Here we go again!
It seems like only yesterday that the newspapers and TV were full of stories about how well the economy was doing.
They said because we’d had 13 years of unbroken growth, and because China and India were soaring, the free market and capitalism were the strongest, the soundest, and the most stable system the world had ever seen or could ever see.
Now the same papers and programmes have the same journalists in the same ties telling us a very different story. This summer’s financial crisis looks set to hit the real economy.
Of course every time the economy goes into an upturn the bosses say the sun will shine night and day. But capitalism is an unstable system – it goes into crises and recessions every seven to 10 years. Some of these crises are sharper than others and, as we show on these pages, this one looks set to be sharper than many.
House prices fall
The US economy is the largest in the world and has a huge impact everywhere. Like Britain, they have had a long property boom, with rising numbers of people buying their own houses and prices nearly doubling over the last 10 years.
Now that has come to a sudden end. Property prices in the USA are falling for the first time since 1991. The number of people who can’t keep up their mortgage payments has sky-rocketed. Home repossessions rose by 30 per cent over the last year.
Now British house prices have stopped rising too. Mortgage lender Nationwide said UK house prices saw their biggest fall in 12 years during November.
And the Bank of England said the number of new mortgages for home buyers is down 31% from a year ago.
People have been borrowing on the “extra” value of their homes – this extra cash will now dry up. That in turn will lessen the amount of money people spend in the shops. This could work its way through into job losses as factories and shops lose orders.
Within a year or so homes might be cheaper to buy. But if house prices fall like they did in the last property crash, people could get caught in the “negative equity” trap as they watch their homes fall to lower values than they paid for them.
Banks in crisis
Banks like Northern Rock borrowed millions to offer mortgages to people on low incomes. Now no one wants to lend to them. Northern Rock only survived because the Bank of England poured more than £24 billion into it. Imagine all the schoolbooks and operations that could be paid for with that sort of money.
But it’s not just Northern Rock – the whole banking system is affected.
Banks that offered mortgages to low earners (so-called “subprime mortgages") packaged this debt up and lent it on around the world. When they finally realised it was all based on money that wouldn’t be paid back, the banks panicked. So far they have notched up losses of more than $200 billion – and many think there’s more to come.
So in August the banks pretty well stopped lending money to each other, to corporations and to millionaires who want to buy and sell companies: this was the global credit crunch of 2007. To get money flowing again, the Federal Reserve (US version of the Bank of England) cut interest rates to make it cheaper to borrow.
It didn’t work. The rate of interest that banks charge each other has continued to rise. The credit crunch is still on, and with a vengeance.
Inflation is back
The US Federal Reserve and the Bank of England would like to be able to stave off a recession by cutting interest rates, boosting the economy by making it cheaper to borrow money. They did this last time, when the Americans cut interest rates 11 times, from 6 per cent to just 1 per cent between January 2001 and the summer of 2003. This was what lay behind the housing boom.
Can’t they just do this again? Not without risking serious inflation and destabilising the world economy even more. So what’s changed?
The last 15 years have been very unusual because recessions in the USA and Britain have tended to be very mild and not to last for long. The underlying reason for this was that inflation was very low – driven by cheap imports from China and the Far East. Britain and America could cut interest rates without fearing the normal consequence of that – inflation. China and the developing cheap labour economies created global disinflation, falling prices.
But now this is coming to an end. In April the price of imports into America from China rose for the first time in years. Inflation is back.
Oil prices have surged – a barrel has reached $100 so petrol prices are going up. China is sucking in such a huge amount of oil that it increases demand massively, while reserves are dwindling.
Food prices have risen sharply, including staples like wheat, pork, milk and cooking oil. Chinese inflation hit a 10-year high in August, pushed by a spike in meat prices.
Europe is being hit, too – Germany’s inflation is the highest for 14 years and in the Euro zone it is at its highest level in more than six years.
Lower growth – recession
When the credit crunch first tightened in August lots of official predictions came out saying that the trouble in the money markets wouldn’t affect the “real economy". Now they’ve changed their tune.
The US Federal Reserve cut its prediction for 2008 economic growth to 1.8 – 2.5%, blaming the credit crunch and the housing collapse.
The White House followed suit and cut its forecasts of growth. And the Commerce Department reported that growth of retail sales fell from 0.7 per cent to just 0.2 per cent in October. If this develops into a full-blown recession – and there are many signs that it will – this will mean more job losses and repossessions.
The Bank of England now predicts a sharp slowdown in UK economy next year – and higher inflation as well. Governor Mervyn King said, “Certainly compared with the very small movements we’ve seen in the last 10 years this looks like a very sharp slowdown".
Finally, falling US spending will definitely have a serious impact on China. A huge 38 per cent of China’s output was for export last year, with the USA receiving between 13 and 20 per cent of these exports.
This would also have a major effect on Europe, whose biggest economy – Germany – is the world’s number one exporter, including of machinery to China.
Currency crisis
As a boom turns into a crisis and then a recession, speculators on the money markets suddenly realise that many of the complicated financial instruments they are holding are not worth anything like they thought. So investors dump the funny money they moved into in the boom years and try to move back to the most dependable, highest quality forms of money. There is a dash for cash.
You would expect the rich to be dashing for the leading form of cash, the world’s number one currency, the good old greenback dollar. But there’s another problem. The dollar is on a sharp downward dive.
An American buying a euro paid 90 cents for it in 2002. Now it costs him nearly $1.50. Anyone sitting on a pile of dollars is sitting on something that is losing value by the day.
So the Chinese and Japanese governments – who hold well over a trillion dollars in their reserves – have been carefully trying to move out of dollars.
The fall of the dollar helps US manufacturers who sell abroad because it makes US exports cheaper. But it undermines the dollar’s position as the world’s senior currency – and the tremendous advantages the US capitalists get from this leading position (which they call “seigniorage").
Above all, the falling dollar is a sign of the decline of the core of the US economy. By December 2005 manufacturing employment in the USA fell to its lowest level since 1945, more than 3 million less than in July 2000. Between 1993 and 2007 the US balance of trade fell from a deficit of $70 billion to $759 billion last year.
International tensions
In a sharp economic crisis each major country tries to make the others bear the brunt. French President Nicolas Sarkozy may be backing America’s wars, but when he visited Washington he told Congress that if it tried to offload the costs of the crisis onto Europe it would face “economic war".
Then the EU leaders went to China and demanded that China’s currency should rise in value so that it stopped “stealing” the EU’s export markets. The Chinese bluntly refused. As the crisis mounts, the thieves fall out.
What does it all mean? A Marxist analysis
The working class movement has produced only one theory that can even begin to explain the crisis that the world economy is entering today: the theory developed by Karl Marx.
Unlike the failed theories of the capitalists – all of which have to pretend there is nothing fundamentally wrong with their profit system, and which therefore cannot explain why the system regularly goes into crisis – the Marxist theory predicts and explains regular crises and breakdowns of the system.
Before capitalism, every economic crisis in history was a result of underproduction. But under capitalism there is already enough to meet the needs of every human being on the planet many times over.
Under capitalism, crises are caused by overproduction – and this means the overproduction not just of useful things like food and fuel, but of every form of value – of money, of property, of financial instruments. Crises are caused by the overaccumulation of capital.
Through the course of the boom phase of a cycle, the rate of profit received by a capitalist – his or her return on every pound invested – gradually begins to fall. Marx explained how this was caused by the fact that capitalists compete with one another by raising productivity through introducing new technology, but that ultimately this reduces the proportion of their capital that is based on living human labour – and this living labour is the real source of their profit.
The resulting tendency of the rate of profit to fall drives capitalists to direct their money out of manufacturing in the more advanced countries and into speculation on the stock exchange, into property deals, or abroad into developing low wage economies. It also forces them to try to cut wages at home and employ migrant labour on terrible pay and conditions.
Eventually this pressure on the rate of profit causes the actual overall mass of profit to fall. Then the only way the capitalists can get back to turning a big enough profit is to devalue a mass of “overvalued” capital. This is what economic crises are. That is why today banks are losing billions; why house and property prices plummet; why people are thrown out of their homes; why factories and shops will close in the years ahead; why inflation reduces the real value of wages.
It is why the bosses will try to get us all to work harder for less and compete among each other for fewer jobs. It is also why the bosses of different countries will start fighting – first at the negotiating table, but one day on the battlefield – over who will bear the brunt of the devaluation.
The main problem is that in every country of the world the leaders of the official labour movement are unable to explain the crisis, unprepared to warn the workers, unwilling to organise the struggles.
We must create a new leadership, able to wrest control of the working class movement out of the hands of these misleaders.
One hundred and fifty years ago, Karl Marx wrote: “These contradictions, of course, lead to explosions, crises… these regularly recurring catastrophes lead to their repetition on a higher scale, and finally to its violent overthrow.” Speed the day.