The economic crisis deepens
October 2008
has seen the most extraordinary and abrupt deepening of the world economic
crisis of overproduction.
The Deputy
Governor of the Bank of England, as he contemplated the financial system
crashing round him, was forced to conclude: “This is … possibly the
largest financial crisis of its kind in human history”.
The fact is
that although trillions of dollars were being poured into the system to try to
calm the financial maelstrom, even these unimaginably huge sums of money were
having little or no effect. Alistair Osborne, writing in the Daily
Telegraph of 18 October (‘There is no end in sight for this particular
storm’), calculated that “Tot it all up and the world’s leaders – acting in
concert after last weekend’s G7 meeting – had thrown more than £2 trillion at
the problem. And, for almost two days, the markets roared their approval”.
Less than 48 hours later, however,
stock markets, which had briefly staged a recovery, were plummeting again.
Suzy Jagger, writing in The Times of 25 October (‘Wall Street halts
futures trading as panic grips global markets’) noted:
“Stock markets across the world
cracked yesterday, forcing Wall Street to suspend trading of key futures
contracts to stem panic-selling, while Moscow shut for business altogether.
“Sharp losses in New York, London, Europe and the Far East raised the spectre that governments may be forced to
impose emergency holidays to avert a meltdown across world stock markets …
“In New York, the Dow Jones
industrial average plunged … 3.6 per cent … In London the FTSE 100 fell to its
lowest level for five years, sinking.. 5 per cent…”
This was on top of falls in share
prices that had already taken place earlier in the month in the week commencing
6 October when in response to the $700bn bailout announced by the US to protect
its banks, stock markets fell by 21% in London, Tokyo by 23% and New York by
18%. The direct consequence of this was the collapse of Iceland’s entire banking system.
Why are stock markets falling?
Part of the reason they are
falling is because the speculative bubble in stocks and shares, and indeed in
many other avenues of investment, that has been building up for years has
burst.
For a long time, people were
prepared to pay for shares a great deal more than they were worth, simply
because they expected to be able to sell them for an even higher price to a
purchaser who judges the value of investments not on the basis of their
underlying profitability, but on the basis of past share movements as tracked by
computer. Of course, this was never a wise path for investors to take, but
because of overproduction there has been for many years a dearth of
possibilities for sound investment.
Although a Marxist training in
economics, or even the application of a little logic and some basic
understanding of market history, would have warned the economic pundits of the
world that sooner or later every bubble bursts, it must be remembered that the
hired ideologues of the bourgeoisie, the professors and the economics experts
who have access to the bourgeois media, have diligently been weaving fairy
stories of limitless wealth creation for the benefit of every human being on
the planet thanks to the greatness of the capitalist system. Every
‘respectable’ economist knew that ‘Marx got it wrong’, unable to foresee the
genius of bourgeois economic science that was able to prove that the laws of
capitalist production discovered by Marx were not laws at all![1]
In the end the bubble burst
because of the credit crunch which was forcing people to sell assets such as
shares in order to be able to pay their debts.
An excess of sellers over
purchasers forces down the price, the falling price then triggers more sellers
– all of this aggravated by the fact that just as previously rising prices
triggered purchases regardless of underlying value, falling prices had the same
effect in reverse.
The effects have been still
further aggravated by the fact that the underlying value of shares has
plummeted. Even very large multinationals are expecting hard times ahead that
will challenge their profitability, not only as regards their ability to pay
dividends to their shareholders but even perhaps to remain in business at all –
so although stocks and shares have already fallen massively, there is every
possibility that they still have a long way further to fall.
The cause of capitalist economic crisis
Crisis is inseparable from
capitalism. The reason for this is that in its search for profit, capitalism
reduces to the maximum all expenditure on wages and the provision of benefits
such as health and education services to the vast majority of humanity, the
working people. It is driven to introduce more and better technology in order
to replace workers by machines and thus save money. Because of this, there are
always unemployed masses, both at home and abroad, competing for such jobs as
there are, enabling the capitalists to pay relatively low wages. The
relatively impoverished masses, however, are unable because of their poverty to
buy the vast mass of goods and services thrown onto the market by the various
capitalist enterprises. This drives many sellers out of business, and even
more workers into the ranks of the unemployed, all of which makes matters
worse, until gradually crisis point is reached, when all hell is let loose. To
overcome crisis, which after all bankrupts many of the great and good
bourgeois, not just the exploited and oppressed millions, bourgeois economists
have come up with all kinds of devices. Keynes famously proposed a period of
heavy public spending financed by borrowing to try to kick start the economy
into recovery, a remedy that Gordon Brown now proposes to resort to in the UK. Application of Keynesianism, however, appears to cause hyperinflation, so that
although buyers are created for the capitalist market, and sellers can
therefore for a while continue to sell their products, the profits they make
are eaten away by inflation, which also reduces the purchasing power of wages,
so that the ultimate effect is much the same as if the Keynesian tricks had not
been tried.
For the last 40 years, however,
the bourgeoisie has resorted to lending people money to enable them to buy,
hoping to have all the benefits of Keynesianism without the downside. At the
end of the day, however, the need to service and repay the loans hits
purchasing power to such an extent that crisis can be held off no longer, which
is what is at the root of the subprime mortgage debacle which triggered the
credit crunch, with forced the crisis of overproduction which had been
simmering under the surface for decades out into the open with an almighty
bang.
Crisis spreading to the “real economy”
Once the floodgates of crisis
have been opened, nothing can prevent its awful consequences. In a capitalist
economy, all production and distribution of necessities and luxuries alike
depends on somebody undertaking the responsibility in the hope of profit. In a
crisis of overproduction there is a total glut relative to buyers’ ability to
pay, as a result of which prices fall below even the cost of production.
Capitalists therefore give up producing even the most essential items, and
throw their employees on the scrap heap, thus aggravating the crisis by
reducing still further the purchasing power of the masses. It is only when
sufficient enterprises have been driven out of business, and existing stocks
have been consumed or destroyed, to create a shortage of supply relative to the
few who are still able to buy, that those who are still in business can start
making profits again. This may not happen for some years.
The present crisis is unfolding
in classic manner. Economies are contracting (i.e., capitalist enterprises are
producing less), while unemployment is rising. A survey of 100 finance
directors in October conducted by accountants Baker Tilly found that 43% of
firms plan to cut jobs this year. 63% have in the last 6 months revised or
halted their growth plans. On 1 October, Chris Giles in the Financial Times
(‘Factory data show world economy suffering’) reported:
“In the eurozone, the
purchasing managers index [PMI] for September was confirmed at 45, down
from 53.2 a year ago. Any figure above 50 indicate a majority of the survey’s
respondents are reporting rising output while lower figures suggest contraction.
“In Britain, a sudden drop in
the equivalent PMI index from 45.3 in August to 41 last month, the weakest on
record, highlighted the fragility of the economic outlook at the vulnerability
of UK manufacturers to global events in spite of a fall of 15% in sterling over
the past year … China’s PMI index increased to 51.2 from 48.4 in both August
and July, although it was still well down on the 59.2 reading of April”.
And Jonathan Sibun in the Sunday
Telegraph of 26 October 2008 (‘Real economy takes a hit’) reports:
“‘There is every possibility that the downturn in activity may be as severe
as the one the UK experienced in the early 1980’s, when unemployment reached almost 12 pc of the labour force,’ warned David Shepherd, professor of economics at Westminster Business
School.
“‘The pessimists would
argue that things may get even worse than that’.
“In the three months
to the end of August unemployment jumped the most in 17 years, up 164,000 to
1.79 million.
“Economists now see 2
million unemployed as a best case scenario – 12 per cent would leave some 3.8
million people out of work.”
The collapse in house prices
around the world will also take their toll on employment, as Myra Butterworth
reports in the Daily Telegraph of 22 October (‘House prices will fall 35
pc from their peak, say economists’):
“House prices are
expected to register their biggest decline on record by autumn next year, and
consumer spending, which is closely linked to property prices, is expected to
plunge.
“The prediction comes
as government data disclosed yesterday that the number of completed housing
transactions dropped to a record low in September of 59,000, compared with
154,000 at its height in December 2006.
“This is expected to
have a major impact on the wider economy as each house sale triggers about
£4,000 in spending on household goods …
“An equivalent amount
is also spent on solicitors, surveys and other house purchase costs.
“The lack of spending
in these areas will affect employment, with some analysts forecasting that the
construction sector alone could see a loss of up to 350,000 jobs within the
next five years.”
Another factor that will
aggravate the present crisis is the fact that people’s savings will have been
drastically reduced as a result of falling stock markets. The most important
savings people have are their pensions, and these have been suffering hammer
blows for many years now, not only as a result of stock market losses, but also
as a result of the insolvency of former employers and also employers’ moving away
from final salary schemes that guarantee a minimum level of pension to schemes
where the pension depends on the value the savings happen to have on the date
of retirement. In the current crisis, pensions have again suffered badly.
According to Yvette Essen in The Daily Telegraph of 27 October, ‘Pension funds
take a £150bn hit’, “Pension funds have seen £157bn wiped off their value in
the past 12 months due to the rout on the global stock markets.
“The value of defined
contribution pension scheme assets has plummeted by nearly a third … in the
past year …
“…although more than 3.7 UK workers have been setting aside money towards their retirement every month, the value of
their pension pots had tumbled by 28 pc. …”
Clearly those retiring this year
will not be able to contribute much by their spending to lifting capitalism out
of crisis!
Measures to
solve crisis in fact aggravate it
The staggering amounts of money
being “found” by the various bourgeois governments around the world to try to
rescue the world’s financial system will not in the long run help matters,
mainly because it will burden the masses in the various capitalist countries
with debts that will have to be repaid through taxes, thus reducing purchasing
power to a considerable extent:
The Centre for Policy Studies (a
right-wing think tank) has estimated the true scale of public debt at £1.8
trillion – more than 3 times official estimates, nearly £76,000 for every
household in the country. Official figures – which put the national debt at £645
billion – do not include the cost of public sector pension liabilities or
projects funded under the government’s public finance initiative, the debt
incurred by national rail and the recent nationalisation of Bradford &
Bingley. Furthermore, the recent banking bail-out could add up to £500 billion
of the debt figure, it claims. This would take the national debt to £2.3
trillion – the equivalent of over £96,475 per household.
If one adds this public debt to
the private debts that households are struggling to repay, then again it is
hard to escape from the inevitable conclusion that it will be years before the
capitalist markets see a resurgence of purchasing power.
Worldwide, according to Philip
Aldrick (‘Taxpayers cough up £4,473 bn to save the world’), Daily Telegraph 29
October 2008, “The size of the unprecedented rescue is equivalent to 12 pc
of the entire global economy. Of the sum, £395 bn will be used to recapitalise
banks, and £397 bn will be spent buying up their ‘toxic’ assets. State guarantees
to get the wholesale markets moving again come to £2,927 bn and another £754 bn
has been provided in loans and through bank nationalisations.” Again,
these debts will weigh down like massive lumps of lead on the ability to spend.
Crisis in non-imperialist countries
If imperialist countries like
the US, the UK, continental Europe and Japan are suffering as a result of the
crisis, one can be sure that in non-imperialist countries matters will be much
worse. If Gordon Brown can calmly draw up plans for public spending his way
out of the crisis (for all the good that will do!), this is not an option
available to oppressed countries that have to approach the International
Monetary Fund for a bail-out. They invariably face demands that they curb
public spending drastically in order to ensure that whatever economic output
they do manage to keep operative is used to the maximum extent possible to
repay the IMF loans. Many non-imperialist countries have benefited in the past
few years from high commodity prices that has enabled many to improve to some
extent the living standards of their populations. There was even the
impression that countries like Brazil and India were ceasing to be oppressed
countries. However, the present crisis is highlighting the fact that the
recent high commodity prices were the exception that prove the rule. Their
economies remain highly dependent on serving the interests of imperialism,
particularly through the production of so-called ‘commodities’, the raw
materials of capitalist industries, and as soon as the imperialist countries
are in economic decline, they drag the oppressed countries down, just as the
ruin of the bourgeoisie also drags down the proletariat, who suffer to a far
greater extent from the crisis although it was not of their making.
Again, however, the
impoverishment of the oppressed countries, just like the impoverishment of the
working masses, exacerbates the crisis, and the bankruptcy of the debtor not
infrequently bankrupts the creditor:
Ambrose Evans-Pritchard, ‘Europe on the brink of currency crisis meltdown’, Sunday
Telegraph, 26 October 2008: “Western
European banks hold almost all the exposure to the emerging market [‘emerging market’ being the bourgeois term for an oppressed country] bubble,
now busting with spectacular effect.
“They account for
three-quarters of the total $4.7 trillion … in cross-border bank loans to
Eastern Europe, Latin America and emerging Asia extended during the global
credit boom – a sum that vastly exceeds the scale of both the US sub-prime and
Alt-A debacles.
“Europe has already had its first foretaste of what this may mean. Iceland’s demised has left them nursing likely losses of $74 bn. The Germans have lost $22
bn. …
“Austria’s bank
exposure to emerging markets is equal to 85 pc of GDP – with a heavy
concentration in Hungary, Ukraine, and Serbia – all now queuing up … for rescue
packages from the International Monetary Fund.
“Exposure is 50pc of
GDP for Switzerland, 24pc for Sweden, 24pc for the UK, and 23 pc for Spain. The US figure is just 4pc. ..
“Amazingly, Spanish
banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined …. Hence the growing doubts about the health of Spain’s financial system – already
under stress from its own property crash – as Argentina spirals towards another
default, and Brazil’s currency, bonds and stocks all go into freefall.
“Broadly speaking, the
US and Japan sat out the emerging market credit boom. The lending spree has
been a European play – often using dollar balance sheets, adding another ugly
twist as global ‘deleveraging’
causes the dollar to rocket. Nowhere has this been more
extreme than in the ex-Soviet bloc.
“The region has
borrowed $1.6 trillion in dollars, euros and Swiss francs. A few daredevil homeowners
in Hungary and Latvia took out mortgages in Japanese yen. They have just
suffered a 40 pc rise in their debt since July …
“Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch
attempt to defend the forint’s currency peg in the ERM.
“It is just blood in
the water for hedge funds sharks, eying a long line of currency kills …
“The markets no longer
believe that the spending structure of the Russian state is viable as oil
threatens to plunge below $60 a barrel.
“The foreign debt of the oligarchs ($530 bn) has surpassed the country’s
foreign reserves. Some $47bn has to be repaid over the next two months…
“A grain of comfort for British readers: UK banks have almost no
exposure to the ex-Communist bloc, except in Poland – one of the less
vulnerable states.
“The threat to Britain lies in emerging Asia, where banks have lent $329 bn, almost as much as the Americans and
Japanese combined. Whether you realise it or not, your pension fund is sunk in
Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?”
Solutions?
The only ‘solution’ for a
capitalist crisis under capitalism is to sit it out, even if you and your whole
family starve to death in the process. The bourgeois media are full of
assurances that it will only be for a year or two that life is really
uncomfortable – in fact recovery will start before there has really been time
to suffer too badly. Experience of other crises since that of 1929 also
suggests that the pain is unpleasant but short-term. However, these other
crises have succumbed to measures postponing their worst effects. In 1929 the
postponement measures came to the end of the road. This is quite probably the
case again, and if so, if the crisis is going to strike the world definitively
as it did in 1929 brooking no obstacle placed in its path, then if we wait for
capitalism to recover, the wait is likely to be a long one.
An anonymous Associated Press
author wrote in ‘It takes a long time for a market
recovery’:
“When
the market crashed Oct 19, 1987, sending the Dow Jones industrial average down
508 points to 1,738.34, the blue chips had lost 938 points, or 36.1 percent,
since reaching a then-record close of 2,722.42 on Aug 25, 1987. It took just
over 15 months for the Dow to get back to its pre-crash level, and almost two
years … to reach a new closing high…
“The
recovery from the 1929 crash was more difficult – and spanned a quarter of a
century. The Dow had reached a high of 381.17 on Sept 1 and then began
drifting downward Although the date of Oct 29, 1929, Black Tuesday, is
probably best-known by the public, many market historians say the crash began
on Thursday, Oct 24, and accelerated the following Monday and Tuesday.
“From
its close … on Oct 23, the Dow tumbled … 24.8 percent, by the time it
ended… on Black Tuesday. It continued its decline to a low … on Nov 13,
giving it a drop of … 35 percent.
“That
also made for a drop of … 47.9% from the September high. But stocks kept on
falling as the Great Depression wore on, and the Dow fell to 41.22 on July 8,
1932, giving it a loss of … 89.2 percent from the September 1929 high.
“The Dow did not close above
305.5 again until 1 April, 1954, more than 24 years after the crash, and it
didn’t return to 381.17 until Nov. 23, 1954, a quarter of a century after Black
Monday and Tuesday.
“The Dow has a large
percentage drop to regain this time. By Friday’s close, the average had fallen
… 40.3 percent from its record finish … a year earlier, on Oct. 9, 2007.
… With Monday’s advance … the Dow is still nearly … 33.7% below its
record close.”[2]
It must be added to this that
capitalist “recovery” was really only made possible by the wholesale worldwide
destruction and devastation brought about by the Second World War, and the reconstruction
demand following that war. Does anyone seriously expect the working masses to
have to wait quarter of a century and to go through another world war before a
small modicum of prosperity is temporarily restored in a few patches on the
globe?
The working class has the power
to put an end not only to this economic crisis, but to the very concept of
economic crisis. All it has to do is to seize the means of production from the
capitalist class, cancel all indebtedness to the capitalist class and its
financial institutions, set up state planning authorities to organise how much
should be produced and how it should be distributed. Only two things can
prevent the working class from saving itself in this way: ignorance and fear.
Thanks to bourgeois propaganda most workers are unaware of the causes of the
crisis, and have been shamelessly brainwashed into believing that communism –
i.e., their own class rule – can never be anything other than inefficient,
dictatorial, arbitrary and useless. In addition, the bourgeoisie is quite
prepared to exterminate physically anybody who tries to dispossess them,
notwithstanding that it is their capitalist system that is inefficient,
dictatorial, arbitrary and useless. History proves that there is no limit to
the brutality and barbarity to which they will resort to keep themselves in
power. The working class, however, far outnumbers the bourgeoisie, and will in
due course be able to overwhelm their resistance.
To do this, however, will depend
on the working class having a sufficiently clear understanding of what needs to
be done, and it is the role of Communist Parties all over the world to be
bringing that understanding to the working masses. It has to be admitted,
however, that very many of these parties are sadly failing even to make an
effort to help workers understand. While prepared to wring their hands and
describe in lurid detail the current economic crisis and the devastating
effects it is having and will in the future have on working people, the cause of
the crisis – overproduction – is ignored absolutely, all the better to palm off
some bourgeois rescue measure as ‘socialism’. They even present bank
nationalisation by bourgeois governments (i.e., adoption of bank debt as
national debt, payable by the taxpayers) as a step that might make it ‘easier’
to bring about socialism! Rather than pointing out the need to organise to
expropriate the capitalist class and organise production according to a state
plan (NOT profit!), while fighting off the furious resistance of the capitalist
class, they make coy references to democratising parliament! They buy into the
thesis that rather than crisis being inherent in capitalism, it is just
mismanagement by greedy fat cats – a problem that should be dealt with by introducing
more supervision and regulation. Heaven forfend that capitalism should be
overthrown!
NOTES
[1]
At the
“University” held by the revisionist Communist Party of Britain this month in
Croydon, Mary Davis got up and sang this vulgar bourgeois refrain as her
introduction to the subject of the present economic crisis!
[2] See International Herald Tribune, 13
October 2008.