Is the worst post-war economic downturn coming to an end? Are the green shoots of recovery really visible, as many politicians would have us believe? Opinion is divided, with some commentators counting down to the next crisis. What is clear, is that this is a time of acute economic instability. Any growth is likely to be slow, with governments and big business out to offload the costs onto working-class people. LYNN WALSH reports.
World capitalism has been shaken to its foundations by the economic crisis that has unfolded since the end of 2007. Nobody disputes that it is the worst crisis since the 1930s. “The downturn has been global in scope”, comments the Organisation for Co-operation and Economic Development (OECD), a grouping of 30 advanced capitalist countries, “even though its financial epicentre was in the OECD area. Indeed, trade and financial linkages prompted a synchronised collapse in activity and trade after financial markets froze in the second half of 2008”. (OECD press release, 24 June 2009)
World trade, the engine of globalisation, collapsed with a 16% fall expected for 2009. The cumulative output losses since the beginning of 2008 have been severe: minus 5.14% for OECD-Europe, minus 8.4% for Japan, minus 3.55% for the US, with an OECD average of minus 4.7%. In Britain, the cumulative loss has been minus 5.54%, and the recession may continue longer than in most of the other advanced capitalist countries. Ireland and Iceland have suffered cumulative losses of about minus 9% of output, while Turkey has fallen by minus 13.92%. (Source: Office for National Statistics, Economic and Labour Market Review, October 2009) There have been even deeper falls in some of the central and east European countries: 18.4% in Lithuania, 16% in Latvia, 14% in Ukraine, and 13.2% in Estonia.
The economic crisis is also a serious political blow to capitalism, especially to the prestige of the advanced capitalist countries. “The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe”. (Roger Altman, The Great Crash 2008, Foreign Affairs, Jan/Feb 2009)
The leaders of world capitalism are consoling themselves that they survived a ‘near-death experience’, and are suffering ‘only’ a ‘great recession’ rather than a ‘great depression’ – a catastrophic slump and prolonged period of depression. They have been encouraged by the revival of growth in the US (3.5% in the third quarter) and the rebound on world stock exchanges. Their optimism, however, is premature. Assessments made by the main economic agencies, such as the OECD, IMF, etc, that a recovery will be “slow and fragile”, remain valid.
The return to GDP growth, which is likely to be very limited this year in Europe and Japan, is heavily dependent on state intervention, through support for the banking system and fiscal stimulus programmes. Many capitalist commentators fear that, when these programmes have run their course (and unless there are further stimulus programmes), the world economy will slide back into recession, giving rise to a so-called double-dip recession.
Regardless of the return to positive growth figures, unemployment will continue to rise sharply for the next year or so. Even according to official figures, which underestimate the true situation, there will be a rise of over 25 million unemployed from the low point of late 2007. Moreover, any recovery will be held back by the enormous burden of debt which weighs on the global economy. Huge private losses made by the banks and finance houses have been transferred to the state, while the general injection of additional credit into the system by central banks will also increase state deficits. The fiscal stimulus programmes will also enormously increase state debt, which will act as a drag on future growth. The ‘green shoots’ of recovery, hailed by many capitalist leaders, are in most cases sickly weeds, growing in barren soil.
Can the stimulus packages work?
Massive state intervention has so far avoided a catastrophic collapse and a prolonged slump. Leaders of the advanced capitalist countries avoided the mistakes made by their counterparts after the 1929 crash, when they stood aside and let the system collapse. On this occasion, they intervened on an unprecedented scale. The United Nations (World Economic Situation and Prospects 2009) estimates that governments worldwide have used around $18 trillion (or about 30% of world gross product) to bail out the banks and support the financial system. At the same time, the major capitalist countries have implemented fiscal stimulus plans totalling about $2.6 trillion (about 4% of world production), to be spent over 2009-11. However, the UN report comments that, in reality, it would require a stimulus of 2-3% of world gross product a year to make up for the estimated decline in global aggregate demand.
It is likely that, at best, it will take five years or more for the major economies to make up the losses of 2008-09. The OECD recognises that there will be a growth in structural, long-term unemployment, and that capital stock is likely to be reduced on a long-term basis, reducing the output capacity of major economies.
The return to positive growth in the US, the world’s largest economy, and the sustained growth in China (expected to be around 9% this year) have been major factors in the limited recovery of the global economy (see box). The return to growth in the US is almost entirely due to the stimulus package (see box). Given the continued rise in unemployment and the mounting debt burden faced by the majority of working people, the economy will slide back without a new stimulus package. However, Barak Obama is currently emphasising the need to reduce the federal government deficit, rather than pushing for a new package. US consumer demand for manufactured products (which account for over 70% of the US economy) are still a decisive factor in world output and trade. Weak or negative growth in the US spells crisis for major exporters such as China, Japan and major European manufacturers like Germany.
Growth in China has been sustained on the basis of massive state intervention, with a $585 billion package of expenditure and loans. This reflects the major role still played by the state in the Chinese economy, despite the recent growth of private capitalism. However, most of the expenditure is concentrated on infrastructure projects, rather than raising the wages and living standards of the masses of workers and peasants. The Chinese regime is still counting on a revival of its export markets in the US and Europe.
A new bubble?
Much of the optimism among investment bankers and economic commentators about ‘green shoots of recovery’ comes from the rebound of shares since March 2009 (up around 60% from the low point, though still around 25% lower than the previous peak). There is special enthusiasm among speculators for financial assets (shares, bonds, property, commodities, etc) and for investment in so-called ‘emerging markets’, that is, economies like China, South-East Asia, Brazil, etc.
The downturn has not been so severe in these economies as in the advanced capitalist countries. But the main reason for the surge of investment is the phenomenal profits that can be made on the basis of cheap credit. Banks, hedge funds and other financial institutions are flush with money as a result of the government bailouts in the US, Britain and Europe. Moreover, on the basis of state guarantees of their assets, they are able to borrow money at very low interest rates. In general, they have not returned to normal levels of lending to business, so the cash is being channelled into speculative activity.
The quantitative easing of the Federal Reserve Bank and other central banks has also hugely increased the liquidity of financial institutions. Mainly on the basis of printing money (rather than the issuance of government bonds, which is a form of borrowing), the US Federal Reserve is purchasing up to $1,800 billion of US government bonds, mortgage-backed securities, and various other forms of securitised debt. This represents a massive injection of liquidity into the finance sector. Given the relatively low rates of interest that can be earned on government bonds, the finance houses are using their credit to invest in shares, commodities, and other more profitable assets.
Added to this injection of liquidity is the fall in value of the US dollar. Paradoxically, given the US downturn, the dollar rose in value during 2008, mainly because governments and speculators internationally saw US government bonds as a ‘safe haven’ for their cash. But since March, the dollar has been falling quite rapidly. Through ‘short-selling’ the dollar (a way of profiting from the fall in the value of the dollar), speculators have been able to borrow dollars effectively at negative interest rates (as low as 10% or 20% negative on an annualised basis). They are then using the cash to buy shares, bonds, commodities, currencies, etc, both in the advanced capitalist countries and in the semi-developed countries (emerging markets). Speculators in these markets have been able to make gains of between 50-70% on these short-term, speculative investments.
These easy profits undoubtedly represent a ‘recovery’ for speculators. But this new bubble is far from representing a real recovery of the US or global economy.
“One day”, warns Nouriel Roubini, “this bubble will burst, leading to the biggest coordinated asset bust ever”. (Mother of All Carry Trades Faces an Inevitable Bust, Financial Times, 1 November) Sooner or later the dollar will stop falling, and speculators will no longer be able to borrow at such huge negative interest rates. The Federal Reserve’s quantitative easing programme, moreover, is scheduled to end by spring 2010. Any rise in US interest rates, which may come if GDP growth continues, would also undermine this speculative activity. Such “an unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall”. (Roubini) A crash of these highly speculative financial markets would undoubtedly cut across any revival of global growth.
Dangers for capitalism
What are the prospects for the global capitalist economy? There is likely to be a weak, fragile recovery, which could last for a few years, but could be equally cut across by a new downturn once the state stimulus packages run their course. Capitalist leaders are themselves uncertain whether there will be a revival of self-sustained capitalist growth. Short-term fluctuation will continue, as always under capitalism. But there is likely to be a prolonged period of feeble growth or stagnation, with depressionary features. There will undoubtedly be a period of structural unemployment which, together with squeezed wage levels and social spending cuts, will erode capitalist markets.
Intervention by the major capitalist powers has so far prevented a meltdown of the banking and finance system. Nevertheless, there are still huge amounts of bad debts concealed within the system, which may lead to renewed crisis in the banking system in the next few years. Bankers and speculators are vigorously fighting off attempts to impose tighter regulation of the finance sector. The current speculative bubble on stock exchanges, especially in emerging markets, show that the stability of the global economy will still be threatened by speculative excesses. Many serious capitalist commentators take it for granted that it is only a matter of time before the next crisis. “The clock ticks inexorably towards another disaster…” writes Francesco Guerrera. (Countdown to Next Crisis, Financial Times, 16 October)
Some, with good reason, also fear the political backlash against the system: “When the next crisis hits, and it will, [the] frustrated public is likely to turn, not just on politicians who have been negligently lavish with public funds, or on bankers, but on the market system. What is at stake now may not just be the future of finance, but the future of capitalism”. (John Kay, ‘Too Big to Fail’ is Too Dumb an Idea to Keep, Financial Times, 27 October)
Moreover, finding an exit strategy from the policy of ultra-low interest rates, super-loose money supply, and quantitative easing (printing money) is fraught with danger for the capitalists. At the moment, quantitative easing is not having an inflationary effect. This is because of the strong deflationary trends in the world economy, with falling demand and global overcapacity underlying a general fall in the prices of manufactured goods. At the same time, banks are hoarding much of the credit they have accumulated under the quantitative easing programmes. However, as soon as growth revives and banks begin to put more of their reserves into circulation through loans to businesses, there will undoubtedly be a serious danger of inflation replacing deflation. Premature withdrawal of monetary stimulus could provoke another downturn. On the other hand, a delay in reining in the excess liquidity could cause an explosion of inflation. “There is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability. For all we know, there may not be a safe way down”. (Wolfgang Muchau, Countdown to the Next Crisis is Already Under Way, Financial Times, 18 October)
Together with support for the finance sector, state fiscal stimulus programmes have hugely boosted government deficits. Many current deficits of the advanced capitalist countries have been pushed above 10%. Given the reluctance of capitalist governments to increase taxation on big business and the super-rich, these deficits will weigh on the economy for a long time ahead. Governments will attempt to reduce the deficits through cutting state expenditure, which will mean a further assault on working-class living standards. At the same time, financing state deficits will take a growing proportion of global savings (an estimated 25% in the OECD countries). This will reduce the capital available for both public and private investment.
Growing inter-capitalist tensions
A period of weak growth will aggravate all the inter-capitalist tensions in the world economy. According to the head of the World Trade Organisation, Pascal Lamy, there is already ‘low intensity’ protectionist war. This is likely to become more intensive in the coming years.
Above all, the role of the US dollar will be threatened. Being able to pay its debts in its own currency has been an enormous advantage for US imperialism. But the price is the huge accumulation of debt with the rest of the world. At a certain point, this debt will become absolutely unsustainable, with a collapse of the US bond market and the value of the dollar. Capitalist leaders internationally are well aware of this problem, but are completely unable to steer an orderly transition to an alternative system of reserve currencies (either through a shared system based on major currencies such as the euro, yen and yuan, or on special drawing rights [SDRs] administered by the IMF). A collapse of the dollar would mean global currency chaos and could itself provoke a new, even deeper downturn in the world economy.
Some of the semi-developed countries, such as Brazil, India, and South-East Asian countries appear to have escaped the worst effects of the current crisis. In particular, the increase in commodity prices (through continued demand from China and speculative dealing in commodity futures) appears to have benefited commodity producers. But this sheltered position will be short lived. The underlying social contradictions in these countries are becoming more acute every day.
Since 1980, world capitalism has managed to find its way out of successive crises through a series of financial bubbles – in financial assets, housing, commercial property, and commodities. But the crisis that has unfolded since 2007 marks the end of this road. There may well be new bubbles and speculative excesses. But they will not provide the huge, inflated cushion on a comparable basis with the last 20 to 30 years. World capitalism has entered a new, more acute period of crisis.
US rebound: how high, how long?
The US economy appeared to have reached the bottom of the recession at the middle of the year and now appears to be at the beginning of a recovery, at least as far as GDP growth is concerned. For workers, however, the recession will continue and may even intensify. Unemployment will continue to rise, while wages are being squeezed. For US capitalism this has been the longest recession since the 1930s (from December 2007 to July 2009, over 18 months). The cumulative loss of output since the beginning of 2008 is minus 3.55% (compared with the OECD average, minus 4.7%).
Provisional figures for the third quarter 2009 indicate GDP growth of 3.4%. There has also been a rebound on the US stock exchange, and some of the big banks have recently announced a return to profitability. Many will be paying their bosses huge end-of-year bonuses – Goldman Sachs, for instance, is planning to hand out $21 billion in bonuses this year. This will intensify the widespread anger at the bankers, whom most people blame for the crisis.
There were no celebrations in the White House when the third quarter growth figures were announced. “The White House was more funereal than celebratory in keeping with the opinion of most voters”, commented Edward Luce, (Angry Americans Feel They Are Still in Slump, Financial Times, 29 October)
In fact, unemployment figures moved above 10% (over 16 million). However, when other jobless workers, like the involuntarily part-time, discouraged workers, and new entrants to the labour market, are included the real figure is around 17%. Over eight million jobs have been lost during this recession, the first since the great depression of the 1930s to wipe out all the jobs growth from the previous business cycle. All the indications are that, even with continued growth, unemployment will continue to rise for several years.
The proportion of long-term unemployed is rising, youth unemployment is over 50%. One in nine workers now depend on food stamps.
While GDP was returning to positive growth in the third quarter, real disposable income fell by minus 3.4%. Both productivity and corporate profitability has been boosted by “unusually aggressive cost control”. (New York Times editorial, 27 October) Cost control means fewer jobs, lower wages, more intensive work effort.
The main factor in the return to growth has undoubtedly been government intervention through the federal stimulus package and financial support for housing from the federal government and the Federal Reserve Bank. The ‘cash for clunkers’ (vehicle replacement) scheme pushed up car sales by over 20% (though this has not prevented massive layoffs and wage cuts in the US car industry). This programme alone accounted for about 1.9% of the 3.4% third quarter growth. Much of the rest was due to businesses rebuilding their inventory stocks, which had been run down to very low levels. The Obama administration claims that the stimulus has added between 3% and 4% to GDP – in other words, there would have still been negative growth without it. But the stimulus package has probably created or saved fewer than a million jobs.
There has been some revival of the housing market, although housing now accounts for 2.4% of GDP compared to 6.3% at the end of 2005. Housing sales have been boosted, at least temporarily, by the $8,000 tax credits for first-time house buyers, as well as Federal Reserve support for the mortgage market (through the purchase of asset-backed securities, taking over the role of the banks).
The two-year stimulus package is about halfway through. There is an estimated $291 billion left to spend on infrastructure and aid to states, with another $150 billion additional tax cuts to come. The big question is, will growth continue when the stimulus has run its course? Many capitalist commentators are doubtful. In an editorial, The Case for More Stimulus, the Financial Times commented: “Without another round of effective stimulus, the worst recession in modern memory will likely become – at best – the weakest recovery in modern memory”. (27 October) It called for another instalment of stimulus.
The rebound of the stock markets since the beginning of the year by no means indicates a healthy economy. The big banks and financial institutions are flush with money from the Federal Reserve’s quantitative easing policy (basically, printing money to boost the credit available to banks). The banks are, nevertheless, still very reluctant to lend to business, especially medium and small businesses. More and more of their cash has been diverted into the stock market where they can earn higher returns than from bank deposits or government bonds. This is yet another bubble and it is unlikely to last very long.
None of the underlying problems of US capitalism have been solved. Sustained growth will depend on a revival of consumer spending, which accounts for over 70% of GDP in the US. Rising unemployment, squeezed incomes, and a huge burden of debt from recent years will all restrain consumer spending. Rising house prices will not be a way out this time.
The fall of the dollar is making US export prices cheaper on world markets. Yet the savage de-industrialisation of the last period has undermined US capitalism’s ability to increase its market share of manufactured goods. A return to growth, if it is sustained, will mean renewed growth of the US trade deficit and an increase in its indebtedness to the rest of the world.
China: cheap goods and cheap credit
At the end of 2008, as the credit crunch spread through the world economy, China was hit by a massive slump in exports (down 15-20%). This was the result of a slump in consumer demand in the US and European countries. This was a serious blow to China’s export-oriented economy.
A year later, the Chinese economy has rebounded, with 8.9% growth in the third quarter and the probability that overall growth for 2009 will be at least 8%. This contrasts with most of the major economies which, despite recent growth, will suffer an overall decline of GDP in 2009.
This growth is the result of a massive intervention of the state, which still plays a decisive part in China’s economy. In November 2008, the regime announced a huge stimulus package of four trillion yuan or $585 billion. This was partly state expenditure and partly a huge increase of loans by the state-controlled banking sector. Over three-fifths of the stimulus spending has been on infrastructure projects: roads, bridges, power plants, and a massive extension of China’s high-speed rail network. At the same time, the government has maintained a super-loose money policy, with low interest rates and a huge increase of the money supply. It has also extended cheap export credits to manufacturing exporters.
As a result of the stimulus, fixed investment, already high, grew by more than 30% over the last year. It is the investment growth that is the real locomotive of China’s economy.
Profits of manufacturing enterprises have begun to recover, while there has been a surge in private investment (up 30% in the year to August), mainly in housing and commercial property construction. There is little doubt that some stimulus money is being siphoned out into the housing sector, with the appearance of bubble symptoms. The speculative housing market is also drawing in capital from overseas, attracted by the prospect of profit and the possible revaluation of the Chinese currency, the yuan (or renminbi – rmb).
There is also a revival of manufacturing industry with a revival of exports of manufacturing goods. There is massive overcapacity in many manufacturing sectors, and this has spurred ruthless price cutting by exporters. Exporters have also benefitted from the fact that the yuan is pegged to the dollar, which has fallen in recent months, reducing the prices of Chinese exports on world markets. Chinese exporters are gaining market share at the expense of other exporters (such as Japan, Italy, Canada and Mexico). Rather than attempting to compete with China’s low-cost production, countries like Japan are more and more concentrating on the export of capital goods (production equipment, components, etc) to China. A revival in China’s economy will therefore have some stimulating effect on Japan and other South-East Asian countries.
Although it has sustained a substantial growth of GDP, the state stimulus package is an emergency policy, a quick-fix that will not resolve the deep imbalances in China’s economy. Nor will it overcome the social tensions. It will not reduce the huge and growing disparity between rural and urban incomes. The demand now sustaining the economy is mainly created by infrastructure spending, not by the development of the domestic market.
It is claimed that social spending has been substantially increased, but from a very low base, and it accounts for under 20% of the stimulus package. Fearful of social unrest in the countryside, the regime has maintained grain prices above international levels in order to support the incomes of farmers. However, the rise in unemployment as a result of the downturn at the end of 2008 has had a devastating effect on the countryside. Earlier this year it was estimated that there were 45 million rural residents who had lost their jobs or postponed their departure from agriculture. By August of this year 32 million had found jobs, though mostly at lower wage rates than previously (at least 10% lower).
The huge amount of funds and cheap credit associated with the stimulus package are feeding the enormous corruption and waste that exists in China. They are also fuelling speculative investments, especially in property.
The infrastructure spending, moreover, will not in any way resolve the problem of the international imbalance between China and the US. China’s share of US imports has continued to grow (China now accounts for 19% of US imports). Its trade surplus with the US has also grown. This year China has so far accumulated another $741 billion of foreign currency reserves, bringing its total currency reserves to $2.27 trillion (mostly held in dollar assets). In other words, China continues to supply the US with cheap goods and cheap credit, subsidising US consumption at the expense of the Chinese working class.