Once more, the world economy is dangling on the edge of a precipice. The crisis in Greece has again hit the headlines and threatens to drag Europe down with it. The days when capitalism could simply sail by without a care in the world have gone forever. As in the interwar period, the crisis of capitalism remains deep-seated and protracted.
Central bankers and governments are busy fretting over what should be done to get themselves out of this mess. With the slump of 2008, the deepest since the 1930s, the capitalist system experienced a qualitative change, a new turning point. An epoch of crisis, stagnation and deflation has opened up. Europe’s prices fell for the fourth consecutive month in a row. Despite all the speculation about a future depression, it can be said that capitalism is already in such a depression. All signs of recovery have been continually dashed. Small rises in economic output are followed by falls or weak figures. Whatever they do, they can’t get out of this intractable crisis. This, to coin a phrase, is the new “normality.”
The International Monetary Fund, in its twice-yearly World Economic Outlook, has again warned of the dangers of a “secular stagnation,” which has become all pervasive, epitomized by falling oil and commodity prices. “Most of the world’s leading economies should prepare for a prolonged period of lower growth rates, which would make it harder for governments and companies to bring down their debt levels,” it argued. This warning will reignite fears that the world economy is facing a prolonged period of low growth, which has huge implications, not least about debt.
The report also alarmingly showed that the global economic crisis was worse than previous economic turmoil and could have permanently lowered the rate at which economies can expand, rather than only having a one-off effect. China, in particular, could see a sharp contraction in the growth of potential output, as it tries to rebalance its economy away from investment and towards consumption. The slowdown in the so-called emerging markets is set to be even sharper. Growth in potential output, which continued to expand in the run-up to the crisis, is set to decline from 6.5 percent a year between 2008 and 2014 to 5.2 percent in the next five years. In the rich world output growth will be 1.6 percent a year between 2015 and 2020, the IMF forecasts.
Each central authority is attempting to solve its own problems, but doing so only creates new problems elsewhere. It is each man for himself. The American bourgeois have their own agenda. By believing that they are finally in a recovery—some six years after the Lehman collapse—they think they can take away the props and restore normality. They have put an end to Quantitative Easing and have talked about raising interest rates from rock bottom levels. The European Central Bank is carrying out its own QE, which has sent the dollar soaring and affected America’s competitive position on the world market. America’s recent slowdown has been in part to weaker exports.
Now, many other countries such as Korea, Canada, Sweden, Australia, and even China have responded to concerns about deteriorating trade competitiveness by cutting interest rates more than usual. While not all countries can devalue against each other, they can all try to “devalue” their currencies against the general price level on goods and services. This opens up the possibility of trade war.
In the past, emerging markets sucked in excess capital, thereby stimulating their growth, and then recycled these assets back into the western economies. This merry-go-round, at least for a period, pushed capitalism forward. That has now come to an end. Capital is flowing out of these emerging economies in a reverse process, creating instability throughout the world economy. Rather than stimulating, their effects are depressing.
“The rise in emerging market reserves from $1.7tn at the end of 2004 has been a foundation stone in the global economy for a decade,” explained the Financial Times. “Much of the capital that emerging markets absorbed from trade surpluses, portfolio inflows and direct investments was recycled into US and European debt markets, helping to finance debt-fuelled growth in developed economies.”
The article continued:
This dynamic may now be going into reverse, economists said. “This all points to something more worrying. If emerging markets are no longer accumulating forex reserves, the world’s savings glut may be more apparent than real,” said Frederic Neumann, economist at HSBC. The world will “sorely miss” the recycling of emerging market reserves when the West’s easy monetary policy turns tighter, he added. (April 1, 2015)
The International Monetary Fund said recently that total foreign currency reserves in emerging and developing economies fell $114.5bn year on year in 2014 to $7.74tn—the first annual decline since the IMF data series began in 1995. At their peak, emerging market reserves reached $8.06tn at the end of the second quarter last year.
Data collected by ING for the leading 15 emerging economies indicated that the decline accelerated in January and February this year, when reserves contracted by a total of $299.7bn. The ING data also showed that reserves shrank year on year for an unprecedented three months in December, January, and February.
Japan is also pursuing its own agenda in attempt to free itself from decades of slow growth and deflation. Their launch of Quantitative Easing has nevertheless done little to raise their inflation rates. The economy remains depressed and deflation is endemic. The fall in the yen has nevertheless made their exports more competitive vis-à-vis the rest of the world.
China is not prepared to risk its position for fear of provoking a collapse. It has attempted to rebalance its internal demand in the face of external challenges.
This has all served to provoke competitive currency rate devaluations, with each country seeking to resolve its problems at the expense of the other. We already have the term “currency wars” in circulation. Almost all the major central banks are engaged in weakening their currencies, if not against each other then certainly relative to commodities, goods, and services.
A similar situation to the 1930s is emerging, where there was also a series of competitive devaluations. This will resolve nothing. Europe’s gain is America’s pain. While one country may be able to temporarily escape, this does not mean the world economy can escape. It can end in the same way as in the 1930s, with a breakdown of capitalism as a result of beggar-thy-neighbor policies.
The Americans will not want this to continue, to have a high currency in a world of deflation.
The position in Europe, which is in the grip of a deflationary crisis, only makes matters worse from a world point of view. The austerity measures simply serve to diminish even more demand from the economy and thereby create an even worse economic situation. Labour has lost out to capital in a big way. An article in The Economist (January 18, 2014, “The onrushing wave”) states:
. . . wages have been flat for a decade. Research suggests that this is because substituting capital for labor is increasingly attractive; as a result owners of capital have captured ever more of the world’s income since the 1980s, while the share of labor has fallen.
This has also served to curb demand. The Germans are fixated with maintaining their trade surpluses and wish to impose the same model on the rest of Europe. This simply places Southern Europe on starvation rations.
Greece is the focal point of the European crisis. It is certainly on the brink. Anything could serve to push Greece out of the euro and precipitate a general crisis. “An accidental exit from the eurozone has become quite likely,” writes Martin Wolf. He is pessimistic about the consequences. Clearly time is running out for any resolution, as no resolution is possible under the circumstances. The contradictions of capitalism are too great. Every little amount of time gained simply puts off the evil day, but prepares a bigger crash when it comes.
Even if Europe was to experience a partial recovery, which is elusive, there are big question marks over how much the recovery will benefit those worst affected by the years of slump and near-stagnation. Unemployment in the eurozone remains at 11.2 percent and few economists believe growth will pick up at a fast enough pace for firms to take on many more workers.
The ECB’s latest forecasts suggest the eurozone’s crisis has been so severe that the jobless rate will stay close to double figures even after the 1.1 trillion euro Quantitative Easing program is fully implemented.
According to estimates published earlier, ECB economists believe 9.9 percent of the labor market will still be without work by the end of 2017—the point at which the central bank expects the region’s cyclical recovery to be complete! They also highlight that the eurozone’s crisis has been so damaging that it has permanently destroyed the economy’s capacity to create jobs, even if demand rebounds. In other words, mass unemployment has become a permanent feature.
The eurozone’s youth have borne the brunt of the crisis, with unemployment rates for under 25s in Spain and Greece above 50 percent compared with around a quarter of the total workforce.
Before the crisis, unemployment rates in the region’s largest economies were broadly similar. Presently, in the region’s largest economy, Germany, youth unemployment is at 7.1 percent. In Italy, more than 40 percent of people under 25 looking for work are without jobs.
Ms Reichlin of the London Business School said:
There is a big stock of young people in Italy that risk being lost forever and that will create political pressures over time. The Italian opposition is fragmented at the moment, but that won’t necessarily always be the case.
Clearly the strategists of capital do not understand the crisis of capitalism. Such knowledge places a big question mark over the so-called eternal nature of capitalism, and they cannot allow themselves such subversive thoughts. This is not new, but was seen 150 years ago by Marx:
It is therefore not possible for him (Ricardo) to admit that the bourgeois mode of production contains within itself a barrier to the free development of the productive forces, a barrier which comes to the surface in crises, and incidentally in overproduction—the basic phenomenon in crises.
Overproduction is specifically conditioned by the General Law of the Production of Capital: production is in accordance with the productive forces, that is with the possibility that the given quantity of capital has of exploiting the maximum quantity of labor, without regard to the actual limits of the market, the needs backed by the ability to pay. (Marx, Theories of Surplus Value.)
It is this fundamental contradiction of capitalism that lies at the heart of the present world crisis. The system has reached its limits. The so-called recovery is as elusive as ever. New storms are gathering on the horizon as the strategists of capital zigzag from one policy to another. In the end, whatever they do will be wrong.
In the meantime, the American imperialists are concerned over their own economic slowdown (again) and are trying to twist Europe’s arm into providing increased demand to a world economy that has a chronic lack of demand. “After you,” is the normal polite reply. Why should Germany risk its position to bail out the world economy, even if it could?
Each capitalist class seeks to protect its own interests. They would love for other countries to expand their markets, but not their own. This is the logic of capitalist competition. Faced with this contradiction, rational behavior has gone out of the window as they are caught in the headlights of an oncoming deep depression. There is no way out on this basis. They themselves recognize that this is the case.
The crisis has far-reaching consequences politically. As Gideon Rachman, a correspondent of the Financial Times, explained:
A depression, or a very prolonged recession, does more than create economic hardship. It also serves to discredit mainstream ideologies and to whip up anger against political elites—and those effects can last well beyond the point where the economic figures show some improvement.
A return to growth is also unlikely completely to address the sense of economic malaise in the EU. Across Europe there is a fear that whole nations have been living beyond their means and may have to accept a permanent downward adjustment in living standards. In countries such as Greece, Portugal and Ireland, that adjustment took place in a fairly swift and brutal fashion because of the financial crisis—and has resulted in cuts in nominal wages and pensions.
But even countries that escaped the worst of the crisis are going through an adjustment in living standards that is hitting the young particularly hard. Rates of youth unemployment are frighteningly high in some countries: above 50 percent in Spain, nearly 40 percent in Italy, 23 percent in France and 17 percent in the UK. In all these countries, there is a fear that the rising generation will live less secure lives than their parents.
As a result, even when governments can boast about relatively strong growth, there is disillusionment with the political establishment. In Britain’s general election in May, it is likely that there will be a record low share of the vote for the parties that have dominated postwar politics, the Conservatives and Labour, and strong gains for nationalist parties in Scotland and England. (Financial Times, 3/23/15.)
The growth of anti-establishment parties is a reflection of the crisis. It marks a sharp change in consciousness and a deep questioning of the capitalist system. What is abundantly clear is: there is no way out on the basis of capitalism. Europe and the world are heading for a new epoch of revolutionary upheavals in which the ideas of Marxism will become enormously attractive.