The stock market surges of recent months suggest that global capitalism has shaken off its ‘near death’ experience of a year ago, triggered by the September 2008 collapse of Lehman Brothers. Talk of ‘green shoots’ has graduated in recent weeks into increasingly upbeat predictions of economic recovery. Financial markets have already priced in this purported recovery as evidenced by their dramatic rebounds in the last half-year. The MSCI World Index, measuring all the main stock markets, has risen 68 percent since 8 March - the biggest gain since it began in 1970. This amounts to "the biggest rally since the 1930s," exclaimed one analyst, apparently oblivious to the irony in these words.
What is happening in financial markets is completely at odds with the real state of the economy. They have begun to pare back the spectacular losses of the previous 18 months based on an unprecedented wave of government-financed liquidity. Banks, bailed out to the tune of trillions, are once again engaging in high-risk speculation and "pushing back", to quote Joseph Stiglitz, against attempts to impose tougher regulation and limits on such activity. The world’s political leaders and central bankers have therefore succeeded through unprecedented state interventions in inflating a new financial bubble, although it is likely to be short-lived and can quickly give way to further waves of financial panic. This is especially the case if, as is most likely, the much-hyped recovery fails to materialise, or slips back into a ‘double-dip’ or ‘W-shaped’ recession.
As the International Trade Union Confederation (ITUC) pointed out in their Pittsburgh Declaration ahead of September’s G20 meeting: "The seeds of another crisis are already being sown". The massive injection of liquidity by world governments, life-support measures for banks, plus stimulus programmes such as tax cuts and support for home and car sales, have succeeded temporarily in cushioning the economic fall, but at the price of stoking record deficits and worsening already unsustainable imbalances in the global economy.
It is worth noting that those who today are proclaiming the end of the global recession are the same ‘experts’ that missed the danger signs last time around. Here, the words of George Orwell are very appropriate: "Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind". In reality, at best, there is a stabilisation of the world economy at the new, lower level to which it collapsed at the end of 2008. A Financial Times editorial (27 July) summed this up when they explained, "Much of the recovery reflects the laws of physics. If you drop something on the floor it bounces."
World trade, which has spurred economic growth for decades, will suffer its first annual contraction since 1982, but this time the fall will be much bigger - around 10 percent. The European Union recently announced that its own ‘recovery’ has begun. Nevertheless it still expects a 4.1 percent contraction of gross domestic product (GDP) this year and a 0.1 percent contraction in 2010. The IMF’s latest forecast for the U.S. economy is a drop of 2.7 percent this year. Stiglitz predicts, "We are going into an extended period of weak economy, of economic malaise." While fellow Keynesian Nouriel Roubini warns that a "double-dip" or a prolonged "U-shaped" recession are most likely. These more sober bourgeois assessments confirm what the CWI and Marxists have argued. We have warned that the world is not facing a "normal" cyclical downturn, but an organic, structural crisis of capitalism, which will run for years, encompassing further sharp periods of contraction and temporary recoveries - but weak recoveries that largely exclude any relief for working class households.
The Keynesian revival - who gains?
Governments worldwide, led by U.S. capitalism, have wheeled out unprecedented keynesian (named after the British economist John Maynard Keynes 1883-1946) bailout programmes to prop up banks, as well as slashing interest rates to zero and injecting massive amounts of liquidity through ’quantitative easing’, which in layman’s terms means printing money. The IMF calculates that rich countries have spent $9.2 trillion ($9,200,000,000,000) in government support for the financial sector, while poorer ‘emerging economies’ have spent an equally staggering $1.6 trillion. As an editorial in the South China Morning Post (15 September) commented: "The crisis has seriously weakened the free-market ideology... It has lent impetus to state capitalism and intervention, a mode of government championed by many developing countries, most notably China. From the most advanced capitalist economies to poor developing countries, much of the world has seen the state becoming the dominant economic actor."
It becomes clearer by the day, however, that it is mainly the rich, the bankers and speculators, who gain from these policies. Governments in the main capitalist states have shifted financial sector losses into the public sector, i.e. onto the back of taxpayers. This is ‘socialism for the rich’ as many economic commentators have dubbed it, or as others say, "Socialism with American characteristics". Needless to say, these policies - which are designed to defend capitalism in a period of crisis - have nothing whatsoever in common with socialism. But despite a verbal abandonment of neo-liberalism and attacks on the "cult of the market" as French president Sarkozy calls it, for the mass of the population governments are continuing and even intensifying neo-liberal attacks in the form of wage cuts, privatisation, and savage budget cuts.
There is an ongoing debate within the ruling class about an "exit strategy", indicating that the current Keynesian phase is seen as temporary. Most of the capitalist regimes understand that an "exit strategy" - re-balancing budgets, raising interest rates and withdrawing stimulus policies - is impossible at this stage. But their discussions are a warning of what is to come: this "exit" is code for even bigger cuts and a concerted drive to make the working class pay the bill for today’s crisis measures. Alan Greenspan, the former U.S. central bank chief, recently blurted out that at some point the U.S. government will have no choice but to raise taxes including enacting a consumption tax in order to dig its way out of record deficits. These attacks will in most cases be decked in the colours of "national salvation", with appeals for sacrifice for the common good, when in reality they mean the poor must make sacrifices for the sake of the rich.
This continuation of undiluted neo-liberalism is most obvious in economies that have been brought to near bankruptcy by the crisis. In Latvia, under the heel of an IMF and EU programme, half the hospitals have been closed to meet stringent budget cuts, while teachers’ pay has been cut buy a third. Iceland, brought to ruin by its privatised banks, has been told by the IMF to cut its state budget by a third over the next three years. But the continued sweep of neo-liberal attacks is not confined to these ‘crisis states’. Japan embarked on a form of Keynesian stimulus spending long before most other countries and again it is not the working class that has gained from these policies: between 1994 and 2007, average annual household income fell by 16 percent. The increase in poverty - Japan’s poverty rate is now the fourth highest in the 30-country OECD - is undoubtedly an important factor behind the landslide vote to eject the Liberal Democrats in August.
The stimulus policies have made little impact on unemployment which is soaring in all parts of the world economy. In China, the government’s top think-tank, the Chinese Academy of Social Science, reports that 41 million jobs were wiped out in the last 12 months - a world record for job destruction. This translates into the loss of 3.4 million jobs every month. Less than half, around 18 million workers have found new jobs according to the CASS report. In the U.S., 7.2 million jobs have been lost since late 2007. This has taken unemployment to over 25 million in real terms, i.e. counting those who are forced into part-time positions and those who have given up trying to find work. Not only is this an indictment of the prevailing economic system - that tens of millions are being expelled from the real production process, as opposed to the illusory gains created by the bankers and financial tricksters - but mass unemployment and falling incomes further drag down the economy, squeeze consumption, and increase loan default rates. Tax hikes and a consumption tax, as proposed by Greenspan, would further compound these trends.
Despite talk of recovery, the OECD predicts another 25 million workers in the advanced capitalist countries will lose their jobs by the end of next year. Aside from unemployment, companies are inflicting pain on workers in a variety of ways: more than one in six U.S. companies have imposed unpaid vacations on their workers, and 20 percent have stopped paying into their employee pension plans. An important lesson from Japan’s drawn-out crisis of 1990-2003 was that falling incomes created a vicious circle of lower demand and rising household debt. This is increasingly the trajectory for much of the capitalist world.
Global coordination - or trade war?
The crisis has also given rise to an unprecedented show of global coordination, principally through the relatively new forum of the G20. This body, which brings together older Western powers and rising economic powers especially in Asia and Latin America, held its third crisis meeting in less than a year in Pittsburgh on 24-25 September. The rise of the G20 reflects the degree of inter-penetration of the world’s economies today and the shift of economic power that is underway between older and newer industrialised powers, especially in Asia. According to McKinsey, annual cross-border capital flows increased to $11.2 trillion in 2007, which is more than 20 percent of global GDP. This rose from $1.1 trillion, or 5.2 percent of global GDP, in 1990. The speed and destructive force of the U.S.-led banking crisis also shows that the capitalist states are mutually dependent to a degree never before seen in history.
But on a capitalist basis, common action across national borders can only take certain limited forms. Each capitalist government fights for advantages for their own companies and markets. The decision in Pittsburgh to increase IMF voting rights for poorer ’emerging economies’ to a combined five percent of the total, shows how reluctant the older capitalist economies of the U.S., European Union and Japan who dominate this institution are to share power and influence with new challengers such as China, India and Brazil. The U.S. alone has 17 percent of the votes at the IMF, giving it an effective veto over the Fund’s policies.
As Michael Pettis of Guanghua School of Management at Peking University commented, the G20 meeting was "an opportunity for world leaders to say reassuring things about global trade, but without serious policy co-ordination, there is little to prevent intensified conflict." [South China Morning Post, 28 September] This is underlined by the sharp trade dispute that has erupted between China and the U.S. over tyres, which threatens to escalate and could, unless diffused quite quickly, lead to clashes over more important issues such as China’s support for the dollar. The Chinese regime is continuing to invest its trade surplus in U.S. Treasury bills, despite record low interest payments. China’s total foreign exchange reserves hit $2.13 trillion last month.
The Chinese regime has lodged a forceful protest over Obama’s decision to impose a so-called "safeguard provision" with tariffs of up to 35 percent on Chinese-made tyres. Leaving aside the tyres which account for just $1.8 billion of $340 billion worth of Chinese exports to the U.S., the problems for China are far bigger and go back to its accession to the WTO in 2001. That is when the previous government headed by Zhu Rongji agreed to one-sided and punitive "safeguard provisions" that go beyond WTO rules and can be used against China until 2013. China’s negotiators reluctantly accepted these terms not just with Washington - dozens of China’s other trading partners could invoke similar measures to block Chinese goods. Spurred by Obama’s tyre tariffs, other groups such as the U.S. paper industry are clamouring for similar measures against Chinese imports. This is why Beijing is likely to react strongly to the tyre tariffs. Initially it will try to win the moral high ground in opposition to protectionism, but has already threatened tit-for-tat measures against imports of U.S. chicken and auto components. The irony in the situation is that most U.S. companies oppose Obama on this issue - several U.S. companies own Chinese tyre factories that will be hit by these tariffs.
National antagonisms are rooted in the capitalist trading system, although these antagonisms develop dialectically, reflecting economic and political changes. New capitalist alliances are created and then break down. The G20 predictably heard renewed calls to conclude the ‘Doha Round’ of world trade talks through the agency of the WTO, because the capitalist class has learned some lessons from the 1930s, when a 25 percent collapse of world trade massively aggravated the economic slump. But at the same time, tensions are rising far beyond the U.S.-China clash over tyres. In all, 17 of the G20 states have taken protectionist measures against each other in the last year. The aircraft production industries of the U.S. and European Union (Boeing and Airbus) are locked in a bitter struggle for market domination, with Europe/Airbus recently losing a crucial WTO ruling over ‘unfair’ subsidies. In reality, such subsidies and other forms of state support or ‘corporate welfare’ are on the rise everywhere, often embedded in the latest Keynesian stimulus policies.
The sick banks - "deja vu again!"
When Ben Bernanke was nominated for a new four-year term as Federal Reserve (central bank) chairman by the Obama administration, he was praised widely for "averting a second Great Depression". The accolade is undeserved - Bernanke is one of the architects of the Lehman Brothers debacle, and the credit bubble that preceded it. It may also prove to be premature. The threat of outright depression, while it has receded in the short-term as a result of the massive state interventions of the post-Lehman period, has not been permanently exorcised, nor can it be on a capitalist basis. Capitalist governments are preparing new crises even as they try to grapple with this one.
So far this year 92 U.S. banks have failed, compared to 25 last year and three in 2007. Almost all the bankruptcies this year have been regional banks, but this includes Colonial Bank, closed by state regulators in August, which was the sixth largest bank failure in U.S. history. As AFP commented, "The regional banks have experienced an explosion of defaults, especially in states hard-hit by [the] recession" such as California and Georgia. Regional banks are more heavily exposed to the commercial real estate sector (as opposed to residential property where the ‘subprime’ crisis developed), and this is a sign of mounting woes in that sector where delinquency rates are soaring. Credit card defaults represent yet another ticking bomb for the banks.
Meanwhile, house prices in the U.S. continue their fall, despite tax rebates and other measures to shore up the sector, threatening more trouble for some of the largest banks. House prices have dropped 32 percent since the market peaked in 2006 (Case-Shiller index) and, according to Deutsche Bank Securities, will continue falling until 2011. "You’re looking at an extremely long horizon in order to see a return of home values to where they were at their peak... It could be 15 to 20 years in some markets," argued a spokesman for property consultants Zillow.com.
In Japan, property prices fell more than 50 percent following the bursting of its financial bubble in 1990. They kept falling for thirteen years, then briefly stabilised before resuming their decline since 2007. Especially when mounting unemployment rates and falling wages are factored into the equation, the stage is set for more foreclosures and new mega-losses for the banks. Today, one in four U.S. homeowners has ’negative equity’ i.e. they owe more than the value of their home. Predictions of 150 to 200 more U.S. bank failures are considered mainstream. Roubini believes more than 1,000 financial institutions could fail: "The financial system is severely damaged, and it’s not just the banks".
In the 1930s Depression, the worst year in terms of bank failures was 1933, the fourth year of the crisis. The current crisis is now entering its third year. It has already cost many times more than the 1930s crisis - 25 times more according to calculations by TheStreet.com ($23,108 per person in the present crisis, compared to $821 per person in the Great Depression, measured in 2009 dollars).
Despite populist attacks by politicians of all stripes on the ‘greed’ and ‘bonus culture’ of the big banks, and calls for tougher regulation and controls reiterated at the G20 meeting, all the factors that led us into the global financial meltdown are again in full view. As the New York Times (12 September) pointed out, "One year after the collapse of Lehman Brothers Holdings, the surprise is not how much has changed in the U.S. financial industry but how little." This article commented that the biggest banks have "restructured only around the edges". As evidence of this, a new bonus extravaganza has begun with top Wall Street banks planning to dish out $18.4 billion in coming months. President Obama warns Wall Street against "returning to reckless and unchecked behavior" and tells them there will be "no more bailouts". But this tough message is completely at odds with actual practise.
300,000 employees have been laid off by the biggest banks in the U.S. and Europe since the crisis began. At the same time, most top executives have kept their jobs and their pay is soaring back to pre-crisis levels. Gillian Tett, writing in the Financial Times (4 September), noted how few U.S. financiers have been convicted or sentenced for wrongdoing over this crisis, when over 1,000 officials were imprisoned for their role in the - far smaller - 1980s Savings and Loans (S&L) scandal: "Compared with the S&L days, in other words, the level of retribution so far seems almost non-existent".
The policies of the U.S. and other governments have not made even a dent in the monster levels of bad or ‘toxic’ debts by which the financial sector is weighed down. Consequently they have not significantly minimised the risk of new shocks, bank collapses and financial panics. "The problems are worse than they were in 2007 before the crisis," says Stiglitz. "In the U.S. and many other countries, the too-big-to-fail banks have become even bigger."
As Lenin pointed out monopoly is one of the features of the imperialist stage of capitalism, as is the dominance of finance capital. In Lenin’s studies, particularly of German companies and banks a hundred years ago, he also noticed how a crisis or depression can accelerate the tendency towards monopoly. The small ‘fish’, and even some quite big ones, are swallowed by the biggest. Today, following 18 months of huge bailouts and mergers, three banks - JPMorgan Chase, Wells Fargo and Bank of America - now hold 30 percent of all U.S. deposits. Their market power has increased enormously. But despite a wave of mergers, the banks’ stockpile of bad debts remains undiminished. In effect, the U.S. government and most others have opted to ‘muddle through’ the banking crisis, placing all hope in a recovery (and there lies the crux!) to allow banks to ‘grow’ their way out of crisis. Stiglitz explains:
"Repeating the Savings & Loan debacle of the 1980s, the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). Worse still, they are being allowed to borrow cheaply from the U.S. Federal Reserve, on the basis of poor collateral, and simultaneously take risky positions... But this won’t get the economy going again quickly. And, if the bets don’t pay off, the cost to the U.S. taxpayer will be even larger." (Joseph Stiglitz, Project Syndicate, 11 May).
So, banks today are back to their old tricks. The big banks have shown a short-term return to profits, based largely on ‘creative’ accounting - the five biggest U.S. banks doubled their profits in the second quarter compared with the same quarter in 2008. The return to profits comes from the investment banking side (related to financial ‘innovation’ i.e. speculation) rather than commercial bank lending (related to the wider economy). The rally on stock and bond markets, pick-up in commodity prices, and a restart of M&A activity (corporate takeovers) has again opened juicy opportunities for speculation. For the banks this is a ‘heads they win, tails we lose’ situation. As Stiglitz argues in the above article, if their bets again go wrong they will be bailed out - despite what Obama says - whereas any profits are theirs to use as they see fit (i.e. higher bonuses and more risky bets).
Stiglitz makes the point that the banks today are not only "too-big-to-fail" (i.e. the government has no choice but to rescue them) but they are also now "too big to be managed". While this is not his intention, Stiglitz’ arguments make a powerful case for nationalisation of the banks under democratic workers’ control and management - i.e genuine nationalisation, not more corporate welfare. Such is the ‘unmanageability’ of the major banks that not only are the regulators constantly falling behind; even the banks’ own executives do not exercise real control, so complex are many of their trades. Stiglitz, in common with some European leaders, wants to limit the size of banks. Such policies have been tried before, however, with capitalist monopoly corporations invariably finding ways around this - given the crushing power they hold within a capitalist economy. This was the case in the 1930s, for example, when Franklin D. Roosevelt introduced anti-trust legislation. But as Leon Trotsky pointed out, "Roosevelt’s fight against monopolies has been crowned with no greater success than the struggle of all his predecessors". [Trotsky, Marxism in Our Time, 1938]
It is a truism that one cannot control what one does not own, let alone begin to plan things in an effective way. This is why socialists demand genuine nationalisation of the banks and the major industrial corporations, with minimum compensation (nothing to the fat cats) and under democratic control as part of a wider socialist transformation of society in the interests of wage earners and producers, not the money men. The idea of nationlisation in recent decades has come under neo-liberal propaganda attack, portraying it - often with completely bogus statistics - state-ownership as ‘wasteful’ and ‘inefficient’, and private ownership as superior. The collapse of the former Stalinist states in the former Soviet Union and Eastern Europe also acted as a ideological boon for capitalism. But in the next period support for public ownership will capture more and more ground in the political debate.
China to the rescue?
There is a widespread hope among the capitalists internationally that China will pull the world out of recession. It is misplaced. By comparison with the deep malaise of the U.S. and European economies, the mere fact that China is on course for around 8 percent GDP growth this year seems impressive. But as always, the headline figures do not tell the whole story, or even half the story. Let us remember that two years ago China’s premier Wen Jiabao argued that its economy was "unbalanced, unstable, uncoordinated and unsustainable." This was at a time when China was growing almost twice as fast as it is today.
The Chinese regime launched its own stimulus package last November worth around $600 billion. A year ago the economy was ‘falling off a cliff’ - GDP growth probably hit zero around the start of this year (regardless of what the official data claims). But the turnaround achieved since then is due mainly to a record injection of credit - 8.15 trillion RMB (around $1.19 trillion) in the first eight months of 2009 - by the state-owned banks under the regime’s "moderately loose" monetary policy. This new lending, rather than the November package, is the real story in China. The amount of new lending is a world record, equivalent to almost 25 percent of GDP, with the banks "shovelling cash out the door" as one commentator put it.
This has partly reversed the collapse in output suffered as a result of the loss of export markets (China’s exports are down by 23 percent over the same eight-month period). But it has also stoked up more trouble for the future. China’s problem is not the need to increase output or add new productive capacity. Its problem is one of demand: who, given the low level of Chinese wages and the sharp decline in world trade, is going to buy its products? Government can square this circle for a certain period, but not indefinitely. Especially when provincial rivalries, waste, duplication of projects, and corruption come into play, the huge credit expansion of recent months has also enormously exacerbated the four ‘uns’ cited by Wen Jiabao in 2007 ("unbalanced, unstable, uncoordinated and unsustainable").
The most glaring imbalance and one that is growing is that between investment (45 percent of GDP) and consumption (just 35 percent of GDP). Investment generated by the regime’s loose credit policies accounted for almost 90 percent of GDP growth in the first half of this year, which again is unprecedented. The extent to which much of this investment, including infrastructure and new industrial projects, is wasted is often underestimated by economic commentators mesmerised by the size of the sums involved. As Guangdong Communist Party secretary Wang Yang noted in a recent speech: "For example, building a bridge is GDP; demolishing it is more GDP; then rebuilding the bridge is also GDP. One bridge contributed three times to the GDP, wasting huge social resources, but only forming actual social wealth once."
In the steel sector there is a plethora of new projects being built illegally, following government efforts to rein in runaway - and ultimately wasteful - expansion. "Some regions have acted illegally. We are once again seeing cases of illegitimate approvals, of construction starting before it has been approved, and of construction starting even as the approval process is underway," complained the government’s website on 30 September.
A short crisis?
The Chinese regime is acting on the belief that the global crisis is temporary, and when ‘business as usual’ resumes it will reconnect to global markets with its huge and growing industrial capacity. We Marxists dispute this scenario and would argue that the capitalist world has entered an entirely new period; the crisis is not temporary, and a return to ‘business as usual’ based on the conditions of the early 2000s is excluded.
Steel production - the skeleton of an industrialised society - is an example of the severe imbalances already evident in China. The industry has undergone a breathtaking expansion: China now has 7,000 steel factories, double the number in 2002. By the end of this year, including 58 million tonnes of ’illegal’ extra capacity built in defiance of government bans, Chinese mills have the capacity to churn out 700 million tonnes of steel per year. But according to the Ministry of Industry and Information Technology total demand for domestic consumption and export will be just 462 million tonnes this year, even with the massive stimulus injection. Correspondingly, capacity utilisation will fall to 74 percent this year from 83 percent last year. The China Iron and Steel Association warned of tough times ahead if the current loose credit regime comes to an end. "Overcapacity is the dominant issue for China’s steel industry," said the association’s chief economist, Li Shijun. "High levels of steel output can’t be sustained if fixed-asset investment slows down because of tightening bank loans."
It is this very fear, that the government will be forced to tighten credit conditions that has triggered sharp swings on the Shanghai stock exchange in recent weeks. As professor Xu Xiaonian of the China Europe International Business School in Shanghai warned: "China will lose steam and slow down. Eight percent growth seems easy to get but it will soon become a luxury. Overcapacity is already a problem... and everybody will feel the pinch. The recovery is not sustainable; the government is extending credit like crazy."
According to a survey by RBS almost half the new lending (over 4 trillion RMB!) has gone into purely speculative channels - the stock and property markets. When this new financial bubble bursts as it must (the Shanghai stock market has risen an improbable 90 percent in 2009) a surge in bad loans will likely result. Likewise the recent uptick in property prices is largely liquidity-driven and prices can resume their fall once the current loose credit regime ends.
China’s ‘recovery’ is therefore fragile (as also Wen Jiabao acknowledges) and loaded with potential for reverses not so different from the overall world situation. The idea advanced by capitalist optimists that China will pull the global economy out of crisis is fantasy. China’s ‘pygmy-sized’ consumer sector is worth about $1.5 trillion compared to a combined $22 trillion in the U.S. and European Union. Therefore, to offset a 1 percent decline in rich country retail spending would require a 15 percent increase in consumer spending in China. Yet the regime’s stimulus policies have had a minimal effect on job creation and increasing final demand i.e. consumption. It is a relatively thin segment of perhaps 10 percent of the population - more affluent urban dwellers - that accounts for the lion’s share of consumption in China. Workers have suffered wage cuts like their peers in other countries and do not feel economically ‘stimulated’.
These few facts underline how processes in the Chinese economy are entwined with world processes. China is not immune or ‘decoupled’ from the global capitalist crisis and the regime’s attempts to ride out what they wrongly view as a patch of extreme but temporary economic turbulence are doomed to fail, producing new economic shocks. One such shock could be the onset of a Chinese banking crisis brought about by precisely the "moderately loose" policies in force today. Another could be an escalation of trade tensions that lead the Chinese regime to begin to unwind its huge dollar reserves, threatening a global run on the dollar. These shocks will in turn feedback into the global arena, shattering hopes in China as a saviour for world capitalism. The need for a socialist alternative globally, a democratically planned environmentally-safe economy, has never been more relevant or urgent.