fallencapital latuff

New Year, Same Old Crisis

Afallencapital latuffs 2013 came to a close, many economists and politicians drew a collective sigh of relief: the Eurozone remains in one piece; the USA has not defaulted; and a triple-dip recession was avoided in Britain- there is even much talk of a recovery! But for the more far-sighted commentators amongst the bourgeoisie, the New Year – far from offering any light at the end of the tunnel – simply brings with it increasing uncertainty, instability, and crisis.

Reflecting these more pessimistic – and realistic! – sentiments, Professor Klaus Schwab, founder and Executive Chairman of the World Economic Forum (WEF), writes:

“At the dawn of a new year, the world is in the midst of several epic transitions. Economic growth patterns, the geopolitical landscape, the social contract that binds people together, and our planet’s ecosystem are all undergoing radical, simultaneous transformations, generating anxiety and, in many places, turmoil. From an economic standpoint, we are entering an era of diminished expectations and increased uncertainty.”

Uncertainty and turmoil

All of the major economic powers are facing a turbulent year ahead, as Schwab comments:

“The US is striving to boost growth in a fractured political environment. China is moving from a growth model based on investment and exports to one led by internal demand. Europe is struggling to preserve the integrity of its common currency while resolving a multitude of complex institutional issues. And Japan is trying to combat two decades of deflation with aggressive and unconventional monetary policies.

“For each, the formulation and outcome of complex and sensitive policy decisions implies many “unknowns,” with global interdependence heightening the risk of large unintended consequences.”

Our learned Professor highlights what the Marxists have stated on many occasions: that globalisation now expresses itself as a global crisis of capitalism. Far from “decoupling”, the world economy is more integrated now than ever before. The result is that economic decisions and responses to the crisis in one country cannot help but have unexpected effects elsewhere.

The WEF founder gives an example of a policy with such “unintended consequences” that we have previously discussed elsewhere: the use of Quantitative Easing (QE) – the buying up of assets and securities by central banks in the US, UK, EU and elsewhere, which has led to a flood of cheap money entering the global financial markets, helping to inflate credit bubbles and property prices in China and elsewhere in Asia.

“When QE was launched,” Schwab explains, “it was the least flawed of the available policies, and it averted a catastrophic global depression. But its downsides are now apparent, and its abatement in 2014 could fuel further uncertainty.

“The Fed’s QE policy, and variants of it elsewhere, have caused the major central banks’ balance sheets to expand dramatically (from $5-6 trillion prior to the crisis to almost $20 trillion now), causing financial markets to become addicted to easy money. This has led, in turn, to a global search for yield, artificial asset-price inflation, and misallocation of capital.

“As a result, the longer QE lasts, the greater the collateral damage to the real economy. The concern now is that when the Fed begins to taper QE and dollar liquidity drains from global markets, structural problems and imbalances will resurface.”

Uncertainty is inherent within the global economic situation. The temporary rest-bite that the world current faces is merely a pause pregnant with further crisis. As has been seen many times already since 2008, all talk of stability and recovery is nothing more than a prelude to further doom-and-gloom. Whilst the political leaders try to put on a reassuring smile, the more sober and level-headed analysts remain deeply concerned about the state of the economy everywhere.

Crisis averted…for now

For the governments in the US and Europe, 2013 was seen as a “success” – not by any usual measure of success, but simply for the fact that their world did not implode. But the long term – and even short term! – prospects are far from rosy for each of these important areas.

In the US, it is most definitely a case of kicking the can down the road. After 17 days of shutdown in October 2013, the problem of federal debt and spending was pushed back to early 2014. Once again, the Republicans and Democrats will play a high-stakes game of chicken, with the threat of default looming in background. As The Economist (in “The World in 2014”, 18th November 2013) comments:

“The ideological fissures that shut much of the government and nearly provoked a debt-ceiling crisis in late 2013 remain. The deal that ended that battle expires in early 2014, raising the spectre of another confidence-eroding stand-off.”

In reality, the two US parties will likely come to another 11th-hour agreement; the working class will of course be the ones presented with the bill for any damage in the process. But the fact that such a possibility of default by the world’s biggest economy can even be raised demonstrates the precarious nature of the situation in the US – and the rest of the world by association.

None of the problems surrounding the US federal shutdown – i.e. of government debts and deficits – have been resolved. At some point, the political leaders will have to face up to this fact, and all of the current optimism about 2014 being a “breakthrough year” in terms of the economy, as recently exclaimed by President Obama, will quickly be shattered.

European capitalism finds itself in no better position. Having delayed – and seemingly avoided – the breakup of the eurozone during 2013, Merkel and her fellow European leaders will no doubt be pleased with themselves. But the champagne will not be brought out just yet, as The Economist (“Free Exchange”, 9th January 2014) emphasises:

“As far as bond investors are concerned, the euro crisis appears to be a thing of the past…Such enthusiasm for these once shunned members of the currency club contrasts sharply with the still sickly economy of the euro zone. A recovery continues following the long double-dip recession that ended last spring but it is a feeble affair. Official figures this week showed unemployment stuck at over 12% of the labour force, the highest since the single currency started 15 years ago…

“…Speaking in Athens yesterday about the prospects for the euro zone in 2014, José Manuel Barroso, the president of the European Commission, accentuated the positive. But in Frankfurt today Mr Draghi stressed the things that could still go wrong. The recovery was not only weak but also fragile, susceptible for example to a relapse in confidence.

“Mr Draghi was right to be cautious. The euro zone remains fractured on north-south lines. All along Europe’s political leaders have been too swift to proclaim victory.The acute phase of the crisis may be over but the chronic phase may only have begun.” (our emphasis)

Much of the relative peace in the peripheral “PIGS” of the eurozone in the latter half of the year was due to the hiatus imposed on the European Central Bank (ECB) and European Commission due to the German elections, which failed to produce a clear winner and thus provide Merkel with the strong mandate that she and the German capitalists desired to bring in the next round of austerity measures in Greece, Spain, and Portugal.

With the “Grand Coalition” now in place in Germany, the fun – i.e. further cuts and attacks – can now begin; and begin they shall, for the financial situation in the PIGS is far from resolved. As The Economist states (“The World in 2014”, 18th November 2013):

“Greece will be lucky to escape a seventh year of recession, and will require extra loans to meet its financing needs in 2014 and 2015: a third bail-out. And, even though Greece has defaulted on a record amount of sovereign bonds, its public debt will be oppressively high, at 175% of GDP. Further debt relief will come to the fore in 2014. Since most of the debt is now owed to other euro-zone countries, that will pose tricky questions, especially for Germany, the biggest creditor, which will do its utmost to avoid outright forgiveness for fear that other rescued countries will clamour for similar treatment.

“Portugal for its part is heading for a second bail-out. A deep recession caused a political crisis in 2013, which undermined investor confidence, causing hopes for a return to market financing in mid-2014 to recede. But it is Cyprus that will suffer the most. Output will decline cumulatively in 2013 and 2014 by over 12%, according to the IMF, which notes that the fall could exceed 20% in “adverse” circumstances…

“…The euro area may no longer be in mortal danger of breaking up. But it will increasingly resemble a joyless union whose members stay together only for fear of a more painful separation.”

Meanwhile, Italy – the eurozone’s third biggest economy, with an enormous pile of debt to match – is sliding further towards economic collapse amidst a seemingly endless political crisis. As Wolfgang Münchau of the Financial Times comments, “Italy’s importance to the future of the eurozone can hardly be overstated.” With a debt-to-GDP ratio of over 125%, any increase in interest rates would send the Italian economy into a vicious spiral. Austerity and cuts are therefore on the order of the day in Italy, and in turn social explosions.

The situation in the BRICs – once looked towards in vain hope as potential savours of the world economy – is no better. According to Professor Schwab, “the emerging-market slowdown may well persist, particularly in the largest economies”.

China, with its slowdown in growth over the past year, still faces the prospect of a hard landing as the consequences of its Keynesian policies over the past few years begin to be born out in practice. Far from avoiding the crisis in 2008, the leaders in China – and commentators elsewhere – are realising the implications of the massive state spending in recent years: chronic excess capacity in key sectors; vastly inflated credit and property bubbles; and worrying levels of local government debt. According to The Economist (4th January 2014), there is “a worrying increase in the size and variety of China’s local-government debt since 2010 as the ambitions of local officials, for additional roads, bridges, utilities, homes, lucrative business hubs and unoccupied ghost towns, far outstripped their revenues.” Meanwhile, Gavyn Davies, in the Financial Times (30th December 2013), notes that:

“Repeated attempts by the authorities to rein in credit growth have had to be relaxed in order to maintain GDP growth at an acceptable rate, suggesting that there is a conflict between the authorities’ objective to allow the market to set interest rates, and the parallel objective to control the credit bubble without a hard landing.”

Having temporarily averted a complete implosion in the US, Europe, and China, the political leaders in these countries will hardly be looking forward to what 2014 has in store. Total collapse has been averted for now, but it must be stressed: none of the fundamental contradictions in the world economic situation have been resolved. The relative peace at the present time is merely the calm before the storm; a temporary lull before the crisis returns on a new higher level.

A stagnant future

Despite all the talk of recovery in the UK, US, and elsewhere, the real picture is one of a stagnating economy and falling living standards across the world. The much-lauded “recovery” is standing on feet of clay. In both the UK and the US, the recovery is not strong, but extremely weak and anaemic; this is not a return to robust health, but rather a short-lived sign of life in an otherwise terminal patient.

The current hubris of George Osborne, the British Chancellor, is merely the pride before the fall. In the so-called recovery in the UK has been based on inflated house prices – due to the coalition government’s almost universally criticised “Help-to-Buy” policy – and a temporary increase in consumer spending as a result of a reduction in household savings. Neither of these can provide a source of genuine long term growth.

The real source of growth under capitalism is investment; more specifically, the re-investment of profits by the capitalists in search of new, greater profits. But with huge excess capacity – i.e. overproduction – on a world scale, businesses have nowhere to invest. Instead, cash hoards of idle money pile up and speculative activity to make a quick profit increases – hence the recent fascination with Bitcoin.

It is dawning on many economic commentators that behind the turmoil of the current crisis, a longer-term trend of global economic stagnation has developed; a new epoch of permanent depression. Such concerns of a “permanent slump” have been raised by Larry Summers, the former US Treasury secretary, and Paul Krugman, the Nobel prize-winning economist. Writing recently for the Financial Times (5th January 2014), Summers warned that:

“We may…be in a period of “secular stagnation” in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come.”

According to The Economist (“The World in 2014”, 18th November 2013), in discussing the long term prospects for the American economy:

“Even as a cyclical recovery gathers strength in 2014, structural drags will become more apparent. With each passing year, the evidence mounts that America is growing slowly because it simply can’t grow as fast as it once did. The Congressional Budget Office has lowered its estimate of America’s potential output by 5% since 2008. Long-term growth rests on labour, capital and innovation and all three seem sickly. Millions of adults have left the labour force, driving the participation rate down to 63.2% from 66% in 2007. They were supposed to return when job opportunities improved; eventually some will, but it appears that most have instead retired, gone on disability insurance or for other reasons chosen not to work.”

Meanwhile, in analysing the UK economy, Martin Wolf of the Financial Times (19th December 2013), in an article entitled “We still need to learn the real lessons of the crisis”, emphasises that:

“The real story is of the impact of the financial crisis on output and productivity…UK output per head and labour productivity are vastly below long-term trends. In 2012, for example, gross domestic product was 12 per cent below the 1950-2007 trend. This is the result of a deep recession followed by the weakest recovery on record. The one ameliorating factor, low joblessness, is a mirror image of the productivity collapse.”

And finally, Klaus Schwab of the WEF, explains, in relation to the US and the eurozone, that:

“Economic conditions are slowly improving in high-income countries, but a range of downward pressures may persist for years. The US economy, for example, remains stuck in a subpar recovery: inflation is too low and unemployment is too high. Official data have often been better than expected, reflecting how resilient, adaptive, and innovative the US economy is, but pre-crisis consumer-spending and growth patterns are unlikely to recur.

“Improvements in the eurozone are real but tenuous. The good news is that the disaster predicted by many pundits has been avoided, and the recession is coming to an end. But improvement does not mean resurgence: achieving the robust growth needed to reduce high unemployment, lower the debt/GDP ratio, and improve the fiscal outlook remains elusive. The greatest risk for the eurozone in the foreseeable future is not a disorderly exit by some countries, but rather a prolonged period of stagnant growth and high unemployment.” (our emphasis)

Recovery – what recovery?

What little “recovery” there has been has not benefitted the lot of ordinary families. Workers and youth face a future of falling living standards, to accompany the previous decade or two of declining real wages. As Professor Schwab comments:

“Even in stronger-performing countries, such as the US or the United Kingdom, faster GDP growth has yet to boost real incomes. In the US, for example, median household income has fallen by more than 5% since the recovery began.”

Meanwhile, The Economist (“The World in 2014”, 18th November 2013) notes in relation to the USA that:

“More troubling is that those with jobs have so little to show for them. Real hourly earnings have grown by just 0.3% a year since 2007. Monthly surveys by the University of Michigan show that households are deeply pessimistic about future income gains, which does not put them in the mood to spend much now.

“Several factors are at work. Much of the growth in GDP has gone to profits, not wages, reflecting the weak bargaining position of workers. Higher energy prices have eaten away at real incomes. Most important, over time real wages track productivity and that, too, is weak. This can be traced to lacklustre business investment. After an initial bounceback early in the recovery, it has stabilised at a little over 12% of GDP, well below the 13.5% peak of the previous cycle, which was itself below the 14.5% peak of the 1990s cycle.” (our emphasis)

As we have discussed on several occasions, and as Schwab and many other bourgeois commentators are now also noting, the issue of stagnant and declining real wages is part of a longer term trend, going back long before the current crisis, in which a larger share of the wealth in society is going to profits instead of wages – i.e. to the capitalists instead of the workers; to Capital instead of Labour.

The causes behind such a trend of rising inequality are many: the effects of globalisation and the opening up of China, with its abundance of cheap labour, to foreign-owned industry; the resultant de-industrialisation in the West and the attacks on the trade unions in advanced capitalist countries; and the use of automation, in both advanced and emerging economies, to replace workers with machines – thus creating unemployment and putting further downward pressure on wages. What all of these factors have in common is an attempt by the bourgeoisie to increase profits at the expense of the worldwide working class.

An increasing number of bourgeois economists are commenting on this trend and discussing its implications. The Economist (4th January 2014) recently reviewed a book, by Thomas Piketty from the Paris School of Economics, entitled “Capital in the Twenty-First Century”, which looks at this question. The Economist notes that:

“A modern surge in inequality has new economists wondering, as Marx and Ricardo did, which forces may be stopping the fruits of capitalism from being more widely distributed…

“…The book [by Piketty] suggests that some 20th-century conventional wisdom was badly wrong. Inequality does not appear to ebb as economies mature…Neither should we expect the share of income flowing to capital to stay roughly constant over time…Mr Picketty argues there is no reason to think that capitalism will “naturally” reverse rising inequality…

“…From the 1970s the ratio of wealth to income has grown along with income inequality, and levels of wealth concentration are approaching those of the pre-war era.

“…New technology can also make it easier to substitute machines for human workers. That allows capital to gobble up a larger share of national income, raising its return. Amid a new burst of automation, wealth concentrations and inequality could reach unprecedented heights, putting a modern twist on a very 19th-century problem.” (our emphasis)

The more far-sighted of these bourgeois commentators see the contradictions contained within such a situation – primarily the contradiction of overproduction, in which the workers cannot afford to buy back the very goods that capitalism produces. This is the cause behind the current crisis, which was only avoided up until 2008 by the unprecedented expansion of credit, which allowed families to keep on consuming, despite falling real wages and attacks on living standards.

Professor Schwab, commenting on the increasing inequality in society, highlights the dangers and implications of such a process – dangers that are inherent to the capitalist mode of production, which inevitability produces inequality as a result of its insatiable search for profits:

“The global growth slowdown is taking place against a backdrop of rising economic inequality, owing to labor’s declining share of national income – a worldwide phenomenon, resulting from globalization and technological progress, that poses a serious challenge to policymakers. Systems that propagate inequality, or that seem unable to stem its rise, contain the seeds of their own destruction. But in an interdependent world, there is no obvious solution, because the high mobility of capital fuels global tax competition.” (our emphasis)

Social unrest and instability

We are not, however, simply interested in the economic situation in order to score points and say “I told you so”; rather, we are concerned with the social and political impacts of the crisis. Most importantly, we must understand the impact of the crisis on consciousness.

The worldwide radicalisation as a result of the crisis is clear, with mass movements from Istanbul and Athens, to Cairo and Catalonia. In this sense, the global crisis has led to a global movement against the system.

In particular, the movements in Turkey and Brazil, which seemed to come from nowhere, have acted as a warning shot to the bourgeoisie about the dangers of having a superficial and empirical analysis that simply looks at “the facts”. The lesson is: don’t be complacent; just when you think things are calm, below the surface there is anger and tension building up, preparing the way for social explosions.

The Economist Intelligence Unit, in an attempt to quantify the prospect of worldwide mass movements over the next year, states that “65 countries (43% of the 150) will be at a high or very high risk of social unrest in 2014” (“The World in 2014”, 18th November 2013), noting that:

“The common backdrop is the 2008-09 financial crisis and its aftermath. Economic distress is almost a necessary condition for serious social or political instability, but it is not a sufficient one. Declines in income and high unemployment are not always followed by unrest. Only when economic trouble is accompanied by other elements of vulnerability is there a high risk of instability. Such factors include wide income-inequality, poor government, low levels of social provision, ethnic tensions and a history of unrest. Of particular importance in sparking unrest in recent times appears to have been an erosion of trust in governments and institutions: a crisis of democracy…

“…The recession is now over or has eased in much of the world. Yet political reactions to economic distress have historically come with a lag. Austerity is still on the agenda in 2014 in many countries and this will fuel social unrest.” (our emphasis)

Schwab – in a warning to the ruling class – highlights the potential threat facing the bourgeoisie across the world if they do not mend the economy and deliver tangible results for the masses:

“More generally, lower growth is fueling popular protest and social unrest, particularly in countries that were growing rapidly (for example, Brazil, Turkey, and South Africa), owing to the impact of rising living standards on expectations. In such a charged social and political context, reviving high-quality economic growth is crucial. But where will it come from?” (our emphasis)

The Professor – like many of the more far-sighted bourgeois commentators – sees the problem but, like the rest, is unable to provide a solution. Of course the ruling class would like economic growth and would prefer not to implement austerity. But as Schwab asks, where will growth come from?

The reality is that the capitalists, in order to restore stability to the economy, have no option but to attack the living standards of the working class. Everything they do to restore economic equilibrium merely destroys the social and political equilibrium. Whichever option they choose is wrong, reflecting the impasse of the capitalist system as a whole.

The Marxists will not be taken by surprise by events – neither by the imminent renewal of the crisis, nor by the revolutionary movements that will explode into action in one country after the next. As Leon Trotsky, the great Russian revolutionary, stated, “theory is the advantage of foresight over astonishment.”

The immediate and urgent task now is not merely to anticipate such revolutionary events, but to prepare for them by building the forces of Marxism in every country. We invite our readers to begin the New Year by joining us in this task – to join us in the fight for the socialist transformation of society.


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