|SocialismToday Socialist Party magazine|
Where is the world economy going?
Is the worst post-war economic downturn coming to an end? Are the green shoots of recovery really visible, as many politician would have us believe? Opinion is divided, with some commentators counting down to the next crisis. What is clear, is that this is a time of acute economic instability. Any growth is likely to be slow, with governments and big business out to offload the costs onto working-class people. LYNN WALSH reports.
WORLD CAPITALISM HAS been shaken to its foundations by the economic crisis that has unfolded since the end of 2007. Nobody disputes that it is the worst crisis since the 1930s. "The downturn has been global in scope", comments the Organisation for Co-operation and Economic Development (OECD), a grouping of 30 advanced capitalist countries, "even though its financial epicentre was in the OECD area. Indeed, trade and financial linkages prompted a synchronised collapse in activity and trade after financial markets froze in the second half of 2008". (OECD press release, 24 June 2009)
World trade, the engine of globalisation, collapsed with a 16% fall expected for 2009. The cumulative output losses since the beginning of 2008 have been severe: minus 5.14% for OECD-Europe, minus 8.4% for Japan, minus 3.55% for the US, with an OECD average of minus 4.7%. In Britain, the cumulative loss has been minus 5.54%, and the recession may continue longer than in most of the other advanced capitalist countries. Ireland and Iceland have suffered cumulative losses of about minus 9% of output, while Turkey has fallen by minus 13.92%. (Source: Office for National Statistics, Economic and Labour Market Review, October 2009) There have been even deeper falls in some of the central and east European countries: 18.4% in Lithuania, 16% in Latvia, 14% in Ukraine, and 13.2% in Estonia.
The economic crisis is also a serious political blow to capitalism, especially to the prestige of the advanced capitalist countries. "The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe". (Roger Altman, The Great Crash 2008, Foreign Affairs, Jan/Feb 2009)
The leaders of world capitalism are consoling themselves that they survived a ‘near-death experience’, and are suffering ‘only’ a ‘great recession’ rather than a ‘great depression’ – a catastrophic slump and prolonged period of depression. They have been encouraged by the revival of growth in the US (3.5% in the third quarter) and the rebound on world stock exchanges. Their optimism, however, is premature. Assessments made by the main economic agencies, such as the OECD, IMF, etc, that a recovery will be "slow and fragile", remain valid.
The return to GDP growth, which is likely to be very limited this year in Europe and Japan, is heavily dependent on state intervention, through support for the banking system and fiscal stimulus programmes. Many capitalist commentators fear that, when these programmes have run their course (and unless there are further stimulus programmes), the world economy will slide back into recession, giving rise to a so-called double-dip recession.
Regardless of the return to positive growth figures, unemployment will continue to rise sharply for the next year or so. Even according to official figures, which underestimate the true situation, there will be a rise of over 25 million unemployed from the low point of late 2007. Moreover, any recovery will be held back by the enormous burden of debt which weighs on the global economy. Huge private losses made by the banks and finance houses have been transferred to the state, while the general injection of additional credit into the system by central banks will also increase state deficits. The fiscal stimulus programmes will also enormously increase state debt, which will act as a drag on future growth. The ‘green shoots’ of recovery, hailed by many capitalist leaders, are in most cases sickly weeds, growing in barren soil.
Can the stimulus packages work?
MASSIVE STATE INTERVENTION has so far avoided a catastrophic collapse and a prolonged slump. Leaders of the advanced capitalist countries avoided the mistakes made by their counterparts after the 1929 crash, when they stood aside and let the system collapse. On this occasion, they intervened on an unprecedented scale. The United Nations (World Economic Situation and Prospects 2009) estimates that governments worldwide have used around $18 trillion (or about 30% of world gross product) to bail out the banks and support the financial system. At the same time, the major capitalist countries have implemented fiscal stimulus plans totalling about $2.6 trillion (about 4% of world production), to be spent over 2009-11. However, the UN report comments that, in reality, it would require a stimulus of 2-3% of world gross product a year to make up for the estimated decline in global aggregate demand.
It is likely that, at best, it will take five years or more for the major economies to make up the losses of 2008-09. The OECD recognises that there will be a growth in structural, long-term unemployment, and that capital stock is likely to be reduced on a long-term basis, reducing the output capacity of major economies.
The return to positive growth in the US, the world’s largest economy, and the sustained growth in China (expected to be around 9% this year) have been major factors in the limited recovery of the global economy (see box). The return to growth in the US is almost entirely due to the stimulus package (see box). Given the continued rise in unemployment and the mounting debt burden faced by the majority of working people, the economy will slide back without a new stimulus package. However, Barak Obama is currently emphasising the need to reduce the federal government deficit, rather than pushing for a new package. US consumer demand for manufactured products (which account for over 70% of the US economy) are still a decisive factor in world output and trade. Weak or negative growth in the US spells crisis for major exporters such as China, Japan and major European manufacturers like Germany.
Growth in China has been sustained on the basis of massive state intervention, with a $585 billion package of expenditure and loans. This reflects the major role still played by the state in the Chinese economy, despite the recent growth of private capitalism. However, most of the expenditure is concentrated on infrastructure projects, rather than raising the wages and living standards of the masses of workers and peasants. The Chinese regime is still counting on a revival of its export markets in the US and Europe.
A new bubble?
MUCH OF THE optimism among investment bankers and economic commentators about ‘green shoots of recovery’ comes from the rebound of shares since March 2009 (up around 60% from the low point, though still around 25% lower than the previous peak). There is special enthusiasm among speculators for financial assets (shares, bonds, property, commodities, etc) and for investment in so-called ‘emerging markets’, that is, economies like China, South-East Asia, Brazil, etc.
The downturn has not been so severe in these economies as in the advanced capitalist countries. But the main reason for the surge of investment is the phenomenal profits that can be made on the basis of cheap credit. Banks, hedge funds and other financial institutions are flush with money as a result of the government bailouts in the US, Britain and Europe. Moreover, on the basis of state guarantees of their assets, they are able to borrow money at very low interest rates. In general, they have not returned to normal levels of lending to business, so the cash is being channelled into speculative activity.
The quantitative easing of the Federal Reserve Bank and other central banks has also hugely increased the liquidity of financial institutions. Mainly on the basis of printing money (rather than the issuance of government bonds, which is a form of borrowing), the US Federal Reserve is purchasing up to $1,800 billion of US government bonds, mortgage-backed securities, and various other forms of securitised debt. This represents a massive injection of liquidity into the finance sector. Given the relatively low rates of interest that can be earned on government bonds, the finance houses are using their credit to invest in shares, commodities, and other more profitable assets.
Added to this injection of liquidity is the fall in value of the US dollar. Paradoxically, given the US downturn, the dollar rose in value during 2008, mainly because governments and speculators internationally saw US government bonds as a ‘safe haven’ for their cash. But since March, the dollar has been falling quite rapidly. Through ‘short-selling’ the dollar (a way of profiting from the fall in the value of the dollar), speculators have been able to borrow dollars effectively at negative interest rates (as low as 10% or 20% negative on an annualised basis). They are then using the cash to buy shares, bonds, commodities, currencies, etc, both in the advanced capitalist countries and in the semi-developed countries (emerging markets). Speculators in these markets have been able to make gains of between 50-70% on these short-term, speculative investments.
These easy profits undoubtedly represent a ‘recovery’ for speculators. But this new bubble is far from representing a real recovery of the US or global economy.
"One day", warns Nouriel Roubini, "this bubble will burst, leading to the biggest coordinated asset bust ever". (Mother of All Carry Trades Faces an Inevitable Bust, Financial Times, 1 November) Sooner or later the dollar will stop falling, and speculators will no longer be able to borrow at such huge negative interest rates. The Federal Reserve’s quantitative easing programme, moreover, is scheduled to end by spring 2010. Any rise in US interest rates, which may come if GDP growth continues, would also undermine this speculative activity. Such "an unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall". (Roubini) A crash of these highly speculative financial markets would undoubtedly cut across any revival of global growth.
Dangers for capitalism
WHAT ARE THE prospects for the global capitalist economy? There is likely to be a weak, fragile recovery, which could last for a few years, but could be equally cut across by a new downturn once the state stimulus packages run their course. Capitalist leaders are themselves uncertain whether there will be a revival of self-sustained capitalist growth. Short-term fluctuation will continue, as always under capitalism. But there is likely to be a prolonged period of feeble growth or stagnation, with depressionary features. There will undoubtedly be a period of structural unemployment which, together with squeezed wage levels and social spending cuts, will erode capitalist markets.
Intervention by the major capitalist powers has so far prevented a meltdown of the banking and finance system. Nevertheless, there are still huge amounts of bad debts concealed within the system, which may lead to renewed crisis in the banking system in the next few years. Bankers and speculators are vigorously fighting off attempts to impose tighter regulation of the finance sector. The current speculative bubble on stock exchanges, especially in emerging markets, show that the stability of the global economy will still be threatened by speculative excesses. Many serious capitalist commentators take it for granted that it is only a matter of time before the next crisis. "The clock ticks inexorably towards another disaster…" writes Francesco Guerrera. (Countdown to Next Crisis, Financial Times, 16 October)
Some, with good reason, also fear the political backlash against the system: "When the next crisis hits, and it will, [the] frustrated public is likely to turn, not just on politicians who have been negligently lavish with public funds, or on bankers, but on the market system. What is at stake now may not just be the future of finance, but the future of capitalism". (John Kay, ‘Too Big to Fail’ is Too Dumb an Idea to Keep, Financial Times, 27 October)
Moreover, finding an exit strategy from the policy of ultra-low interest rates, super-loose money supply, and quantitative easing (printing money) is fraught with danger for the capitalists. At the moment, quantitative easing is not having an inflationary effect. This is because of the strong deflationary trends in the world economy, with falling demand and global overcapacity underlying a general fall in the prices of manufactured goods. At the same time, banks are hoarding much of the credit they have accumulated under the quantitative easing programmes. However, as soon as growth revives and banks begin to put more of their reserves into circulation through loans to businesses, there will undoubtedly be a serious danger of inflation replacing deflation. Premature withdrawal of monetary stimulus could provoke another downturn. On the other hand, a delay in reining in the excess liquidity could cause an explosion of inflation. "There is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability. For all we know, there may not be a safe way down". (Wolfgang Muchau, Countdown to the Next Crisis is Already Under Way, Financial Times, 18 October)
Together with support for the finance sector, state fiscal stimulus programmes have hugely boosted government deficits. Many current deficits of the advanced capitalist countries have been pushed above 10%. Given the reluctance of capitalist governments to increase taxation on big business and the super-rich, these deficits will weigh on the economy for a long time ahead. Governments will attempt to reduce the deficits through cutting state expenditure, which will mean a further assault on working-class living standards. At the same time, financing state deficits will take a growing proportion of global savings (an estimated 25% in the OECD countries). This will reduce the capital available for both public and private investment.
Growing inter-capitalist tensions
A PERIOD OF weak growth will aggravate all the inter-capitalist tensions in the world economy. According to the head of the World Trade Organisation, Pascal Lamy, there is already ‘low intensity’ protectionist war. This is likely to become more intensive in the coming years.
Above all, the role of the US dollar will be threatened. Being able to pay its debts in its own currency has been an enormous advantage for US imperialism. But the price is the huge accumulation of debt with the rest of the world. At a certain point, this debt will become absolutely unsustainable, with a collapse of the US bond market and the value of the dollar. Capitalist leaders internationally are well aware of this problem, but are completely unable to steer an orderly transition to an alternative system of reserve currencies (either through a shared system based on major currencies such as the euro, yen and yuan, or on special drawing rights [SDRs] administered by the IMF). A collapse of the dollar would mean global currency chaos and could itself provoke a new, even deeper downturn in the world economy.
Some of the semi-developed countries, such as Brazil, India, and South-East Asian countries appear to have escaped the worst effects of the current crisis. In particular, the increase in commodity prices (through continued demand from China and speculative dealing in commodity futures) appears to have benefited commodity producers. But this sheltered position will be short lived. The underlying social contradictions in these countries are becoming more acute every day.
Since 1980, world capitalism has managed to find its way out of successive crises through a series of financial bubbles – in financial assets, housing, commercial property, and commodities. But the crisis that has unfolded since 2007 marks the end of this road. There may well be new bubbles and speculative excesses. But they will not provide the huge, inflated cushion on a comparable basis with the last 20 to 30 years. World capitalism has entered a new, more acute period of crisis.