and become intractable. The description of Wolf is not of a
cyclical crisis, but a structural crisis of capitalism. While there can
be partial recoveries, as in the 1930s, there is an overall decline. The
productive forces, the key to the development of society, were in an
impasse in the 1930s. The same is true today. They are hemmed in by
private ownership and the nation state.

Whatever the capitalists
do they will be wrong. If they cut state spending, they will simply cut
into the market and make the crisis even worse. Whereas if they increase
state spending they will make the budget deficits even bigger and
provoke a deeper sovereign debt crisis. They are in a catch-22
situation. That is why we are not in a normal recovery.

The
endless turmoil on a world scale provides a disturbing background to the
attacks upon the working class in all countries. Capitalism can no
longer afford lasting reforms. Those days have long gone. On the
contrary, this is the era of counter-reforms and vicious austerity. For
working people, capitalism means decades of austerity. Tinkering with
the system provides no solution. Only with the overthrow of capitalism
and the establishment of a socialist planned economy can we put an end
to this nightmare once and for all.