Recently the world’s central bankers gathered in Jackson Hole, Wyoming for their annual meeting. Having experienced the biggest banking crisis in history, there was a sense of relief at having avoided a complete collapse. The talk now was of the dust settling. Ben Bernanke, chairman of the US Federal Reserve, despite saying a month earlier that the outlook was “unusually uncertain”, said he was now “confident”. But such confidence is very much misplaced. With the world economy facing at best a painful recovery, and slow anaemic growth, the world’s bankers are deeply troubled as to what steps to take next.
Since then, as the economy slowed further and unemployment remained around 10%, the Federal Reserve was considering a new bout of Quantitative Easing, i.e., shovelling more money into the economy. For Bernanke, the only issue was whether “the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.” For us ordinary mortals, this looked more like a script from a Marx Brothers’ film. More seriously, it reveals the dangerous risks of expanding its over-stretched balance-sheet even further.
The thought of more pump-priming the economy has provoked deep divisions amongst the strategists of Big Business, especially between those who want to “loosen monetary policy” and those who want to drastically cut the huge budget deficits. The Europeans have taken a more orthodox approach, urging deeper and swifter cuts to reduced public and private debt. Postponing these cuts, says the European Central Bank would be “very dangerous” and risked a Japanese-style “lost decade”. This was clearly aimed at the Americans, who they feel are being too prolific. But the Americans have their own interests and are terrified of the recovery running into the sand.
But both are right, and both are wrong. They are caught between the devil and the deep blue sea. Whatever they do will be wrong. It will prove a very long time before they get out of this crisis, years, if not decades, as was the case in the inter-war period. Clearly this is no temporary economic stumble. Even President Obama recognised that “there’s no quick fix to the worst recession since the Great Depression.” (Financial Times, 4/9/10) Mervyn King, head of the Bank of England also chimed in. “Whereas crises occur suddenly, they fade only gradually,” he fretted, as the recovery splutters along. (Financial Times, 28/8/10)
Recent analysis by two bourgeois economists, Carmen and Vincent Reinhart, poured cold water on the proceedings at Wyoming. After studying economic crises over three-quarters of a century, including the Great Depression, they concluded the future looks bleak. According to them, “the future is likely to bring only hard choices.”
Their research showed that real per capita gross domestic product tends to be much lower and unemployment much higher during the decade following such crises. In the 10 of the 15 examples they studied, unemployment never fell back to its pre-crisis level, not in the following decade, nor right up to the end of 2009.
“It gets worse. Where house price data are available, 90% of the observations over the decade after a crisis are below their level the year before the crisis,” states their analysis. “Median prices are 15 to 20% lower too, with cumulative declines as large as 55%. Credit is also a problem.”
The prospects for world capitalism are dire. In the United States, unemployment is affecting some 30 million workers, after including those looking for full-time work and those who have dropped off the register. Americans who have been unemployed for 27 weeks or longer now make up 44.9% of the jobless, up from 17.3% when the downturn began. The construction industry is experiencing a double-dip recession as house sales continue to fall and a quarter of US home-owners find themselves in negative equity. The US growth rate has been revised down from 2.4% to 1.6%. Imports rose by 32.4% in the second quarter, the biggest jump for 26 years, which is sure to raise protectionist hackles.
All the major capitalist powers are attempting to escape the crisis by boosting exports. But they cannot all succeed in doing this, and this has already resulted in rising international tensions. The recent actions by the Japanese to devalue their currency has provoked fury in Europe and the US. China is also deliberately holding down the value of its currency. “There were growing fears of a global trade war last night after the world’s largest countries clashed over currency policies aimed at protecting their own faltering economic recoveries at the expense of others”, explained City A.M. “There are fears the global currency order is disintegrating with countries breaking ranks to use 1930s-style devaluation to boost exports and shore up their own economies.” (17/9/10)
With black clouds gathering internationally, pessimism in Britain about the future is even more palatable. According to a recent Markit/YouGov index, 47% of households expect their finances to deteriorate over the next year. That is twice as many as those hoping for an improvement. Housing is again in trouble, with prices and mortgage lending much lower. “Everybody in the industry thought they had died and gone to hell during the second half of 2008,” said one industry official, noting that times seemed worse now.
Business confidence has also taken a big hit in recent months, and the British economy is in real danger of sliding back into recession. In August, the purchasing managers’ index for the service sector, which registers the level of business activity, fell to its lowest level since the depths of the economic crisis. Growth has tailed off in manufacturing, while construction orders in the last quarter plunged 14%. The only comparable period for such a decline was in the first three months of 2009 when the banking system came close to collapse. Of the £1.9bn drop in orders, 70% came from lower orders in the public sector.
This is no surprise as the coalition government makes cuts and embarks on the biggest austerity programme since the 1920s, with cuts ranging from 20 to 30% or higher. This will be a nightmare for working people, especially the most vulnerable. Added to this, 1.3 million jobs are to be axed across the board, with workers in the public sector facing a two-year wage freeze. Things we once took for granted will be destroyed.
The coalition’s fiscal tightening of 1.6% of GDP every year for five years is certainly going to snuff out any growth that may exist, especially with slowing world growth and falling investment. Ed Balls has warned of an economic “hurricane”, and advises a more considered approach. But cuts are cuts, whether they are spaced out or not.
Whatever approach is adopted, it will not make a fundamental difference. The capitalist system is suffering from a deep-seated malaise. It has just suffered a severe heart-attack. And this will not be the last. The crisis of over-production, endemic to capitalism, has left behind swathes of excess-capacity. In booms the capitalists can only use 80% of productive capacity. In slumps they can barely use 65%. This shows the complete blind alley of capitalism. The world market has become too narrow and the capacity too great. There is a crisis of the productive forces, hemmed in and choked by capitalist property relations (and the nation state). Deep crises of over-production are but a reflection of this impasse of the social system.
The only reason why it was able to put off this massive crisis in the past period was through speculation and the creation of the biggest credit bubble in history. Perhaps for the very last time, it was able to expand world trade through “globalisation”. But this has now created a globalised crisis – on a scale and scope greater than the 1930s. It was only able to save the banking system by a blood transfusion of an eye-watering $14trillion. When you consider that between 1948 and 1952 over $17bn was given in Marshall Aid to rescue Western Europe, a truly enormous figure equivalent to around $200bn in today’s terms, you can see what a staggering sum was doled out to rescue capitalism over the last two years. And it has still not finished, with pressure for more money to be poured into the economy in the USA and Britain. They may have temporarily avoided a Depression, but they have certainly not resolved the crisis of capitalism. No amount of “liquidity” will accomplish that. Even the “pump-priming” of Roosevelt’s New Deal failed and did not prevent the slump of 1937-39. The crisis was only “resolved” through world war, which is ruled out at the present time.
The capitalist state rushed in to rescue capitalism and now the working class is being asked to pay through massive austerity and savage cuts in living standards. On the road of capitalism there is no way out. The strategists of capital have tried Keynesianism and Monetarism, but both have failed. They are head and tail of the same coin. This impasse has now led to the current catastrophe. Whatever they do will be wrong and shows the blind impasse of the system.
The working class is facing a nightmare of austerity, which, according to the strategists of Capital, will last for more than a generation. No amount of tinkering with capitalism will change this fact. Capitalism can no longer afford lasting reforms. It is the epoch of counter-reforms and attacks. The reformists in the labour movement are blind to this. They are hoping that everything will return to “normal”. But this is not the case. This is normality under capitalism from now on.
Only with the overthrow of capitalism and the abolition of private property can the crisis be resolved in the interests of the working class. Only on the basis of the socialist transformation of society can we prevent this barbarism and offer a way out from this morass. On the basis of a socialist plan of production the resources of society can be used to the full in the interests of the majority and not in the interests of a tiny handful of capitalist tycoons. The choice we face, in the words of Rosa Luxemburg, is socialism or barbarism.