Richard Brenner
The leaders of the world’s biggest economies met at the G20 summit and declared that the world economy was improving. Richard Brenner analyses the evidence for their claims
The newspapers are filled with talk of economic recovery. But at the same time economists, bankers and politicians are gripped with uncertainty. Are we heading for an upturn that will bring back jobs, boost profits, and restore the prestige of the capitalist system? Or will the recovery be weak and racked with instability?
On the one hand facts and figures are coming through showing that the industrial cycle is nearing the bottom and that an upturn is on the horizon. Yet at the same time a wide range of indicators suggest that the recovery will be slow and sluggish, with strong risks both of inflation and even of a collapse into a second downturn (what they call or “double dip”or “W” shaped recession.) So who is right, and what is going to happen?
Signs of stabilisation?
There is no doubt that capitalists are drawing confidence from the signs of stabilisation that have been seen in the system since April this year. In March 2009, figures showed that the world had entered the most synchronised global downturn since the 1930s at least, with huge economic contractions in every major country. But since then, between April and July, capitalists saw the value of their stocks and shares recover sharply (though they have started falling again over the past four weeks). In the first three months of 2009 monthly job losses averaged 691,000. But by August “only” 298,000 people lost their jobs in the private sector (the lowest figure for nearly a year), and this followed July when “just” 360,000 were thrown out of work so far this year.
So while unemployment in the US continues to rise, drawing ever closer to 10 per cent of the workforce, the speed at which jobs are being lost is slowing. Good news for bosses trying to attract investment by pointing to better times ahead – not so good for the million people who lost their livelihood since June, or the four and a half million Americans thrown out of their jobs this year.
In the housing market, price falls have levelled off in the USA and prices in the UK have shown signs of rising again. The National Association of Realtors reported that pending US home sales surged by 12 per cent in July when compared to July 2008, and 3.2 per cent compared to June. In the UK there was a similar picture; in July mortgage approvals rose 7.8 per cent compared to June, a 17-month high.
It’s not only the USA where the pace of decline is slowing and glimmers of recovery can be seen. Pro-capitalist newspapers announced triumphantly that France, Germany and Japan had all “come out of recession” this summer, as each recorded two successive months of overall growth in their Gross Domestic Product. And in China, where soaraway economic growth of 11-12 per cent in 2006 and 2007 declined sharply last year as more than 20 million workers were sacked under the impact of the global recession, GDP growth is estimated to return this month to the 8 per cent level needed to keep pace with population growth.
Crisis continues
Given these signs of recovery, why are the capitalists so nervous about the prospects for their system returning to sustainable growth and profitability? The answer is that the effects of the great financial crisis are far from over and threaten to drag the recovery down.
The global credit crunch paralysed lending from banks to companies. Although credit lines have recovered slightly since the financial heart attack of 2007-8, whole swathes of credit products and complex derivatives have disappeared and are unlikely to return. Despite governments handing vast sums to insolvent banks in last year’s historically unprecedented trillion dollar bailout schemes, banks are still not lending to businesses. Why? Because those businesses are showing very low rates of profitability so the banks don’t think they can rely on them to pay back loans.
That is why, despite the Institute of Chartered Accountants’ August report claiming the recession in the UK is “at an end”, in fact UK business spending is at its lowest for 43 years. With a famine of bank lending to companies, the companies slashed their own spending at the fastest rate since 1966 warned Home Office figures in August. David Kern, chief economist of the British Chamber of Commerce, told the BBC that the sharp fall in investment means the country will “lack the necessary capital stock to sustain a recovery”.
With companies cutting spending and going bust, joblessness looks set to carry on growing for some time. In the US official unemployment rates may be below 10 per cent but George Magnus, chief economist of Swiss bank UBS, explains that “discouraged workers and those forced to accept part-time work continued to rise to 10 percent and 16.5 per cent” reflecting what he calls “hidden unemployment and under-employment”. And of course, with fewer people having cash to spend, sales of food and other consumer goods will decline, having a further negative knock on effect on the economy, leading to a further spiral of stagnation.
Even in Japan, the world’s second biggest economy which was reported to have come out of recession with growth of 0.8 per cent, unemployment has now reached 5.7 percent with a million more workers out of work since this time last year.
State debt soars
Another critical factor suggesting that the recovery will be painful and slow is the crisis of public finances. The downturn means far less money going in to the state’s coffers through taxes, and more being paid out in unemployment benefits. At the same time of course, the US, British, EU and Japanese governments are all massively in debt themselves, especially as a result of the trillions they wasted bailing out the bankers. Stimulus packages to try to get the economy going again have also pushed up government debt.
In short, governments everywhere agreed to take on the losses made by banks on bad loans. Now they expect working class taxpayers to pay the price.
What does this mean? If governments try to balance their books and control the soaraway state debt, it will means raising taxes on the mass of the people, or savage cuts in state spending on essential services like health and education and on benefits for the millions of extra unemployed. Of course, if millions of people are made poorer in this way, they will have less to spend, which will also aggravate the trend towards economic stagnation.
Inflation, deflation, stagnation
On the other hand, if governments don’t make enough of these vicious cuts – or if they are stopped from doing so by resistance from the working class around the world, on the streets and at the ballot box – then the crisis of public finances will force the value of their currencies down. There could be a run on their currencies in the international foreign exchange markets. More likely still, the bond markets – where governments borrow money from investors who buy promises from governments of guaranteed repayment plus interest further down the line – would punish governments, causing inflation.
As Professor of Economics at New York University Nouriel Roubini has predicted, “policy makers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending…they would undermine recovery and tip the economy back into stag-deflation (recession and deflation). But if they maintain large deficits, bond market vigilantes will punish policymakers. Then inflationary expectations will rise …and borrowing rates will go up sharply, leading to stagflation.”
What is more, once signs of recovery strengthen, as they show every sign of doing, the excess uninvested money currently sloshing around in the banks and finance houses could spot under priced assets and companies and rush towards them like air through the walls of a pierced vacuum. This would cause them to bid up asset prices, leading to even sharper inflation. Then we could get a repeat of last year’s chaotic price rises in oil and food which sparked riots around the world.
So there are two scenarios – government cuts impoverishing the people and battering the ability of consumers to spend, or inflation driving down the value of money, impoverishing people and destabilising the world economy still further.
From this one thing is clear: the massive subsidy and stimulus packages promoted by the US, EU, China and Britain will have to come to an end. There is already a sharp dispute within the G20 between Germany and France on the one hand and the US/Britain on the other over how quickly the rescue packages should be cancelled. In the US, which is most cautious about ending the stimulus programme, the budget deficit is predicted to be $2 trillion higher than anticipated, with the Congressional Budget Office warning of a 10-year deficit of $7.2 trillion, and a cumulative 10-year deficit of $9.05 trillion predicted by the White House itself. This year’s budget deficit will be $1.6 trillion, with debt as a percentage of US GDP set to rise to a staggering 69 per cent in 2019 – a figure that gives cause to wonder whether the foundations have been laid for an even more seismic economic crisis in the next decade.
It is therefore no surprise that the Financial Times reports that bond markets are working on the assumption not of a strong recovery, but of “a very weak recovery ahead”.
China crisis looms
Finally, we have to take China into account. The Chinese economy has been hit hard by the world recession, with its exports slumping dramatically earlier this year. A strong recovery appeared to be setting in this summer, but now stock markets have taken fright at both a sharp decline in bank lending in China and at signs that the government’s vast stimulus package has gone onto the pockets not of productive industries but of speculators in property and shares.
China’s rmb 4 trillion stimulus and 7.4 trillion state bank loans this year represent 45 per cent of China’s GDP – economists at French bank BNP Paribas say no country has done anything on this scale since World War Two. But the Royal Bank of Scotland reports that fifth of this money has gone to stock speculators and nearly a third into property and other financial assets, “helping to inflate unsustainable asset bubbles”, warns Jamil Anderlini in the FT on 24 August. So when the Chinese stock exchange dropped 14 per cent in just three weeks in August, many saw it as a sign of a coming bursting of the bubble. A China crisis would massively disrupt a recovery in world trade.
Marxism and the recovery
In conclusion, we can see that the coming recovery is encumbered by continuing features of the world financial and economic crisis.
Marxists insist that the capitalist system follows a pattern of 7-10 year trade-industrial cycles in which crises and phases of sharp decline lead to periods of stagnation followed in turn by phases of recovery. Unlike capitalist economists, we do not believe that crises and periods of decline are a strange exception to a normal equilibrium of steady expansion, but are built in to the system itself and are unavoidable by-products of the way capitalism works.
The underlying cause of crisis is the tendency in capitalism for the rate of profit to fall. As returns on investment fall in the productive economy, capitalists pour their money into all manner of complex financial instruments.
Eventually however, the banks and financiers recognise that falling profit rates mean they will not get their loans back. The sums they were depending on and the financial instruments they were trading are revealed as fictitious values. A credit crunch ensues as lenders withdraw loans, credit lines break, stock markets plunge, banks go bust.
The existence of huge volumes of capital that can no longer secure sufficient return to warrant them being invested is what Marx called the “overaccumulation of capital”. It is this that the crisis attempts to correct – by destroying surplus capital. So it is that in a world of poverty, inequality and need, vast quantities of capital must be destroyed so that the capitalists can once again invest at a high enough profit to make it worthwhile for them. This is why the recession sees wholesale and wanton destruction of jobs, or workplaces, of communities and of lives. Eventually, when sufficient has been destroyed, capital can move in, buy up property cheaply, hire workers at low wages, use unemployment to drive down pay still further, and begin making huge rates of return again.
Lessons
There are therefore two lessons to be drawn from today’s economic crisis. The first is that it is no use sitting tight and just waiting for a recovery to save our jobs, our living standards, our communities and our futures. The recovery when it comes will be weak and unstable, with high unemployment. The Labour Party and the pro-Labour union leaders always point to the economic cycle as a reason not to fight, just to hold on and things will “things will only get better”. On the contrary, the path for capitalism to a strong recovery is years off and lies over the broken ruins of our existing jobs, services, pensions, and pay.
The second lesson is that the crisis didn’t arise from a bad policy here or there, or bankers who got “too greedy” (a non-greedy banker would go out of business quickly). Nor was it some uncontrollable force of nature, like a catastrophic weather event, that humans can’t do anything about. It is caused by the very nature of the system – and that system can be changed, can be brought to an end and replaced by a rational system based on a democratically planned economy.
The conclusion is simple. The working class needs to resist every attempt by the capitalists to make us pay for their crisis – and we need to convert our resistance into a political challenge to the whole system of capitalism itself.