World economy: A synchronised crisis

The world economy is on the edge of a prolonged period of stagnation. Before the war on Iraq began, its approach had already made a negative impact. A United Nations statement in January this year forecast: "An escalation into military action would have even more profound negative economic consequences". The war is speeding up the development of the crisis. The year 2003 is not the year 1991.

After the war, according to Stephen Roach, chief economist with Morgan Stanley, Bush and US capitalism, "Will still have to cope with persistent post-bubble excesses, deflationary risks, anaemic national saving, exploding budget deficits and massive current expenditure gaps. Victory in Iraq changes none of that".

The last Gulf War (1991) was fought at a time when the world economy was beginning to recover from the relatively short crisis of 1990-92. The European economy was growing, mainly due to the boom following the unification of Germany. Also Asia, especially the countries later referred to as the ’Tigers’, and Latin America experienced a period of growth in the early 1990s. At the same time, the world political situation was marked by the collapse of Stalinism and, in its wake, worldwide capitalist triumphalism. The forces of global capitalism and neo-liberalism looked more or less invincible.

Today’s situation is totally different. Global capitalism is moving into a new synchronised crisis and the anti-capitalist mood has turned into mass anger against Bush and Blair’s war on Iraq, while the imperialist camp, or the "international community" as Blair calls it, is ridden by divisions and splits. This rift will inevitably spill over from politics into economics.

The likely economic consequences of the war have to be seen in the broader context and should not only be analysed from a purely economic point of view. The combination of political and social turmoil and new world relations mired in persistent instability will also have economic repercussions. Not for nothing did Karl Marx use the term ’political economy’.

"Given the weakness of the world economy at present, this may be a particularly bad time to go war", as one capitalist economist said to the BBC News, once the war started. This was confirmed last week by, for example, the gloomy report from the Confederation of British Industry (CBI) saying that retail sales volumes fell at the fastest rate for a decade in March. The CBI survey was followed by figures showing a slowdown in housing and the construction industry, while manufacturing is still, "Struggling against incredibly difficult conditions", according to Patricia Hewitt, the New Labour Industry Secretary (Guardian, 2 April 2002).

Recent figures revealed in the US indicate lower consumer and manufacturing activity. Sales at US retail chain stores fell by 1.4%, taking retail sales to their lowest growth rate so far.

There was, of course, a global "war rally" as the financial markets were hoping for a short war. However, the immediate euphoria that greeted the slaughter of the Iraqi people was based on wrong political and economic assumptions. "People are trading on the idea that the war will be short lived and an easy victory, which will lift the geopolitical uncertainty that is weighing on the dollar and pave the way for a better US economy", said a currency strategist in New York two days before the war started. This statement says a lot about the irrationality of the markets and the ignorant speculators who are in the driving seat.

Big three face economic crisis

The world’s three biggest economies – the US, Japan and Germany – are all either in or teetering on the brink of recession. US capitalism is slowing down. "The risks to the global economy, taken together are now greater than at any time since the 1973-74 oil crisis", warned John Llewellyn, the chief economist with Lehman Brothers, a month before the war. The US economy needs to expand at an annual rate of at least 3 to 3.5% to continue acting as the sole engine of world capitalism and spark off a global recovery.

"Many forecasters now expect GDP growth (in the US) of only 1% to1.5% at an annual rate in the first half of this year". (The Economist, 15 March, 2003). Even a short war will not alter the fundamental course that global capitalism has taken over the last few years. US capitalism has now started to pay the ultimate price for acting as the world’s buyer and lender of last resort. This, together with Bush’s imperial ambitions, has caused huge imbalances in the world economy.

The US current account deficit has reached an unprecedented level. Goldman Sachs expects the US current account deficit to reach $600 billion in 2003. The budget deficit is growing faster with every new report and the 2003 budget shortfall could reach $400 billion. It is striking that Bush, as an article in the International Herald Tribune on 21 March put it, "Remains about as transparent as a Stealth bomber in specifying the likely price (of war). The president obviously fears that this information might fuel the public debate about the wisdom of the war – or at least the wisdom of his tax cuts".

The huge cost of war together with the biggest increase in military spending ever announced is a new heavy burden on the economy; the US working class and the oppressed will be forced to pick up the bill.

Capital inflows into US equities were close to zero in January this year. Even if capital inflows were at their 2000 peak, it would still not be enough to fund the 2003 deficit at the current level of the dollar. "The strain of funding the current deficit is taken entirely by bond inflows. And with German five-year bonds yielding 36 points more than their US counterparts, the dollar no longer has a rate premium in its favour", commented the Financial Times (28 January 2003). US capitalism is literally living on borrowed time and can no longer offer the same return (earnings) as before. The decline in the value of the dollar (the dollar has lost more than 20% against the euro since January 2002) reflects a capital outflow from the private sector in the US to Europe, which explains why the euro is no longer regarded as "toilet-money". However, not even a fall in the value of the dollar has given US industry and exports a relief or a lift. The US trade deficit surged last year. The deficit with Germany set a record and the gap with Japan was the highest since October 2000. The present "Grand Canyon of trade deficit", as one commentator called it, partly explains why John Snow, US Treasury Secretary, is "not particularly concerned" about the dollar’s decline.

In fact, US capitalism uses its deficits as a means of blackmailing other capitalist nations. Countries scared of a currency appreciation against the dollar provide the US with a stream of money that makes it possible for the world’s biggest debtor to go deeper into the red. Nevertheless, the cost of being the world’s military global police, together with rising unemployment and less tax revenues, will increase the budget deficit. Bush’s modern form of Ronald Reagan’s ’voodoo-economy’ is the road to ruin and to class war in the United States.

Volatile cocktail

However, the existing huge imbalances introduce new vulnerabilities fuelled by the political and diplomatic tensions within Western imperialism. A sustained 10% rise (against the dollar) in the euro over today’s level would knock almost a percentage point off growth in Europe over a year. All the main capitalist blocs or countries argue that they need a weaker currency or have to act in order to protect their own industry.

"The US can make the case for a weaker dollar because of these imbalances, Japan’s banking system makes the case for a weaker yen, and the Eurozone’s weak economy makes the case for a weak euro. This could leave the currency markets sequencing back and forth, or even with the prospect of competitive devaluations. The backdrop of geopolitical discord, a sluggish world economy, and US-centricity is a volatile cocktail. I hope we don’t go down the slippery road of protectionism, but politicians feel squeezed and pressured from the prospect of competitive devaluations", warns Morgan Stanley’s chief economist Stephen Roach, who has been banned from the White House because of his criticism of Bush’s tax cuts.

The "beg-o’-thy-neighbour" tactic already used is bound to backfire at some stage. US imperialism is the biggest economic, political and military power, but not even US capitalism has the power to put the rest of the world on rations.

That consumer confidence in the US is falling after a series of cuts in interest rates is unprecedented and reflects the fact that households have to tighten their belts and start saving. With interest rates at a 40-year low, close to 1%, there is not much scope for further cuts in interest rates in order to cut the cost of borrowing.

The impasse of capitalism is expressed by the fact that that US manufacturing companies use just 73.6% of their capacity. Industrial production in the US did pick up through much of the year 2002, but capital utilisation did not. There is obviously still an excess of capacity left over from the boom. This, together with the debt overhang and the low rate of return (profit), explains why capital spending (investment) is falling. New military contracts and the re-building of Iraq will have little impact on the overall crisis of manufacturing in the US and worldwide.

In addition to the problems that already exist there is the risk of an increase in the price of oil, not only because of the war. The combined impact of the war as well political and social turmoil in other oil-producing countries such as Venezuela and Nigeria, have the potential of creating a higher price for oil. Stocks of oil in the US and other countries are also lower now than in 1991, which could mean that the price of oil could stay high for some time.

The United States is on the brink of a recession, while Japanese capitalism is in a black hole and Germany expects zero-growth this year: so where on earth will demand come from? The capitalist bubble of the 1990s – the biggest in history – has not yet fully burst. The debt overhang and the "excess of capacity" still haunt the world economy and around the corner is the threat of a deflationary crisis as in Japan. "Even if the war is a success, there is much less in the world economy to be optimistic about". (The Economist, 29 March)

US imperialism is winning the war against Iraq. However, Bush will not be the first and certainly not the last conqueror who wins the war at the price of losing the peace and prosperity that should follow, as "imperial overstretch" takes its toll. The war and its global economic, political and social consequences could be the prelude to a long period of sluggish growth, stagnating markets and intensified rivalry which could turn the whole globalisation process into reverse.

A version of this article first appeared in Offensiv, weekly paper of the CWI section in Sweden.

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April 2003