Are we entering a third great depression, asks Richard Brenner?
The crisis is the predominant and determining factor in world politics. Approaching its second anniversary, it shows little sign of abating, and has moved on to embrace the entire globe. Already the greatest financial crisis in history, it has metamorphosed from paralysis of the banking system and capital markets into the most synchronised global recession yet seen, so far uncontained – and in many respects aggravated – by the battery of policy responses the bourgeoisie has fired at it.
Although the impact of the historically unprecedented counter-cyclical measures advanced by the bourgeoisie over the past year (interest rate cuts, currency devaluations, bank recapitalisations, nationalisation of losses, increases to money supply) cannot yet be fully assessed, they failed in their initial purpose of averting a global deflationary collapse.1 There is no sign as yet that this deflation (recession) is slowing. On the contrary, the destruction of surplus (overaccumulated) capital has moved from annihilation of fictitious capital in the debt, derivatives and equity markets into a tremendous decline in world trade and a manufacturing slump in the real – i.e. productive – economy. We see sharp falls in GDP and soaring unemployment in most countries in the world, from the imperialist centres of the US, EU and Japan through to the so-called emerging markets of Russia, China, India, the Gulf, Eastern Europe and South America. In April 2009, the IMF predicted that the world economy would suffer its first global recession in 60 years, declining by between an estimated 1.3 per cent in 2009 – up on its 0.5-1.0 per cent projection issued only a month earlier.
Despite a sudden bout of optimism driven by a short equities rally in Q1 2009 causing President Obama to claim that the worst for the US economy may be over, 20 April 2009 brought this to a sudden end with a raft of profit warnings from banks and non-financial corporations alike. Retail sales fell in the US 1.1 per cent in March over February’s figures, hitting auto, clothing, furniture and food sales; down 9 per cent on the previous year. Consumer spending accounts for 70 per cent of US economic activity recorded for GDP purposes. With April 2009 on course to see another 600,000 job losses, the current 8.5 per cent unemployment rate is due to exceed 10 per cent (official slump figures) by the end of the year. This is matched and in most cases exceeded by the projected destruction of capital and economic activity in the other advanced (imperialist) economies.
In its World Economic Outlook published in April 2009, the IMF predicts an “unusually long and severe” recession, with a sluggish recovery. The report traces the similarities with the (Second) Great Depression of the 1930s.2 However, the IMF goes on to emphasise aggravated features of the present crisis:
“An important common feature is that the US economy is the epicenter of both crises. Given its weight, a downturn in the US has all but guaranteed a global impact. This sets the current crisis and the Great Depression apart from many other financial crises, which have typically occurred in smaller economies and had more limited global impact. In both episodes, rapid credit expansion and financial innovation led to high leverage and created vulnerabilities to adverse shocks. However, while the credit boom in the 1920s was largely specific to the US, the boom during 2004-07 was global, with increased leverage and risk-taking in advanced economies and in many emerging economies. Moreover, levels of economic and financial integration are now much higher than during the interwar period, so US financial shocks have a larger impact on global financial systems than in the 1930s.”3
The optimistically named “emerging markets” continue to submerge in the sea of global economic contraction. China’s GDP growth rate has now fallen to an official level of just 6.1per cent in the first quarter, the worst quarterly figure since 1990, although the government’s massive stimulus of spending may have some effect in raising this in the course of the year, promoting internal demand. Russia is facing industrial devastation: in late April the Russian Ministry of Economic Development revised its projections for economic contraction in the first quarter of the year from -7 per cent to a staggering -9.5 per cent, with up to 10 per cent predicted for the second quarter. South Korea’s US$37bn tax cuts and stimulus slowed its decline from a 5 per cent fall in the last quarter of 2008 to around zero this quarter, aided by a 30 per cent currency decline against the dollar, boosting exports. But Singapore’s economy is in freefall, declining an annualised 19.7 per cent last quarter.
Consultancy Oxford Economics predicts India’s growth rate will fall drastically to just 3.4 per cent this year, down 9.2 per cent in 2007 and 7.4 per cent in 2008. The Reserve Bank of India predicts growth below 6 per cent this year, despite repeated interest rate cuts, which are failing to stimulate lending. In Latin America, which showed mid-decade growth following the devastating crisis of 2000-01, the IMF now predicts a continental recession this year, with economies contracting 1.5 per cent because of cheaper commodity sales and falling demand for exports: the IMF warned that the recession will be more severe in Mexico (because of its ties to the US).
The US government has declared that the greatest threat to its global order is no longer terrorism but the impact of the crisis. From their class standpoint, they are right. Across the world, unrest in the form of demonstrations, strikes and occupations is on the rise, driven by sackings and enterprise closures, real pay and pension cuts, food and fuel price rises and sharp increases in the number of unemployed. Objectively, and increasingly subjectively, consciously this posits the refusal of the working class and poor farmers to bear the burden of the devaluation of capital: “We Won’t Pay For Your Crisis.”
The manifest failure of the Anglo-American model of liberalised capital markets, laissez faire and neoliberalism, the sudden reversal of orthodoxies, the inability of the bourgeois theorists and propagandists to deliver a coherent explanation of the causes of the crisis or how it can be solved, the stunning contrast between the bailout of the banks and savage cuts in workers’ jobs, incomes and services, the bourgeoisie’s willingness to use state ownership to socialise banking losses but not social assets, have all contributed to an ideological crisis of legitimation. This weakens the self-confidence of the bourgeoisie, confuses and enrages the petit-bourgeoisie, radicalises the intelligentsia and sensitises the working class and popular masses to socialist ideas. More, it impels hundreds of millions of workers and small farmers around the world to fight in their own defence, and is instilling a distinctly anticapitalist character to some of the most visible protests against the crisis (Paris, Athens, London) and encourages militant actions such as occupations and workplace seizures (US, France, Ireland, Britain).
The G20 summit revealed the decline of US power on the international stage as the world hegemon – a debtor nation dependent on continued large-scale purchases of its bonds by cash-rich exporter nations – proved unable to force the EU and China into a coordinated global counter-cyclical and inflationary stimulus package. The summit announced instead a US$1 trillion programme comprising a series of prior agreements to recapitalise the IMF, an insurance fund to underwrite trade credit, the extension of the IMF’s own capacity to issue its Special Drawing Rights currency, and a promise to review in two years’ time the US/EU domination of the IMF and World Bank. The trend is therefore towards a world order in which the subordination of rival capitalist powers to the weakening US is not so clear cut, in which the rival states’ imperatives of protecting the integrity of their currencies, resisting taking too great a share of the devaluation attendant on the crisis, securing markets for labour, resources and exports, asserting their demands in the sphere of trading rights, all propel governments to an increased level of protectionist policy.
Although the WTO, regional and national competition laws and the persistent warnings of the bourgeoisie’s economists have maintained the overarching structure of free trade, there has been a very sharp rise in the number of juridical challenges to foreign products and services, legislative measures asserting national privilege in the location and control of productive capacity, preferences for purchases of national products and even outright tariff impositions. The WTO warns that if states were to increase their tariffs to the maximum levels permitted within global rules, this would effect a doubling of import duties worldwide. While it is certainly not a completed process, we are seeing a powerful impulse towards deglobalisation and the break up of the free trade system, one which would not merely exacerbate the recession and impede a sustained recovery, but which would as in the Second Great Depression of the 1930s intensify commercial, trading and ultimately military confrontation between the great powers.
This is a cyclical crisis, but no mere cyclical crisis. It is the end not merely of the 2002-07 boom, but of a long period which opened in 1985 and is known to the economists of finance capital as the Great Moderation, in which the impact of neoliberal reforms such as the defeat of the Anglo-US unions, sharp rises in the working day, trade and capital markets liberalisation, the vast expansion of consumer credit, and above all the restoration of capitalism in the USSR, Eastern Europe and China created a global regime of accumulation in which recovery phases of the cycle were strong in the hegemonic imperialist US-UK bloc, while crises and recessions were of reduced intensity and duration. Yet far from establishing a new and permanent paradigm, the equilibrium established in these neoliberal years was the result of the dynamic interaction of contradictory forces that were mounting in scale and intensity. This crisis is the culmination of that process and the breakdown of that equilibrium. The Great Moderation – otherwise known as globalisation – has given way to a new period: one which shows every sign of being a Third Great Depression.4
Fundamental aspects of the present crisis express not merely the defects of bourgeois policy in the preceding period but the crystallisation of capital’s inner limits. The banking solvency crisis, the bursting of the bubble of fictitious values in the credit and derivatives markets, the collapse of the credit system, deleveraging and the unavoidable necessity for capitalist states to nationalise and part -nationalise key banks exposes not merely the unsustainability of finance as the organiser and regulator of production, but present the real possibility and necessity of the expropriation and centralisation of the banks and their transformation into instruments of democratic planning. The scale of the banking bailouts and the injustice of the treatment of the banks when contrasted with job, pension and service protection show that a programme of redistribution of wealth is really possible, and could be driven by non-profit centred priorities; the state reveals its class bias in prioritising bankers and bosses over everyone else. The forced reduction of net employment posits the possibility of a shared and planned reduction of labour time as a social expression of rising productivity: mechanisation could eliminate compulsory labour “in a good way” (socialism), but capital (control and ownership of the tools and means of production by a profiteer) means mechanisation eliminates labour “in a bad way” – unemployment and unpaid short-time working. The paralysis of world trade; the infection-transmitting effect of the dollar’s seigniorage as US devaluation exported recession; the inhibiting effect of the absence of a world currency; the transformation of the effect of Chinese and Indian development from low cost production creating temporary equilibrium into inflationary growth causing seismic disequilibrium; the crisis of state finances gripping the semi-colonial world revealing the limits of combined and uneven development: all highlight the contradiction between global social production and the nation state, positing the possibility and necessity of a new global mode of production transcending the limits of capital.
The crisis therefore poses the immediate need for – and drives real examples of – working class and popular resistance to the crisis, at the same time as making the need for socialism a factor, not merely to be articulated by reference to the past or the future but to the real unfolding dynamics of the present. The crisis directly posits the immanent necessity of the transition to socialism.
There can and will be a recovery. The condition for the resumption of an expansionary phase of the capitalist cycle is that the crisis does its work of destroying/devaluing/cheapening enough capital to enable investment in buildings, machinery and materials (“constant capital”) and labour (“variable capital”) to resume at a higher rate of profit, one at which the rate of return will be sufficient to enable surplus value to successfully expand its value (“valorise”) by exploiting labour in subsequent rounds of investment. The speed and scale of devaluation currently in progress demonstrates that this can be done.
Factors, which indicate that this destructive work is far from complete and that the end of the recessionary and stagnation phases preceding the next recovery is at least 18 months away, are:
1. Despite the longevity of the financial crisis, the recession has only just begun.
2. Despite some reduction of the Libor-Federal funds rate spread (the difference between central bank interest rates and the rates charged by commercial banks to one another) since January, credit markets remain extremely tight.
3. The absence of a functioning credit system impedes recovery.
4. Alternative finance, such as hedge and private equity funds, cannot take up the slack immediately – private equity funds are hampered by tight credit lines – hedge funds are nursing massive losses.
5. The model of credit based on financialisation of consumer debt is severely wounded. Sub-prime mortgages and the packaged-up debt based on them (CDOS, mortgage-backed securities) are dead; a whole array of securitised debt products (credit card, motor and other higher purchase and consumer loans) is only now beginning to unwind.
6. The current recessionary phase of the crisis massively weakens the market for wage goods, feeding back into the decline of manufacturing and services.
7. The recently vaunted first signs of recovery in the US housing market represents a slowing of the fall in prices and a rise in the number of enquiries, not a significant rise in value or volume of transactions. A sustained recovery of house prices requires a significant rise in disposable income among the broad wage-earning section of the population, something undermined by the current phase of the recession.
8. The near zero interest rate policy in the US and UK is crushing growth in the EU and Japan by making their exports uncompetitive – this is why Germany and Japan’s projected GDP declines are so severe,
The recovery will be unstable and weak, because:
1.The crisis of public finances aggravated by the trillion-dollar bailout will impel tax increases and cuts in public services and employment, reducing the stimulus to demand.
2.The long virtuous circle of the 1990-2007 period, in which cheap labour and cheap products from China created a rare situation combining both low inflation and low interest rates, is over; the recovery will not be able to reproduce this most fortunate of conditions for capital, and will demand sharp rises in central bank interest rates if serious inflation is to be avoided.
3. It will not be possible to expand consumer credit or the derivatives market in the same manner as in 1985-2006.5
4. The gross expansion of the money supply overseen by the US and UK authorities will aggravate inflationary pressures, potentially to destabilising levels. This policy is common to Keynesians and monetarists alike and has deep ideological roots in bourgeois financial theory.6
Therefore, when it comes, the recovery could be frenetic. This does not mean it will be long lasting or will restablise the world financial system and economy. When asset prices reach a low enough level, the huge volumes of capital currently being hoarded by banks and investors, swollen by the impact of the trillion-dollar stimulus and the central banks’ deliberate expansion of money supply, will rush into the breach like air into a pierced vacuum, bidding up prices and running the risk of soaraway inflation and new, short and intense bubbles in commodities, land and capital.
What will be the effect of the “quantitative easing” in which central banks have increased the money supply to stimulate investment and spending? If we were to assume that it is successful in stemming the scale of the recessionary devaluation, perhaps by relaxing credit to enable bankrupt businesses to avoid insolvency, then it will slow the recession’s work, impeding the restoration of profit rate, which is the precondition for recovery. If on the other hand, as we suspect (see Workers Power 334, April 2009) it has no appreciable impact in this respect, then it could nevertheless succeed in slowing the collapse of the dollar and sterling, sowing the seeds for an inflationary crisis in the recovery phase. It may appease demands of the Chinese and Middle Eastern holders of US treasury bonds who are increasingly unwilling to hold huge volumes of a depreciating asset and whose threat to dump their holdings could spell the end of the dollar as the primary means of exchange in world trade.
Finally, the huge expansion of public debt in advanced economies like Britain could cause investors to doubt the creditworthiness of the state and shun government bonds, pushing down their price and neutralising the impact of quantitative easing altogether.
Whatever the outcome, that the measures taken cannot resolve the crisis, which represents an historic shift to a new period in which upturns will be weak and recessionary and stagnation phases longer, more pronounced and intense: a period in which the curve of development is downwards. This opens a new phase of class struggle leading to increased incidence of wars and revolutions.
Footnotes
1 “The power of a central bank begins only where the private discounters stop, hence at a moment when its power is already extraordinarily limited.” (Marx, Grundrisse, p.124)
2 Pernicious feedback loops between the financial sector and the real economy emerged, leading to entrenched debt deflation and four waves of bank runs and failures between 1930 and 1933. Private consumption and investment contracted sharply. The stock market crash led to price falls and wealth losses elsewhere, while declining US aggregate demand had an adverse international effect through trade channels. Moreover, the financial crisis in the US spread to the rest of the world.” (World Economic Outlook, Chapter 3, IMF April 2009)
3 ibid
4 The first great depression was between 1873 and 1894; the second was the Great Depression of the 1930s.
5 The IMF’s World Economic Outlook observes that in this crisis, as in the Great Depression, “financial innovation accompanied the boom. In the 1920s, household credit expanded more rapidly than personal income in the United States, because the rapid diffusion of mass consumer durables was associated with rapid growth in instalment credit provided by nonbank financial institutions (Eichengreen and Mitchener, 2003). Also, new marketing techniques for stocks helped to broaden equity ownership, while investment trusts and individuals increasingly used margin loans to leverage their equity market investment. In the current episode, financial innovation centred on mortgage related products, both in origination and distribution (securitization, structured products).”
6. It is important to bear in mind that mainstream monetarist orthodoxy does not dispute this ‘Keynesian’ view. Bernanke agrees Milton Friedman’s view that the failure of the Fed to take energetic counter-cyclical measures in 1930 contributed to or even caused the Great Depression. The IMF says that “Friedman and Schwartz (1963) argued that the severity of the Great Depression could be attributed to monetary policy mistakes. Although subsequent research has qualified some of Friedman and Schwartz’s findings, the thrust remains relevant.” (IMF – ibid)