As we go into 2009, world capitalism is experiencing its
worst economic crisis since the 1930s. In some ways it may even be worse than that because, this time, every
country in the world is affected. In the
1930s, many very poor countries not closely integrated into world markets did
not feel the sharp collapse of the capitalist system that was dominant in
Europe, North America and Japan. But
since the Second World War, and particularly in the last 25 years,
‘globalisation’ has brought India, China, Latin America, nearly all Asia and
much of Africa fully into the capitalist nexus.
So no country can escape the terrible slump that world capitalism
entered in the latter part of 2008 and will continue to grind down through this
year.
Another feature of this slump that may make as bad if not
worse than the 1930s is that it has happened so quickly. Only a few months ago, capitalist commentators
were telling us that, sure there was an economic slowdown, but it would
probably be shortlived and mild, as it was in 2001. Indeed, central banks like the Bank of
England and the European Central Bank were still convinced that it was not a slump
in the economy that they had to worry about, but inflation. If there was a crisis, it was mainly
restricted to the banking system and to the US with its housing mess. So they were unwilling to consider cutting
interest rates.
But in October, how things changed. The economies of the US, the UK, continental
Europe and Japan fell straight off a cliff.
And they have been quickly followed by the Asian tigers, China and India;
and also by the great agricultural and energy exporters of Brazil and Argentina,
Russia and Ukraine.
Now every week brings yet more awful data in the state of
these economies. Most commentators now
expect the US economy to contract absolutely by 1-2% in 2009, by nearly 2% in
the UK and over 1% in Europe and Japan.
China and India, which had been growing at around 9-10% a year up to
2007, are now expected to manage only half that rate this year – not enough to
stop a significant rise in unemployment in those teeming countries. Indeed, the UN estimates that the number of
unemployed of working age in the world will reach a new record of 200m in 2009.
It is no accident that the major advanced capitalist
economies that are suffering the most are just those that have ‘expanded’
mainly on the basis of finance capital (banking, insurance, hedge funds, stock
broking etc) and non-productive sectors or services (like real estate, legal
services, media, marketing etc).
They are also the countries where politicians, whether
Conservative or Labour, claimed that manufacturing was not the centre of growth
any more and the fat cats of Wall Street or the City of London were what
mattered. Moreover, it was vital that
these very important sectors of the modern capitalist economy were not
interfered with petty regulations, supervision or unnecessary taxes, so that
‘free market’ forces could flow in these monopoly banks and financial
institutions. The best policy was ‘do
not touch and let greed operate’.
Well, greed certainly has operated. The grotesque billions made by the management
tycoons of the big banks and investment houses make the pay of professional
footballers or baseball players look like chicken feed. Chuck Prince of Merrill Lynch admitted to the
US Congress that in just eight years he had made $800m in personal pay, let
alone the extras from stocks he owned.
He held a birthday party for his daughter that cost $10m and had golden
fountains built in the birthday venue.
And with greed came corruption, fraud and embezzlement. Just before Xmas, it was revealed that a Mr
Madoff, who ran a $17bn investment fund for decades that involved hundreds of
very important, famous and so-called ‘clever’ people, had faked all his
accounts. He had paid his investors not
from making money on his investments, but by raising yet more money from new
investors in a classic example of what is called a Ponzi scheme or pyramid
selling scheme. It all came tumbling
down when the credit crunch came and he could not find enough new investors or
credit to pay off his existing investors who wanted their money back. Madoff was ‘highly respected’ in Wall Street
and was a ‘great philanthropist’, the epitome of a successful finance
capitalist. The regulators were happy
with him and his word was never questioned.
But he was a crook.
Well, the chickens have come home to roost in these
economies where 10-20% of annual output depends on banks, investment houses,
insurance brokers, lawyers, estate agents and advertising agencies. The US and the UK, proudly held up by their
political leaders and economic experts as models for the rest of the world to
follow, have been shown to have feet of clay, which have now crumbled to
dust.
All this makes a sorry joke of the statements of George Bush
that America is the richest place in the world and the ‘fundamentals’ of the US
economy are ‘sound’. That is exactly
what those in power said in 1930. It is
also a cruel irony that UK PM Gordon Brown should say that Britain is the ‘best
placed’ of all the major capitalist economies to weather the economic storm.
On the contrary, it is in these ‘Anglo-Saxon’ economies that
the biggest drops in output are being recorded.
In the US, the UK, Ireland and others, house prices have plummeted more
and are still falling; unemployment is rising fastest (550,000 jobs lost in one
month in the US in November!); manufacturing is falling the most along with, of
course, banking and financial services.
In the US, the big three auto makers are basically bust, threatening to
put nearly 3m workers out onto the street – just as happened in Detroit in the
1930s. Only this time, the jobs may
never come back. The same thing is about
to hit the British auto industry (even though it has not been owned by British
capitalists since the 1980s).
The US auto industry has now stockpiled four months of
vehicles in its car parks and is losing $2bn a month. The UK auto firms will
stop production and put 30,000 workers on the dole within a matter of weeks
after Xmas unless somebody bails them out. And that is what the US and UK
governments are doing with taxpayers’ money. (But not by taking them into public
ownership, of course.)
So, although these economies have been dominated by finance
capital in the last 25 years in particular, the collapse of that sector is now
destroying the productive sectors of these economies as well. Jobs will be lost in the financial sector,
but also in the relatively small manufacturing sector too and in the big
employing retail and service sectors (high street shops like Woolworths, cafes,
restaurants, and a host of small ancillary services like building,
do-it-yourself, transport etc).
The head of Barclays Bank in the UK now forecasts that the
British economy will dive between 2-4% this year, unemployment will go from 1m
to nearly 3m and house prices will drop another 15% from the 15% they are
already fell in 2008. In the fourth quarter of 2008, UK manufacturing is now
falling at the same rate as in the 1980-2 slump.
As the banks went bust and had to be bailed out, they
stopped lending. This has led to a
catastrophic situation for many small businesses that rely on bank credit. In the US, Republic Windows and Doors had
their credit line cut off by Bank America, which had just been bailed out by
the US taxpayer and taken over by the rapacious JP Morgan Chase Bank. At Republic, 240 employees faced being put on
the street, so they occupied the factory in Chicago, home town of the president-elect
Barack Obama, when the firm’s management refused to pay any severance pay. Earning just $30,000 a year, barely enough to
pay for a banker’s annual holiday outlays or feed the kids, the workers had had
a enough. As one put it: “we have
nothing to lose”. Bank America was
forced to come up with a quick loan to pay off the workers – a small victory in
a sea of despair that is sweeping across heartland America.
Workers in the financial sector will lose their jobs too –
not the big wheels but the hundreds of thousands who staff the bank counters,
make the settlements, fix the computer problems, look after security etc. But spare a moment for the financial fat cats
too. Goldman Sachs is the most famous of
the big US investment houses (most of which have now been devoured by the slump). It has avoided the worst of the crisis. But even GS has recorded losses for the first
time in its history. It has about 300
managing directors out of a workforce of 30,000. I heard of the terrible story of one of these
MDs who arrived from America to London recently: “how was the flight?” he was
asked. “Terrible” was the reply, “we had
to fly economy or coach class, with the unwashed – it was awful” to save
money. Such are terrible ignomies that
the fat cats are experiencing in these days of economising!
This capitalist crisis will make American and British
capital suffer the most, along with their working classes. This has made some
politicians cocky in countries where finance capital is not so dominant and
where taking bankers loans or getting huge mortgages to buy real estate is not
the culture. German and French politicians have looked smugly at the failure of
finance capitalism in Britain and America.
They have railed at Anglo-Saxon capitalism compared to the ‘mixed
economy’ that they support. But the
smirks will be wiped off the faces of Merkel, Sarkozy, etc in the months to
come. German and French capitalism are
heading down the spout just as much as British and American capital.
German industrial output fell at nearly a 4% rate in October
and probably finished the year dropping faster than in the 1991 recession. German manufacturing is joining the
Anglo-Saxon financial economies in the slump. It is the same for Japan, that
other major economic power that depends on manufacturing rather than finance
for its health. In the last quarter of
2008, Japanese manufacturing actiivity dropped more than it has done in 34
years.
And the world’s great manufacturing powerhouse, China, is
also being hit. Exports fell for the
first time ever in November. Sure, China’s economy is still comparatively heavily
planned (even if mismanaged by a dictatorship) and will be able to avoid a
major economic slump, in the sense of an absolute fall in production. But even so, its increased exposure to global
capitalism makes it much more liable to economic downturn than in previous
capitalist slumps.
That other great rising economic power, India, is also
taking collateral damage from the slump in the advanced capitalist economies. Its
growth has been founded on foreign capital investment in the Indian stock
market and privatisation and ‘deregulation’ of the Indian industries. That
exposes it to a sharper downturn than for China.
How long and how deep will the global economic slump
be? All the evidence suggests that it
will be deeper than any capitalist slump since the 1930s. The main reason is because some of the key trends
in the motion of capitalism are coming together as they have seldom done
before.
The most important law of motion of capitalism is the one
that Marx identified: the tendency of the rate of profit to fall. That law is
now operating in its downward phase that generally lasts 16-18 years. The rate
of profit in the major G7 economies peaked in 1997: it fell sharply to 2001 and
then recovered up to 2007. Now it is
falling quickly. We probably won’t see a final bottom until 2015, even if there
is some recovery in between.
At the same time, capitalist construction is also in a sheer
fall. House prices and commercial rents peaked in 2007 and have plummeted since
in most advanced economies. The US is now experiencing the lowest construction
starts for 50 years. And the stock market is also in its downward phase, or
what the financial ‘experts’ call a bear market. Bear markets can last up to 18 years and
usually start a few years after the Marxist profit cycle enters its downward
phase. The current bear market started in 2000 and so has some way to go yet
(although it will be interspersed with rallies that last a few years like
2003-07).
The stock market matters to many workers in the advanced
economies because so much of their retirement pension funds are now invested in
stocks by the pension fund experts. Some observers of the market reckon that,
although share prices were down 40% in 2008, they have further to fall and,
even if there is a rally from 2010 to 2013, they will go down further before
the crisis is over. Already many workers’ retirement savings are down 30% in
value, with more to come.
But there is another important capitalist sector that in its
downward phase: the prices of commodities. This follows an even longer cycle
than the Marxist profit trend – of about 32-36 years upwards and 32-36 years
downwards. It has been in its downward
phase since 1982 and so will not bottom until 2014-18.
All these trends of capitalist development are now in their
downward phase – something not experienced since the 1930s. It means that the capitalist slump may take
the form of a deflationary depression. There may be a brief recovery from 2010
to 2013, as there was between 1933-36, before the capitalist economy slips back
into a depression as it did in 1937.
Then only world war took enabled recovery as overcapacity was destroyed
and economies were put on a semi-planned war footing.
Some capitalist commentators like to think that the Great
Depression of the 1930s was finally overcome by Keynesian policies of cheap
credit and public spending programmes under the Roosevelt administration in the
US. But the reality was that Roosevelt
did not even adopt Keynesian policies when he came into office in 1932 – the
brief economic recovery that took place between 1933-36 happened without
Keynesian measures. When they were
applied from about 1935 onwards, they did not stop the renewed slump of 1937-8.
So the current Keynesian policies of zero interest rates,
tax cuts and spending programmes being applied by Obama in the US and European
governments will have little or no effect.
We can expect another slump some time around 2014 after this one comes to
an end.
