The sharpest fall in world stock markets since 9/11 met with a panic response from fiscal policymakers and uniformly pessimistic estimates of the state of the US economy from bankers, brokers and the bourgeoisie’s financial analysts. Suddenly, the gentlemen who insisted that the “fundamentals of the US economy were sound” are talking of recession as a near inevitability. A few are even using the D word, ‘depression’.
Writing in the midst of the share falls, Richard Crossely, a leading analyst and charter of trends at NCB, observed that weakness in global mining and financial companies allied to sharply rising food prices produces “a clear picture in prospect, recession and inflation.” Morgan Stanley’s chief European strategist announced “More bad news on global growth. We think it is quite safe not to start buying equities [shares] before US economic weakness clearly spreads.”
Referring to the idea held by some that China’s boom will be able to withstand a US recession, which is called the ‘decoupling’ thesis, top investment bank Morgan Stanley added: “We do not believe in decoupling, and interestingly that is indeed where we get the most investor pushback currently, showing that recoupling would be a nasty surprise to investors. Investors are well aware of the US recession, but appear not to be expecting it to spread globally in a meaningful way. We do.”
Sandy Chen, banking analyst at Panmure, added to the gloom: “We think there is far more pain to come. If/when the major bond insurers are downgraded, a whirlwind of downgrades and write-downs would be triggered … This whirlwind of rising defaults would threaten to topple one of biggest structures of all – the US $45 trillion in credit derivatives contracts.” And, indeed, Ambac, the biggest insurer of bonds, has been downgraded by rating agencies last week.
This threatened collapse of the ‘monoline insurers’ who issue bonds underwriting the credit worthiness of participants in major construction and infrastructure projects, is absolutely terrifying the capitalists. The collapse of this sector would seriously hit a huge number of very significant projects around the world and extend the credit crunch still further into the ‘real economy’. It is no accident that the mere announcement by the US government and Federal reserve that it was aware of the problem and was seeking to put together a rescue package for the monolines caused the stock exchange to stop falling and start soaring again in January. Yet again the intense volatility of the stock markets shows just how unstable a situation we are in, and how desperate the capitalists are to organise these billion dollar rescue packages. There is as yet no sign that such a rescue will be any more successful than attempts to unlock the existing credit crunch have been so far.
David Buik at Cantor Fitzgerald spoke of the ‘acrid stench of fear’ permeating the City, while Michael Metz, chief investment strategist at Oppenheimer in New York, said the Federal Reserve had ” no power to reverse what in my opinion is the worst post-war recession”.
With the housing slump getting worse, retail sales stagnating and the highest inflation for 17 years, many commentators – including investment bank Merrill Lynch – believe the USA is already in recession. Citigroup, the biggest bank in the world, is now predicting negative growth in the USA for the first quarter of 2008.
Asian markets fell sharply, with India’s stock exchange falling by more than 7% for two days running and a similarly large fall in the Chinese stocks listed on the Hong Kong Hang Seng exchange.
China’s boom did not create the conditions for a ‘long wave’ of world economic upswing. What it did do was create powerful deflationary pressures through the export of cheap manufactures and Chinese purchase of US Treasury bonds. These had the effect of offsetting the inflation that would otherwise have been created by the Federal Reserve’s low interest rates. However, since April 2007, Chinese prices have been rising and this anti-inflationary effect has come to an end.
A major US recession will have a decisive impact on the world economy as a whole – as the financial markets are already signalling. Of course, the industrial cycles of the United States and the other main imperialist blocks (Japan and the EU) are not yet synchronised. Continental Europe – especially Germany and France – took much longer to pull itself out of the early 2000s recession. But even the huge block of the Eurozone would be seriously affected by a sharp reduction of its markets in North America.
Can recession be postponed yet again? The answer is yes, even if this is far from being the most likely outcome. However,the notion that the growth of China and India might be sufficient to provide an alternative ‘main engine’ for the world economy, immunising it from the effect of a US recession, seems fanciful to say the least. Howard Davies, Director of the London School of Economics, has pointed out that the US consumer is eight times more powerful than the Chinese consumer – domestic consumption in China would be far from sufficient to offset the impact of a collapse of US demand in any coming recession.
What is possible is that cuts in interest rates in the USA could, once again, as in 2001, have the effect of boosting demand at home, and that cheap money could allow a new expansion of production in the USA. The dream scenario for the capitalists would then be that low interest rates and a falling dollar would encourage US exports, kick-starting US manufacturing and boosting production. Rising exports could then help restore the value of the dollar, in turn depressing inflation at home.
This rose-tinted perspective seems very unlikely. Right now, inflationary pressures are being encouraged by the plummeting dollar and the cuts in interest rates that have been urgently deployed to offset recession and the credit crunch. With inflation in the USA at a 17-year high, more and more working class and lower middle class consumers are feeling the pinch. This will aggravate the trend towards repossessions of homes, spreading it from just ‘sub-prime” to more standard mortgages. The credit crunch would be deepened by this. No wonder so many commentators regarded the emergency rate cut as a wild gamble.
Already the credit crunch has had an effect on the ‘real economy’. Despite attempts by the bosses’ economists to suggest that low levels of corporate debt would mean that the financial crisis would have little effect on non-financial corporations, profits were sharply down in the US in the last quarter of 2007. In Britain, too, profit warnings by listed companies are at their highest level for six years. Accountants Ernst & Young say nearly 400 warnings were issued in 2007, up by more than 10% on 2006. In the final quarter, warnings were up by
more than 20% “largely due to the credit crunch”. The 2007 figure is the highest since the 2001 recession. The BBC reported that, “one in five warnings blamed the fallout from the US sub prime mortgage crisis and the credit crunch. Most of those were from firms outside the financial sector.”
This will have an effect on consumer demand and spending, and this has already begun. In the UK, the Office of National Statistics reports that the Christmas retail sales figures were the worst for 13 years and actually fell in December. House prices are falling and so are commercial property values. (see below).
What about America? The US Commerce Department says sales fell 0.4% in December when compared with 2006. Retail sales are two-thirds of US gross domestic product and were a key element of its growth in the credit-fuelled boom of 2004 and 2005, alongside house building and defence. Firas Askari of BMO Capital Markets said “This shows us the US consumer, who has been the stalwart holding up the US economy of late, is starting to buckle here.”
Marxism and capitalist crisis
As we have explained in previous articles since the emergence of the financial crisis (from June 2007), the crisis can only be correctly understood by applying the Marxist theory of capital accumulation and breakdown. Indeed, exactly 150 years ago, Marx was prompted to draw up the first outline (the “Grundrisse”) of his analysis of the capitalist system by the great crisis of 1856. In the very first chapter of the work, he analysed the “credit crunch” that precipitated that crisis before analysing capital in a second chapter that concluded with notes on the essence of the character of commodities. Marx wrote in the margin “This section to be brought forward”, and indeed this did become the starting point for the first volume of Capital itself.
And with good reason. His abstract analysis of the commodity can be unfolded to give us a powerful explanation of capitalist crisis that is strikingly relevant to today’s financial turmoil.
Marx’s theory is based on the labour theory of value. The value of commodities is determined by the average labour time expended in their production (‘socially necessary labour time’). Commodities exchange on average at this value, and this holds true also for the commodity labour-power, the only commodity owned and sold by the working class. This commodity is the only one that actually adds value in the course of being used up in production. The value of labour power is also determined by the labour time necessary for its production: in the case of labour power this is the rough value of the goods required to reproduce labour power, that is, to keep the worker alive and able to return to work the next day, to live at or around the general level of culture achieved by the working class in any given country. The value of labour power governs wages and is less than the value the worker adds to the product produced. The difference between the value of the worker’s wage and the value of the goods produced is surplus value – the capitalist accumulates this as profit.
In the course of capital accumulation, the capitalist raises labour productivity through the application of new and more advanced machinery. This reduces the time it takes for an average individual worker to produce the product and therefore raises the proportion of surplus value produced by a worker in a given day. In this ceaseless quest for greater profit, capital therefore has a general tendency to raise the proportion of constant capital (machinery and raw materials) relative to living labour (variable capital). While this boosts the mass of profit in the short term, it reduces the component of the capitalist’s investment that generates a profit (the living labour).
In the expansionary phase of the industrial cycle, profits rise but, in the course of the cycle, the tendency for the rate of profit to fall asserts itself. This gives rise to an overaccumulation of capital as the capitalist finds that he has more capital than can be profitably invested in further production.
Of course, a proportion of this excess of wealth can be spent on the luxury goods and lifestyles that always characterise the “boom years” of a cycle but far more is channelled into alternative investments: capital is exported to lower wage economies abroad where higher profit rates can be found because of a lower level of technology, it is used to buy shares and what Marx called the, “insane forms of capital” such as today’s Collateralised Debt Obligations through which US sub-prime mortgages were sold to banks around the world, it can fuel commercial property speculation, forcing real estate prices ever higher; and it can underpin an ever more reckless use of the credit system to keep the system going. In short, towards the peak of a cycle, excess capital stimulates the development of widespread forms of fictitious capital which are not related to the underlying value of real commodities.
Marx recognised that this was not a simple and straightforward process, economic advance brought “countervailing tendencies” such as cheaper goods that could, for a time, offset the falling rate of profit but these could not postpone the eventual reckoning indefinitely. The boom phase of the industrial cycle develops into a speculative fever that ends in crisis. A credit crunch explodes as bank loans and complex financial instruments are revealed to be massively overvalued. The process of capital circulation comes to an abrupt halt; the system seems to be gripped by a kind of heart attack. A process of traumatic devaluation of capital ensues. The capitalists begin to fight among themselves as to who will bear the cost in real locations and in real time. Currencies are devalued (like the dollar today); loans cease (the credit crunch); not just the rate but the mass of profit falls (profit warnings); bosses begin to look for how they can close ‘excess’ capacity. Crisis gives way to recession as the effect of the devaluations hits demand and production contracts sharply, causing a sharp rise in unemployment. Ultimately – and the length and depth of the crisis and recession depend on broad geo-political factors – capitalists begin to reinvest in cheaper plant, machinery and workers, and a recovery stage sets in. The cycle begins afresh.
Over the last period, cycles in the US and Britain have been shaped by the world situation. Deflationary pressures coming from Asian development allowed low interest rates to shorten the recession of 2001 through cheap credit. But the US credit-fuelled boom of 2004 and 2005 took place mainly in housing, retail, and defence: manufacturing continued to decline sharply during that period. With inflation back on the agenda and being driven by China now, the chances of a repeat performance of the credit-fuelled recovery are slim. When the current crisis turns into an economic downturn, there is every possibility that this time it will be severe.
With the Marxist theory delivering such a compelling explanation of the current crisis, it is at first sight surprising that it is not just bourgeois commentators who are at a loss to explain how their ‘most perfect’ of systems can have entered a new phase of crisis so abruptly. Some writers working within the framework of Marxism are also seemingly puzzled. Costas Lapavitsas, an expert on the Marxist theory of money working at the School of Oriental and African Studies in London, has written of the current crisis that “It is clear that this is not the same mechanism as described in classical Marxist analysis where the capitalist firm would borrow, over-expand production, be unable to sell its products and therefore find it impossible to honour its debts to banks and others.” Of course, when the Marxist theory is defined in this way, the current crisis does appear strange, because the banking crisis has emerged before a collapse in consumer demand. The credit crunch appears to be driving the collapse of retail sales and not the other way round.
In fact, Lapavitsas is misinterpreting the ‘classical Marxist analysis’, in which the collapse in the purchasing power of the consumer is not the cause of crisis. This idea – underconsumptionism – is a misrepresentation of Marx’s theory and one that leads to the reformist conclusion that all that is needed to avoid crisis is merely higher wage deals.
Marx’s theory is more powerful than this. By locating the cause of crisis not in the sphere of consumption but in the sphere of production – the law of the tendency of the rate of profit to fall – it focuses not just on the overproduction of goods but the overproduction of capital itself. In this way, the banking crisis of 2007 can be understood as a stunning verification of Marx’s theory. As the subprime crisis and the re-emergence of global structural inflation came to full light last year, the banks were suddenly confronted with the fact that the vast expansion of speculative fictitious capital was unsustainable. Just as in the case Marx analysed in his Grundrisse, the banking crisis was the onset of a phase of traumatic devaluation, driven by overaccumulation in the underlying economy and caused by the innermost contradictions of capital.
The collapse in property values is also explicable only by the Marxist theory. How many times have we heard over the course of this decade’s property boom that values would not decline because of undersupply of homes and offices? This excuse for a theory has been exposed by hard facts now that not only US but also UK values are falling.
Marx’s theory of rent explains this. For Marx, rents are a deduction from profits charged by landlords to capitalists in return for allowing the use of land. Marx calculates ‘absolute rent’ as the average deduction from profit charged for the use of the worst land. Two categories of ‘differential rent’ are then introduced which allow the landlord to charge a greater sum in rent to the capitalist: one differential rent is based on the fertility of the soil; another category of differential rent, most interesting for our current discussion, is derived from the locational advantage to the capitalist of a particular piece of land.
This is why in the boom phase the latter form of differential rent has so inflated commercial property values in city centres, why they have been highest in the financial centres where super-profits are made. But bear in mind the essence – all these rents are based on differential adjustments to the absolute rent that is a deduction from profit. When the mass of profit begins to fall at the peak of the boom, the rental values begin to fall. So do the freehold values of the land and buildings, which, in Marx’s system, are understood as nothing more than capitalised rental income.
Today, commercial property values are indeed falling. The Financial Times, along with all the specialist real estate journals and reports from major surveyors, reports that “UK commercial property values are in freefall”, adding that the latest data from IPD, the industry index, “showed that December was the worst month ever and the last 12 months recorded heavy falls.”
What is this analysis for?
The question of whether we are currently in a technical recession, or how long it will take to emerge, while important, is nevertheless not the most important issue. We are plainly in a phase of crisis, and there will at some point plainly be a downturn. The capitalists will attack the workers to make us bear the brunt of the crisis and to ensure that the most favourable conditions are established for the cycle to resume. The underlying tendency of the system towards stagnation and breakdown will not be overcome; we are not in a long period of boom in which China and India’s growth will postpone a serious crisis into the middle of the next decade. There is every possibility not only of a harsh recession this year or the next, but of the recession affecting the main levers of the world economy in Europe and Asia too.
The task of Marxists in this situation is:
• to continue to analyse the crisis, demonstrating how only the Marxist analysis of capitalism can explain its dynamics and its consequences
• to warn the working class of the attacks on jobs and living standards that the bourgeoisie will launch against us and the heightening of global tensions between the major capitalist and imperialist powers that will follow in the course of the crisis
• to show how the existing ‘moderate’ leaders of the working class are unprepared to resist a heightened wave of attacks, have no theory to explain the crisis and, above all, have no understanding of the origins of the crisis in the inner nature of the capitalist system itself.
Historically, one section of the Fourth International, after the split of 1953, adopted a ‘catastrophist’ framework by which it suggested that capitalism was in some kind of permanent crisis. This is not and can never be the case, under capitalism a permanent economic crisis is a contradiction in terms. On the other hand, today, some groups on the left, demoralised by the defeats of recent years, view all talk of emerging crisis with suspicion and declare all analyses which predict the emergence of global crisis and recession to be in some way ‘catastrophist’. This is an abuse of terminology and an impediment to effective understanding of the real crisis phase that is currently breaking around us.
The task of Marxists, as we have said before, is not to declare that the crisis will somehow resolve the political crisis of the working class and lead to socialism – for that to happen, revolutionaries will have to fight within the movement of the workers and youth for a programme of resistance to the crisis that directs the class struggle towards revolution and socialism. However, nor is it our task to downplay the real crisis tendencies and to suggest that little can be expected in the period ahead because of the dazzling speed of development in Asia. This is to propagate over-expectations in capitalism’s ability to avoid crisis, to misunderstand how Asian development is now driving not stability but crisis in the West, and to lull the working class organisations to sleep.
Our watchword must be: don’t let the capitalists make the workers pay the cost of the crisis. Prepare for struggle, and prepare to take advantage of the crisis by actively striving to discredit capitalism as a system, to promote revolution against this unstable and unsustainable system.