The current economic crisis, which started as a financial
collapse in 2008, has since been transformed into a crisis of sovereign debt.
This is due to governments across the world bailing out the banks. With historically
high deficits, along with massive public debts, Greece and Ireland have been
very much at the forefront of the cuts. Along with Portugal and Spain, these
countries are now considered to be the weakest links in the global economy.
However, with a budget deficit in Britain of 11.5% and a
public debt of 68.1%, the Con-Dem coalition has announced the biggest austerity
programme since the 1920s. The working class is in for the fight of their
lives.
These savage cuts are not just the product of a hatred
towards the public sector. They have arisen from the crisis of capitalism. The
massive sovereign debts of the advanced capitalist countries are the result of
governments converting private debt into public debt, having bailed out the
banks and rescued the system. Worldwide, the cost of this unprecedented
bail-out is estimated to be US$10.8 trillion (£7 trillion). Some estimates have
been as high as US$14 trillion.
In Britain, an eye-watering £1.5 trillion was thrown at the
banks, equating to 94.4% of the Gross Domestic Product (at the time). Much of
this money was for guarantees against banking losses, which have since been
recovered. Into the bargain, the government was forced to nationalize Northern
Rock and the Royal Bank of Scotland. However, the total cost to the taxpayer is
estimated to be £815bn, or £31,000 per household.
Although these banks were formally nationalised, in reality,
the bail-out meant the nationalisation of the debts and the privatization of
the profits; in Britain, ordinary people are being attacked in order to reduce
a budget deficit of £149bn, whilst bankers continue to receive millions in
public subsidies and bonuses.
The Credit Crunch
What was the reason for this financial crisis? When the
crisis broke out in 2008, it was dubbed “The Credit Crunch” and was blamed on
greedy bankers who had taken extreme risks by trading bundled packages of
assets, including the notorious “sub-prime mortgages,” i.e. mortgages sold to
people who didn’t have a reliable source of income to pay them back. As
sub-prime mortgage holders began to default on their loans, people started to
realise that there was a mountain of toxic debt in the financial system. This
spread panic throughout the system, drying up credit and causing a run on the
banks.
Nevertheless, this explanation of the financial crisis still
does not explain the real cause of the current situation. This popular version
of events misses out the crucial question – why were banks taking such
extortionate risks by lending to people who didn’t have an appropriate credit
rating? To answer this question, we must take a look at the role of credit in
the economy.
Under capitalism, credit fulfils two functions. Firstly,
credit plays the role of increasing the money supply in the economy so that any
bottlenecks in production and circulation are overcome. For example, a producer
cannot wait until his goods have been sold before buying new raw materials,
since this would completely disrupt production. To overcome this problem, a
producer will need to borrow short-term credit to buy raw materials and pay
wages, in order that the flow of production may continue without interruptions.
The source of this credit comes from capital markets (for large companies) and
banks, who lend money at interest. In turn, the money in banks comes from
deposits and savings made by individuals and firms, who receive a lower rate of
interest. The difference between these interest rates is the source of profit
for banks. Capital markets, run by finance houses and insurance companies, also
lend money but at more favourable rates of interest.
Surplus Value
In Capital, Marx described the various forms of commodity
circulation, and shows that the intention of the capitalist is to start with
money, M, and transform this into a greater quantity of money, M’. This is done
via the production of surplus value contained in commodities, C, which need to
be sold. This M-C-M’ circulation relies upon the capitalist being able to
dispose of the commodities profitably on the market. To assist this process,
credit allows the market to expand beyond its natural limits; that is, limits
that are constrained by the purchasing power in the economy. If the market were
restricted to the effective demand of consumers, i.e. the ability and
willingness to buy goods and services, this alone would not be able to mop up
the total output. This contradiction is overcome by the capitalists reinvesting
the surplus value extracted from the labour of the working class. Profit is
nothing more than the unpaid labour of the working class.
This investment nevertheless leads to greater and greater
productive capacity. Sooner or later, the market becomes too narrow for the
continuous outpouring of commodities. The capitalist system faces a crisis of
over-production. This is what happened in 2008.
The capitalists attempted to delay this crisis by creating
the greatest credit bubble in history. At bottom, the restricted consumption of
the masses prepares the way for crisis under capitalism. The market is
therefore restricted by the amount of money that people have in their pockets
to spend on goods and services, as well as the excess capacity that has built
up throughout the economy. Today, the world is awash with excess capacity. The
market is saturated and the capitalists have had to cut back on production.
Their attempt to overcome the crisis by credit has reached its limits. The productive forces have outgrown the
limits of the capitalist system.
Recent figures illustrate how far credit was used to put off
the crisis. A recent report on debt in The Economist stated that, “average
total debt (private and public sector combined) in ten mature economies rose
from 200% of GDP in 1995 to 300% in 2008. There were even more startling rises
in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700%
respectively” (26th July 2010). In relation to consumer credit, The Economist
reports that:
“At the end of the Second World War in 1945, consumer credit
in America totalled just under $5.7 billion; ten years later it had already
grown to nearly $43 billion and the party was just getting started. It reached
$100 billion in 1966, $500 billion in 1984 and $1 trillion in 1994, or around
$4,000 for every man, woman and child. The peak, so far, was almost $2.6
trillion in July 2008. Household debt approached 100% of GDP in 2007, a level
seen only once before, rather ominously in 1929. America was not alone in
embarking on a debt spree. In Britain, household debt rose from 105% of
disposable income in 2000 to 160% in 2008” (ibid).
This huge expansion of credit was made possible by banks and
governments encouraging people to take out cheap loans, mortgages, and credit
cards; hence the growth of “sub-prime mortgages”. However, this debt-fuelled
party could not last forever. In the United States in 2006, people started to
default on their loans. Consumer demand dropped. Producers could no longer find
any consumers to sell their commodities to, and capitalism was faced with a
classic crisis of over-production.
Profit
Capitalism only produces in order to make profit. However,
profit can only be realised in the act of selling. When commodities cannot be
sold, the M-C-M’ circulation is broken and the flow of money is stopped. It can
be seen, therefore, that far from “The Credit Crunch” causing the crisis, it
was the crisis that caused the lack of credit.
This understanding of the current economic crisis shows that
it was not an accident but was due to the underlying contradictions that are
inherent within the capitalist mode of production and exchange.
The idea of governments running a deficit and accumulating
sovereign debt is not unique to the current period. Even at its lowest point in
the last 30 years, the UK debt was 26% of GDP, and before the current crisis,
in September 2007, the UK debt stood at 36% of GDP. The government regularly
borrows money to make up the deficit between public spending and money received
from various sources of tax. In fact, the British government has only recorded
a budget surplus in six of the last 36 years, generally overspending by between
2% and 5% of GDP
Governments raise money for their deficit by auctioning
government bonds, or “gilts.” The government pays interest on these bonds every
six months, up to the “maturity date,” at which time the full value must be
paid back. The majority of British debt bonds have a maturity of 15 years, and
currently the government pays £42bn per year in interest payments, making
interest payments the fourth biggest source of public spending after benefits
and pensions, health, and education.
At its peak, Greece was charged 40% interest on its gilts as
the lenders (i.e. speculators) began to get worried about the possibility of
sovereign default, as happened in Iceland in late 2008. Demands were made for
public spending to be dramatically cut, and the EU and IMF came in, as
representatives of the ruling class, to outline the austerity measures that
were to be imposed. Similar demands are being made of Britain. The Con-Dem
coalition, which represents finance capital, is now embarking on a merciless
austerity package to slash public spending.
So who actually buys these gilts? Who owns the debts? Who do
we owe money to? The UK Debt Management Office breaks the ownership of UK debt
down as follows:
39.8% – Insurance companies and pension funds
35.1% – Overseas investors
17.8% – Other financial institutions
2.9% –
Households
2.9% – Banks
1.5% – Others
Speculators
We can see, therefore, that the overwhelming majority of the
public debt in Britain is owned by financial speculators (insurance companies,
overseas investors, and “other financial institutions”, e.g. hedge funds, etc.)
who are looking to make a profit out of Britain’s debt crisis – a crisis that
was created by bailing out the very same bankers and speculators in the first
place! It does not matter that only 35.1% of this debt is owned by foreign
investors – British-based speculators are still just as ruthless and will still
demand their pound of flesh.
To eliminate this debt at a single stroke, a socialist
government would simply nationalise the financial institutions, insurance
companies, and banks that own the public debt, with compensation only being
paid on the basis of proven need (e.g. to compensate ordinary people and
households for their savings and pension funds, but not the fat cats). The
government could default on the remaining debt owned by foreign speculators.
Nationalisation of the banks and other financial
institutions under democratic workers’ control would allow for the wealth of
society to be invested efficiently and effectively. If combined with
nationalised, democratically run industry, it would enable production to be
rationally planned for the needs of people. Money flows could be controlled and
the country would no longer be held to ransom by big business sharks and
speculators – at home and abroad. An appeal would then be made to workers in
other countries to follow suit, laying the basis for a Socialist Federation of
European States, as a stepping stone to a Socialist World Federation.
Of course, the ruling class in Britain and internationally
has a very different solution to public debt: draconian cuts. The programme of
austerity in Britain (following on from Greece and Ireland) is seen as an
example for the ruling class internationally. If the coalition can carry out
such brutal attacks on the British working class, then governments elsewhere
will have no qualms about carrying out equally severe cuts.
The Economist – usually a reliable mouthpiece for the ruling
class – described the Con-Dem coalition as a “radical force” and described
Cameron as “the unlikely revolutionary” (12th August 2010).
Warnings
Concerns have, however, even been voiced from some sections
about the extent of the Con-Dem’s austerity measures. A senior police chief
warned that if the government carried out their plans to reduce front-line
police numbers by 40,000, the remaining police would not be able to “deal with
likely social unrest and industrial action stemming from the cuts” (Evening
Standard, 14th September 2010).
Meanwhile, military chiefs are warning that cuts to defence spending
will make it impossible for the army to fight in Afghanistan, indicating
potential fault-lines of future splits within the ruling class.
Keynesian economists, such as Paul Krugman (a former Nobel
Prize winner for Economics), warn that the effect of such deep cuts will be to
reduce demand and usher in a “double-dip” recession. They are correct; the cuts
will exacerbate excess capacity and over-production. However, the Keynesian
solution of increasing government expenditure is also not viable. Continuing
government stimulus to maintain the economy would just inflate public debt,
driving up interest rates on the debt and would end up pushing national
economies further towards default.
The Keynesians often respond by pointing out that
governments have had much larger debts in the past. This is true; the UK’s
public debt was above 100% of GDP for most of the inter-war period, and peaked
at over 250% after WWII. However, the reduction of the national debt after the
Second World War was achieved on the basis of huge economic growth, which in
turn was only possible due to the destruction of capital during the war and a
massive expansion of world trade, Marshall aid, and investment in the
profitable new technologies that had developed as a result of wartime research
and development.
Fears
None of the above conditions exist at the present time. The
prospect for most of the advanced capitalist countries is for a long period of
slow growth, stagnation, or even a “double-dip” recession. The supposed “green
shoots of recovery” are hard to see, as unemployment continues to rise and
public services are slashed.
There are also worries about the American economy, which
accounts for approximately 25% of world GDP, with The Economist stating that:
“Americans are not optimistic. Official statistics say that
the economy has been growing for nearly 15 months, but so sluggishly that most
people seem to think it is still in recession. For a few months it looked as if
the economy might even shrink again, as growth slowed to a mere 1.6% (at an
annualised rate) in the second quarter, job creation almost stopped and home
sales plunged” (16th September 2010).
Whilst there are enormous contradictions facing capitalism,
it should be pointed out that, as Lenin often said, there is no such thing as a
“final crisis of capitalism”. The ruling class can always find a way out of a
crisis, but only at the expense of the working class.
In reality, there is no fundamental difference between the
right-wing of the Labour Party and the Con-Dem coalition, insisting that the
cuts are necessary but spread over a longer period.
The reasoning given by advocates of the “lower and slower”
plan is essentially another Keynesian viewpoint, to prevent plunging the
economy back into recession. But, as we have already pointed out, the size and
speed of the cuts is dictated by the ruling class (both from Britain and
internationally), and not by the whims of politicians. They are dictated by the
interests of capitalism in the shape of the EU and the IMF.
Had Gordon Brown won the general election in May, we would
likely be seeing little difference now in terms of the planned cuts.
On the other hand, many honest left-wingers, both within the
trade unions and the Labour Party, support Keynesian “alternatives” to the
programme of Coalition austerity. They argue that the working class did not
cause the crisis, therefore they should not pay for it. This is absolutely
correct. They argue however that the £149bn deficit can be plugged by taxing
the rich and cutting spending elsewhere. They explain:
- £25bn
is lost through tax avoidance, in which the rich find legal loopholes in
order to avoid taxes. - £70bn
is lost through tax evasion, where the rich just don’t declare certain
income. - Replacing
Trident (nuclear missile submarines) will cost between £15bn-20bn. - The
UK budget for defence spending is currently £37bn per year.
Measures
Their proposals, therefore, are to eliminate tax evasion and
avoidance, scrap Trident, and reduce “defence” spending. Adding up the money
from these measures results in a potential £152bn that could be raised – £3bn
more than the deficit! Along with a higher rate of income tax for those on high
incomes, a tax on financial transactions (also known as the “Tobin tax” or
“Robin Hood tax”) and greater corporation tax, it seems that we should have no
problem in finding ways to plug the deficit. What could be easier?
Of course all socialists would support these measures. However, such measures, to chase up
every penny of the £95bn that is lost through tax evasion and avoidance for
instance, would face the wrath of the ruling class, who would attempt to
sabotage them at every turn.
The only way they could be carried out would be by a
government that was prepared to take ruthless action against big business and
mobilise the working class to help carry it through. If that was the case, then
why stop there? Why not go the whole hog and take over the commanding heights
of the economy? This is not a secondary question. The measures to tax the rich
will result in a strike of capital. They will cause a panic in the stock market
and bond markets in order to bring the government to its knees.
If a determined government was going to stand up for the
working class then it would need to take the economic power out of the hands of
the ruling class. This can only be done by introducing bold socialist measures
to take over the banks, finance houses and giant monopolies that have a
stranglehold over the economy.
We are in favour of building a mass movement against the
cuts. This must include mass demonstrations and national industrial action.
However, even this will not be enough as can be seen from Greece and the series
of mass mobilisations, public sector strikes and general strikes in the last
year. The Labour movement must be armed with a real programme to answer the
crisis by taking over the banks and industry. In short, the working class must
put an end to capitalism and the misery it creates.
Contradictions
The left-reformists who put forward a Keynesian
“alternative” are trying to seek a “solution” within the limits of capitalism.
But there is no solution on a capitalist basis. The crisis of capitalism is due
to the contradictions of capitalism. The productive forces have outgrown the
nation state and private property. The whole system is in an impasse.
A mass movement must not only challenge the Con-Dem
government but must challenge the system itself. Open the books! Let ordinary
people see how much of their money is wasted on outsourcing services to private
companies and on fees for management consultants! Let workers see how much
profit the giant monopolies make! Let us see how many millions are spent on
bankers’ bonuses! If the books are opened, then we can really see the
rottenness of capitalism. Drastic times call for drastic solutions.
Under the current conditions, the demand should be for the
trade unions to call for a public sector strike, followed by a 24-hour general
strike. After the long period of low activity in the class struggle in Britain,
a day-long general strike would act as a demonstration of strength and can help
to give the working class a sense of their power, thus raising consciousness.
The fight for socialism will require a mass movement of the working
class. On the basis of historic events, workers will become conscious of the
need to change society. The stormy period we have entered will shake society
from top to bottom. The mass organisations will be transformed and
re-transformed.
The ideas of genuine Marxism will find an increasing echo
within the workers’ organisations. Workers will learn on the basis of their own
experiences that the attempts to reform capitalism are no longer possible. The
consciousness of the masses will be shaped by the hammer blow of events.
On
this basis a mass revolutionary tendency will be formed that is prepared to
undertake the task posed by history: a fundamental transformation of society,
the overthrow of capitalism, and the establishment of socialism. There is no
alternative.
