The world financial system has entered a phase of instability that is beginning to panic the billionaire bankers. Many are asking if the orgy of speculation that has gripped stock markets in the USA, Britain and China is about to come to an abrupt end. Even the Bank for International Settlements – one of the world’s most important financial institutions – has raised the spectre of a global depression at some time in the foreseeable future.
In June, the price of US government bonds fell sharply. This meant that investors were expecting higher interest rates and this caused the world’s already jumpy stock markets to take fright. They plunged several times in June, each time staging recoveries that gave way to sharp selling of shares when more bad news emerged.
The root of this nervousness is the fear of a serious recession in the US, by far the world’s biggest economy. Higher interest rates mean higher mortgage payments and deeper problems in the US housing market, where house prices are falling and repossessions are rising. That threatens the high-risk mortgage lenders in the “Sub-Prime” market, and the billionaire “hedge funds” that have lent them money. There is also a threat to the parasitic private equity companies that borrow cheap and use the money to buy companies and then strip their assets while avoiding paying tax on their profits because of their debts.
Internationally, there is a risk to the so-called global “carry trade”. This is a particularly parasitic form of finance that relies on borrowing huge sums of money where interest rates are low, in Japan primarily, investing it for a period of time where rates are higher and then repaying the original loan and pocketing the profits. With Japan’s economy beginning to grow, interest rates there will rise and slash those profits.
The main reason for rising interest rates is the threat of inflation. For years, but especially since the collapse of the “dot-com” bubble at the end of the 90s, economic growth in the US has been financed by a combination of cheap credit and tax-breaks. Economists who warned that this would lead to inflation appeared to have been proved wrong, if anything, prices for consumer goods were falling. There were several factors causing this; real wages in the US were held down, firms shifted production to low wage areas or exploited cheap immigrant labour and new technologies lowered production costs. Perhaps the most important factor, however, was the emergence of China as a major industrial power. Cheap Chinese goods kept prices down and Chinese purchase of US Treasury bonds kept down interest rates. Now, however, the impact of these factors is declining, even that of China.
For nearly two decades, very low wages and substantial subsidies from the state ensured low prices for goods made in China. In sector after sector, the “China price” undercut virtually all others. Production in China boomed and China was presented as a textbook example of all that was dynamic and good about capitalism. Its growth seemed to prove that capitalism provided a sustainable way out of poverty for developing nations and the world’s poor. Today we are told that the Chinese economy is growing too fast, is in danger of overheating and that steps need to be taken to slow it down. So how is it that soaraway growth can suddenly become a problem? How can an economy be growing too fast?
The answer lies in the chaotic, unplanned nature of accumulation and development in a society based on private profit rather than the general good. The expansion of capitalism in China is a classic example of the chaotic and crisis-ridden nature of the capitalist system. The vast expansion of profit-driven production and capital accumulation in China has created a wild rush for the essential resources that fuel production, primarily energy and raw materials. As ever more capital chases limited resources, the price of these critical commodities naturally rises. In the crucial coastal cities of China, where the export-based industries are located, wages are also rising, particularly for skilled and semi-skilled workers.
The days of sweatshops employing armies of workers straight off the land are not entirely gone, but they are going. Because of the massive expansion of Chinese production, the “China price” is now the only price for many commodities. Capitalists in China are no longer competing with higher priced overseas rivals – they are more often competing with each other. Inevitably this means trying to increase market share by introducing technology that raises productivity. This itself requires more skilled labour but it also requires bigger capital investments.
Because all capitalists feel under the same pressure, this has led to a boom in heavy industry and massive investment in productive capacity. Although production volumes have risen, the costs of the investment have to be recouped in prices and the actual profits, which can only derive from human labour, are smaller in relation to the overall investment. So the rate of profit tends to fall and, although the employers accumulate huge masses of capital, it is increasingly difficult to invest it at the rates of return their shareholders and bank lenders demand. A crisis of over-accumulation has begun to develop.
In China today we can see many signs of this: over-capacity, especially in heavy industry, massive speculation in real estate, a huge growth of parasitism of every sort, and a surge towards the export of capital from China. Vast sums of money are searching for a quick return because less and less can be invested profitably in production. This hasn’t stopped China “growing like mad”, but this mad fizz – complete with stock market manias and sudden collapses in share prices – is a classic example of the last phase of a boom, before a crisis and a downturn or even a crash. In its recent report, the Bank for International Settlements (BIS) compared China’s current situation to Japan before its slump in the early 1990s, or to southeast Asia before the crash of 1998. It said: “The Chinese economy seems to be demonstrating very similar, disquieting symptoms”, including a bubble in credit, a boom in asset prices and massive investment into heavy industry.
China mania
Why else would the Chinese government be taking persistent, increasingly anxious measures to cool their economy? And yet these measures have failed to tame the irrational exuberance of the Chinese investor. Only a crisis will do that. And a crisis is inevitable in the period ahead. Fools who think China’s boom can go on forever – or perhaps, as one group of wiseacres has suggested, until 2015, when all the rural workers will somehow be employed in urban factories – know nothing of the spatial economy of China, nothing of the unevenness of capitalist development, and nothing of the way that the over-accumulation of capital takes place in every industrial cycle.
China’s rise has forced up global prices for energy, food and raw materials. This is undermining the deflationary factors that kept interest rates low. At the same time, China’s decision to diversify investment away from Treasury bonds has also contributed to upward pressure on interest rates. Bankers and financiers are worried that interest rates are set to rise again in the US, just as they have been rising in the UK over the last year. Interest rates are the price of borrowing money, based on the lender’s expectation of future profits to be drawn from the assets the borrower is putting up for the loan. When rates rise, that means the lenders – above all the most powerful banks and finance houses – anticipate depressed accumulation and lower profitability in the period ahead. They are calling their loans back in, faster.
The world’s central banks are wrestling with a fundamental contradiction: to combat inflation they need to raise interest rates but if they do this could force the world into recession. A couple of years back the US Federal Reserve carried out a series of successive interest rate hikes but then panicked in the face of a possible recession last year. Many of the bosses’ own economists think it was a mistake to stop further increases: the Bank for International Settlements called it “sowing the seeds for more serious problems further ahead”. They argue that, by holding rates down to stimulate investment and exports in the face of a massive balance of payments deficit (currently 6.5 percent of gross domestic product) the Fed was just storing up even greater trouble for the future.
Despite keeping interest rates down, economic growth in the US slowed to O.7 per cent in the first quarter of 2007, its lowest growth rate since 2003. The big money people know that the deflationary impact of China’s boom is declining. They know that interest rates will have to go up again, and again. House prices in the USA are already falling as prospective buyers desert the market. Millions of middle class and working class homeowners know they cannot risk extending their personal credit by remortgaging their homes, so consumer spending is down. In the “sub-prime” sector, millions more face eviction if rates rise any higher.
Growth in “new money forms”
Meanwhile, the speculative fever of the last years has seen mortgages being “repackaged” into new forms of money called Collateralised Debt Obligations, in which big tranches of mortgages owned by major lenders are themselves lent on to other capitalists or even used as means of payment. Last year saw a record issue of $470bn of these. These classic examples of what the bosses call “sophisticated instrument” and what Karl Marx called “insane forms” of capital, can now be seen to carry a deadly sting in their tails. The problems in the sub prime mortgage market do not just affect a handful of lenders who lend money to poor people. It is a mass of capital on which a huge amount of other lending and investment is based – and it is chronically overvalued and insecure.
Today, the face value of all this fictitious capital is much greater than the value of the real production that supposedly underlies it. It is only a matter of time before this comes to an end. The readjustment of these fake values to real values is what the capitalists call a credit crunch: Marxists call it the onset of a capitalist crisis.
“Sooner or later”, the BIS says, “the cycle will turn and default rates will begin to rise.” One leading financial consultant, Tim Lee of pi Economics, told the Financial Times on 25 June that the idea that the Federal Reserve will be able to bail out investors once again is “a failure to understand the unique nature of this global credit bubble and the consequences of its inevitable collapse.” Unless inflation is allowed to rise sharply in Japan and America, he said, “global deflationary collapse will be inevitable once the credit bubble bursts.”
One thing is clear: once the bosses wake up to the fact that a major devaluation of capital is inevitable, they will try to shift the burden away from themselves and onto others: other countries, other currencies and, above all, onto the working class.
For Marxists, the underlying cause both of the mad speculative fever we are seeing today and of the inevitable credit crunches and crises that brings these phases to an end lies in the deep contradictions at the heart of the bosses’ profit system.
At a general, simplified, level, the problem can be seen in the whole way capitalists accumulate wealth. At the heart of production lies the relationship between the capitalist and the worker. Capital is not an independent factor of production; in reality all the profit the capitalists earn stems from the worker’s capacity to labour that the bosses buy for a delimited period of time and use to produce commodities. A worker receives in return not the value that he or she adds to goods or services in production, but roughly what it takes to stay alive, get back to work week after week, and bring up a new generation of workers. This money is the wage or salary. The difference between the two values- the value of reproducing labour capacity and the value of everything it creates, is surplus value: it is the source of profit and the capitalist pockets the lot.
As capitalists compete with one another they use various methods to boost profit: one is to raise productivity by introducing more advanced machinery. But over the years of any given industrial cycle, this creates unbalanced development. Because each capitalist is trying to outdo the other (and because of misleading price signals that arise from the operation of the credit system), the way capitalists raise labour productivity starts to undermine the very basis for profitable accumulation in the future. As we saw earlier in looking at the case of China, as living labour forms a reducing component of capital relative to technology and other factors, the rate of profit comes under downward pressure.
This eventually results in a crisis of overaccumulation: the incredible fact that under capitalism where billions languish in poverty, there is too much capital, too many commodities, too many workers employed and too much money. Of course, it isn’t too much at all in terms of human need to satisfy – it is just more than can be applied profitably given the pressure on the rate of profit. When there is overaccumulation of capital, ultimately some capital must be destroyed (devalued) to restore the conditions of profitable accumulation.
This tendency towards overaccumulation and breakdown can be offset by a range of measures like lower food prices, faster turnover times, expanded world trade and so on. But none of these factors can fend off overaccumulation forever.
At a more complex level, we have to take the credit system into account. As competition hots up in the expansionary phase of an industrial cycle (the 7-10 year cycles of stagnation, recovery, expansion, speculative fever, crisis, slump that characterise the entire history of capitalism), capitalists fuel their expansion ever more by reliance on loan capital, credit or investment in an equity stake in the business (share capital). Relying on a share of future profits deriving from future exploitation of the working class, the parasitic capitalists of finance and credit develop ever more complex methods and instruments that increasingly detach themselves from the real underlying economic activity on which they are supposedly based.
This leads inexorably towards a credit crunch as overaccumulation brings a sudden adjustment, a fall back towards the actual values. There is a rush out of fictitious credit, loans, shares, bonds and strange “derivatives and instruments” towards the higher quality measures of value: money. The banks call their debts back in, crushing companies, bankrupting investors, throwing workers and whole communities onto the scrapheap. Then, when asset values have fallen sufficiently, they start to buy them up again on the cheap, ready for the time when profitable accumulation resumes and the industrial cycle recommences its upward path again.
Finally, we need to take into account the real social, political, national and international situation in which these crises take place. When a crisis and devaluation strikes, the first thing the capitalist thinks is how he can make others pay the cost of devaluation. This means a real destruction of real capital in real places on the ground. The struggle then turns to the question of who is going to get it in the neck and where.
As investors and financiers dump funny money and turn to the real thing, attention will focus on the stability of the various national currencies. Each state will try to prop up its currency, if necessary at the expense of others. Today, in a period of heightened international tensions, with the dollar very weak because of the USA’s historically vast trade deficit and external liabilities amounting to over $4 trillion, there can be little doubt that a global crisis of devaluation would inflame international rivalries still further.
Global deflation?
Either the US and British capitalists could once again succeed in rebalancing the world economy by “switching” the crisis into another zone such as the Far East, or even China itself, or – more dramatically but perhaps more likely – the world could sink again into protectionism as the USA and the EU, in particular, try to manage the effects of a global deflationary collapse.
In short, the reason the world’s bankers and financiers are so worried is that they sense the possibility of a large scale crisis – a crisis of globalisation. One that would destroy the myth that globalisation has brought us a wonderful new pattern of endless development and pitch the world into a new period of intense attacks on working class people and sharpening rivalries between the capitalist powers.
All the more reason for the working class to resist now. From the fight to defend public sector pay and jobs and to maintain public services, to the fight to defeat the occupations and war drives around the world, we must understand that we are not just fighting to stop the bosses running down our living standards today, but to prepare for a great offensive when the crisis comes, to turn our local, regional, industrial and national resistance into a globally organised struggle of the working class to overthrow this truly insane system and create a rational, democratically planned, future for humanity.