World economy: Here comes the slump

Summer is usually a period when "not much happens", at least in Europe. But this Summer is like the calm before the storm. The mass demonstration in Genoa and the last general strike in Argentina are indications of the tumultuous years ahead.

However, in the last weeks the capitalist commentators have suddenly woke up to the fact that a global capitalist crisis, a recession or slump, is looming. It will be working class and middle class families that will have to pay for the crisis; the rich and the capitalist class will, as usual, find an escape route. But the fact that the crisis has set in at the same time as the anti-capitalist mood is gaining momentum will have a profound effect on the political outlook of workers and young people. A socialist revival is on the agenda.

However, while the spokespersons of capitalism are occupied with eating their previously optimistic words and making face saving comments, the British economy is sliding down. Manufacturing is already in recession; in the year to March, 148,000 jobs were lost in manufacturing and industrial production, and the pace has picked up in recent months.

The economic slowdown in manufacturing has now started to spread to the service sector. But according to Chancellor Gordon Brown, everything is fine and somehow, he claims, British capitalism can mysteriously weather the storm.

At the beginning of this year the same was said about Europe, but the slump in demand at home and abroad has meant that unemployment once again haunts the continent. The slowdown in the US had an immediate downward effect on Europe, particularly on German exports. German manufacturing orders, since March, have fallen at their fastest rate for over five years. The Financial Times wrote on 1 August: "Euro zone manufacturing reported more cuts in jobs and output as the threat of a worldwide industrial slump increased. This announcement – echoed by their counterparts in the US and the UK – casts more gloom over the global economy".

A global crisis

This crisis is the first synchronised global downturn. The three main capitalist countries – Germany, Japan and the US – are going down together, while the rest of the world slides after. "It looks like the downside of globalisation could be globalised slump", warned the London Evening Standard [30 July].

The present global downturn represents a new phase in what has become a drawn out process of crisis, which began in East Asia in 1997. But the processes towards worldwide recession have accelerated in the course of this year.

There is no major capitalist power that can act as a locomotive to economic growth and pull the rest of the world along. Japanese capitalism is mired in a slump as the country is entering its second decade of stagnation. The US economy is hardly growing at all and recent economic data from the Euro zone "are back at the level seen after the crisis in Russia [1998] and Asia [1997]", according to the US newspaper International Herald Tribune [28-29 July].

At the same time the crises in, for example, Argentina and Turkey have gone from bad to worse in the last months. The world’s financial system is walking a tightrope at the moment. A country’s default on its debt, a new wave of currency depreciations in the so-called emerging markets or a fall in the value of the dollar could trigger off a financial meltdown.

The situation today is different to 1997-1998, when the US could act as an engine of growth for the rest of the world. But this was a period when the US economy was growing at an annual rate of 4 to 5 per cent.

The US economy expanded at a 0.7 per cent annual rate in the second quarter, the lowest growth rate for eight years. Manufacturing output in the US has fallen for 12 months in a row, investment dropped 13.5 per cent at an annualised rate last quarter, corporate America’s profit is plunging and unemployment is on the rise again. Even further rate cuts will do little to change the situation, given the level of overcapacity and lack of demand.

Moreover, US capitalism is now paying the ultimate price of living beyond its means – a record current account deficit and the creation of a dangerous debt trap. While the US economy was growing, huge imbalances were created in the world economy and the US has become totally dependent on the will of foreign speculators to finance its deficits. But the capital inflow to the US could overnight turn into an outflow as the slowdown starts to deflate the Wall Street bubble. This in turn would throw the value of the dollar into reverse causing panic across the world – "the meltdown scenario" as The Guardian called it in an editorial [30 July].

It is almost impossible to predict the speed and the depth of the impending global crisis of capitalism. The downturn has not yet spread to all the main sectors of the economy and consumers are still spending. It is the consumers, in fact, who are keeping the economy going in the US and, for example, Britain. But this cannot continue for any length of time because of the enormous amount of personal debt accumulated. Further job losses, low or no growth in disposable income and falling household wealth as the stock market declines will mean that households will have to cut back and some will start saving again.

However, global trade has slowed at its sharpest rate for 25 years in the course of this year and world industrial production is falling in absolute terms. This is bound to affect other sectors of the economy as growth in national income stagnates.

What happened to the "New Economy"?

Globalisation, instead of giving way to a "New economy", has bred a classical crisis of capitalism expressed in overcapacity and overproduction. Increased integration and interdependence works both ways.

On the one hand, markets for capital and goods are more integrated than ever; on the other hand this has also meant greater synchronisation of economic ebb and flows, of political and social turmoil. In short, globalisation tends to aggravate all the main contradictions inherent in capitalism when its "downside" starts to come to the fore.

In the words of the London Evening Standard on 30 July: "In an investment-led slump, which we now have for the first time probably since the 1930s, all this efficiency and lean manufacturing turns round to bite us. It means there are no leads or buffers to damp the impact of the slowdown, nothing to mitigate the transmission of its effect. The gloom goes round the world in a flash… Business round the world has over-invested and there is insufficient demand for the goods it seeks to produce and sell. There is chronic overcapacity in most businesses, acute price pressure and ferocious competition". But while the capitalist commentators may be able to describe what is actually happening, they are not able to give an explanation why. It is the madness of the market and the production for profit which cause the crisis. It is "over-investment", overcapacity and overproduction in relation to profit, not need. Capitalism is a system of production for profit.

It was Karl Marx in his three volumes of Capital who explained how the over-accumulation of capital, fuelled by credit expansion and leading to a fall in the rate of profit, was "the main lever of overproduction and overspeculation" (Capital Volume III).

The capitalist economists are using different terminology to try to grasp the same process, they even invented a new term to describe the present crisis – "profit recession". But modern capitalism not only faces the problem of a profit squeeze, but also the problem of the limits set by the market. At the end of the day, goods produced have to be sold in order to make a profit, but who is going to buy all the goods when the buying power of workers is increasingly squeezed and the public sector has been slashed? Furthermore why should capitalists invest when they can, with existing capacity, already produce more than can be absorbed by the market. It is an unsolvable capitalist equation, which is why the system develops through ebbs and flows, periods of growth and periods of recession and stagnation.

It was not accidental that the dot com bubble was the first to burst, because most of those companies never generated any profit. But money was poured into the dot com companies on the basis that they would, at some stage, make a profit. However, the bursting of the dot com bubble was a prelude to a crisis in the whole hi-tech sector, including telecommunications, which after all has been the most dynamic sector of capitalism in the 1990s. The telecoms industry is facing a meltdown long before any 3G (third generation) mobile phones have been made, showing the inability of capitalism to take full advantage of even the existing level of technology.

It will take years to reduce the amount of overcapacity that exists, for example, in the hi-tech sector, and millions of jobs will be lost. The telecom industry has already cut 293,000 jobs worldwide so far this year, mostly in the last quarter. A further 54,000 have gone from related component suppliers.

What has happened in Argentina and Turkey has delivered a dire warning of what could effect the poorest areas of Europe as well when the crisis starts to hit. Around 500,000 jobs alone were lost in Turkey in the first 4 to 5 months of this year. Working class families saw their living standards cut by one third in the same period. Tens of thousands of small businesses went bankrupt.

Argentina has been in crisis for four years. Unemployment is at 20 per cent and a third living in poverty. The new package of draconian cuts – in public sector workers wages and pensions – will spark off new mass upheavals, which will give an illustration of the ferocious class battles, in Argentina and elsewhere, that lie ahead when workers and the poor are forced to take to the streets in order to protect their jobs, income and future.

This article first appeared in The Socialist

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