The Long View Marxism takes the long view of history. There are certain moments in history that are decisive turning points. Such moments were 1789, 1917, 1929. At such times the whole process is accelerated, and processes that seemed to be fixed for all time turn into their opposite. To this list of great historical turning points we must now add the year 2008. The new period that opened with the crisis of 2008 finds its reflection in an intensification of the class struggle, and in relations between states, by wars and international conflicts. Dialectics deals with processes in their development through contradictions. The dialectical method enables us to look beyond the immediately given (the “facts”) and observe the deep-seated processes that lie beneath the surface. The capitalist system historically produces and destroys its internal equilibrium. This is manifested at intervals in the outbreak of crises. In the economic sphere this is expressed in the alternation between booms and slumps, which are a fundamental characteristic of the capitalist system for the last 200 years. Periods of prosperity and full employment are followed by periods of slump in which investment falls off, factories are closed, unemployment soars and the productive forces stagnate. Marx explains that the fundamental cause of all real capitalist crises is overproduction, or, in the jargon of the modern economists, excess capacity (which is the result of overproduction of the means of production). The fact that society is plunged into crisis because it produces too much is a feature of capitalism that was unknown in previous societies. It is the fundamental contradiction of capitalism, which cannot be resolved within the limits of private property of the means of production and the nation state. For what appeared to be a long period—approximately three decades, this seemed to have been falsified by history. The collapse of Stalinism was an important turning point. From a psychological point of view it gave the bourgeoisie and its ideological defenders a new lease of life. It further impelled the Social Democracy towards the camp of capitalism, creating new illusions in the “free market economy”. It set the final seal on the former Stalinist parties, which abandoned any pretence of standing for socialism and became a pale reflection of the Social Democracy. The same process led to the virtual collapse of left reformism as a definite tendency in the labour movement. During the last boom, capitalism went beyond its natural limits through the unprecedented expansion of credit and the intensification of the world division of labour through so-called globalization. The growth of world trade propelled the system upwards in what appeared to be an unending spiral of growth. The expansion of credit temporarily increased demand. In the case of Britain, the size of private credit, as a proportion of GDP, has doubled to 200% in the last 50 years. The USA and other countries went down the same road. The sun shone, the markets boomed and everybody was happy. Everything seemed to be for the best in the best of all capitalist worlds. Then came the crash of 2008. With the collapse of Lehman Brothers, they came very close to a catastrophe on the scale of 1929—or even greater. They were only saved by massive injection of public money. The whole burden of debt accumulated by the private banks was placed on the shoulders of the taxpayers. The state—which the economists insisted had no role to play in the economy—had to prop up the whole crumbling edifice of the “free market economy”. The crisis continues disperdollaroSince 2008, all the factors that drove the system upwards have combined to drive it downwards. The massive increase in credit has become a huge mountain of debt, a colossal burden on consumption, which is dragging the economy down under its weight. While the press and politicians talk about a recovery, the serious strategists of capital are plunged into the blackest pessimism. The more far-sighted economists are talking not of recovery but of the danger of a new and even deeper crisis. The “recovery” is really a convenient fiction, calculated to soothe the nerves of investors and restore “confidence”. Insofar as it is possible to speak of it, the partial recovery in the USA is the weakest recovery from a slump in history. Normally after a slump, the economy tends to rebound strongly on the basis of productive investment, which is the lifeblood of the capitalist system. But this is not the case now. According to the IMF, the world economy is on track to grow just 2.9%, which is roughly half its pre-crisis level. The irrational nature of capitalism, trapped in the vice of insoluble contradictions, has been given an even sharper and more painful and destructive character through globalization. “National sovereignty” has become an empty word, as every government is subjected to the vicissitudes of the world market. Speculation flourishes despite all the talk about regulation. A vast amount of money is sloshing around the world, adding hugely to the danger of an unprecedented economic collapse. The global derivatives market, which amounted to $59 trillion in 2008, had risen to $67 trillion by 2012. This is a measure of the unbridled speculative frenzy that has gripped the bourgeois in our times. The tangled interconnections of the derivatives market, which it seems nobody truly understands, have introduced complex and new risks. The nervousness of the bourgeois is mirrored in the feverish rise and fall of the markets. The slightest incident can cause a panic: political tensions in Portugal; social unrest in Egypt; uncertainty over the outlook for China’s economy; the possibility of military action in the Middle East leading to a sharp rise in oil prices; any of these things can cause a panic that can plunge the world economy back into a deep recession. The yields on government debt play approximately the same role as the charts on the bottom of a hospital bed that denote the rise and fall of a fever. Beyond a certain limit, the increase in the level of a fever threatens the patient with death. The lifeblood of capitalism The most serious problem is the lack of productive investment. In the US, private investment remains below even its long-term share of national output, while public investment peaked with the stimulus in 2010 and has been falling ever since. The capitalists are not investing in the kind of productive activity that would lead to the hiring of American workers in sufficient numbers to allow the economy to take off. The reason is because there is no market for their goods; that is to say, there is no “effective demand”. The economic outlook is dark and uncertain. Nobody wants to spend or invest because they cannot predict the future. The number of jobs increased in 2013 but factory employment continued to decline. Initial forecasts that the US recovery would be led by a manufacturing rebound have been comprehensively falsified. A healthy and sustainable recovery must be based on productive investment, not a larger number flipping burgers in McDonald’s. The costs of investment are actually far lower now than in 2008. Yet business investment in the US is running at only slightly above its 2008 level. A recent survey of the 40 biggest publicly traded US companies recorded that roughly half of them intended to curtail their capital expenditures in the course of 2013. What is the point in building new factories and investing in costly new machinery and computers when they cannot use the productive capacity they already have? In the UK, a mere 15% of total financial flows actually go into investment. The rest goes into supporting existing corporate assets, real estate, or unsecured personal finance. Instead of investing in new plant and machinery, the big companies are borrowing large sums of money at negligible rates of interest in order to buy back their own shares. In the first nine months of 2013 alone, $308 billion was spent for this purpose in the USA. The problem is therefore not lack of liquidity. In the USA, businesses are awash with cash yet they do not invest in productive activity. In the last four years vast sums of money have been pumped into the economy, particularly the banks. The result has been to increase the public debt to alarming levels, without producing any economic recovery worthy of the name. Yet Moodys estimate at the beginning of 2013 (reported by Forbes in March 2013) was of $1.45 trillion in cash stashed away by US non-financial corporations. The increase for the year 2012 alone (included in the total) was of $130 billion. This is not a new phenomenon. In the late 1920s, there was a massive accumulation of unspent cash in the economy—just before the crash. The bourgeois economists have an aversion to pronouncing the word “overproduction” (strangely, some self-styled Marxist economists suffer from the same affliction). But from a Marxist point of view the root cause of the crisis is very clear. Surplus value is extracted in the process of production, but this does not exhaust the process of money-making. The ability of the capitalist to realise the surplus value extracted from the labour of the workers ultimately depends on his ability to sell his commodities on the market. But this possibility is limited by the level of effective demand in society, that is, by the ability to pay. The capitalists’ urge to produce in order to obtain profit is virtually unlimited, but his ability to find a market for his produce has very definite limits. The world economy is perilously dependent upon the USA. In reality, the whole world now depends on US consumption. But consumption in the USA is hardly in an ideal condition to act as the engine of world growth. Median earnings have fallen by 5.4 per cent since the US recovery began. Unemployment hovers around 7 per cent. Consumption accounts for roughly 70 per cent of US gross domestic product and about 16 per cent of global demand. Exporters everywhere are thus hoping the US consumer will come to the rescue. But this creates new contradictions. Last year, surging imports pushed the US trade deficit up by 12 per cent to $45bn per month, which was the largest jump in five years. Imports from China accounted for almost two-thirds of that. If this continues, the US-China deficit will exceed $300bn. On the other hand, US exports fell. Obama’s goal of doubling exports in five years is a hopeless dream. The US recovery might peter out, dragging the global economy down with it.This resembles the old Russian fairy tale of a hut supported by chickens’ legs. Quantitative easing The so-called recovery is based almost entirely on the injection of huge quantities of fictitious capital into the economy of the United States and other countries. Like a terminally ill patient, capitalism is being kept alive by a continuous blood transfusion of public money. The Central Banks are compelled to rely on so-called quantitative easing—or in plain language—printing money. QE and zero interest rates have failed to produce serious results and have clearly inflationary implications. The relative improvement of the US economy was due in no small measure to the loose monetary policies that were carried out by the Federal Reserve. Since 2009, the Federal Reserve has been buying financial assets—US Treasury bonds and some types of corporate debt. Through an expansion of the monetary base, they kept interest rates low, which served to prop up indebted businesses and households. This has been the major factor in the so-called recovery, and it is propping up the financial markets as crutches support a man with no legs. The capitalist system is based on the economics of the madhouse. In their greed to make quick profits from speculation the bourgeois only succeeded in creating gigantic asset price inflation in the twenty years prior to the crash of 2008. This was brought about by the Federal Reserve’s policy of holding down interest rates. The same insane policy is now being pursued in a desperate attempt to reflate the bubble. They seem to have forgotten that this very policy was what led to the collapse in the first place. It seems as if the bourgeoisie has taken leave of its senses. But as Lenin once said: “A man on the edge of a cliff does not reason.” The Federal Reserve’s quantitative easing programme amounts to $85bn per month. The UK, the Eurozone and, most particularly, Japan, are all slavishly copying Bernanke’s long-term promise of easy money. Paradoxically, this is just when he is attempting to back away from it. Bernanke therefore found himself in a very delicate balance. He tried to signal the beginning of the end of zero interest rates without triggering a panic. Those who are engaged in this activity are well aware that they are performing a dangerous experiment. They have known this for some time. Fred Neumann, chief Asia economist at HSBC explained that QE “buys us time but it does not solve anything fundamentally.” (FT, 20/9/13) “The longer they continue in this process the worse it gets for our ability to pull out of the slump”, said Mike Crapo, Republican on Senate banking committee. Moreover, experience shows that this policy is subject to the law of diminishing returns: ever bigger quantities of money are required to obtain ever more meagre results. Gillian Tett, Financial Times chief columnist states: “one way to interpret this weeks dance around QE is that policy makers are continuing to prop up a financial system that is (at best) peculiar and (at worst) unstable”. We are “in a world where asset prices and animal spirits are now dependent on cheap money”. The Financial Times pronounced its verdict on QE in the US in an editorial (21/9/13): “Although QE has lifted spirits, its effect has been more muted than some had hoped. Despite low funding costs, investment is in the doldrums. Governments are cutting deficits, households are repaying debt, and corporations are piling up cash. Consequently, the money created by the Fed is not funding activity such as house building or capital investment, which would contribute directly to growth. Instead, it is lifting the value of existing assets.” The housing finance agencies Fannie Mae and Freddie Mac remain as before, pumping credit into the mortgage market. But while before the crisis they controlled 60% on the mortgage market in the US, now they control 90%. This kind of thing was what ended in the collapse of 2008. Conscious of the dangers involved, Bernanke, cautiously announced last June that the Fed might be phasing out QE. The Keynesians, led by Paul Krugman, were horrified. They warned that it was a premature move that would send the wrong signal to the world economy, that the central banks would tighten before the private sector recovery has achieved escape velocity. This is what happened in 1937-38. Bernanke attempted to soften the blow by introducing all manner of “ifs” and “buts”. He stated that the Fed will end its asset purchases only if unemployment falls below 7 per cent—which it now has—reducing the risk of tightening before the economy can take it. Short-term interest rates would stay close to zero for a long time after that. Any rises would be gradual. And so on and so forth. It was all to no avail. The bourgeoisie has become dependent on QE and cheap credit, just like a junkie who has become hooked on heroin and needs a regular dose to keep going. The announcement caused an immediate panic in the financial markets hedge funds began selling off bonds, causing a big drop in their prices. Borrowing costs (or “yields”) soared. By mid-September the Fed was forced to retreat. The markets rose again on hearing the decision of the Fed to leave the QE3 “punch bowl” in place, although new Fed chief Janet Yellen has now announced plans to taper it off to nothing by the end of 2014. Crisis in the USA In 2009, two weeks after entering the White House, Obama made a speech in which he said: “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity—a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad”. Four years later, the US is still building on foundations of sand, preparing the ground for a future crisis. This is reflected in the staggering figure for the nation’s accumulated debts. The precarious nature of the situation was shown by the US government shutdown, which threatened to drag the USA and the world economy as a whole into free-fall. US government debt reached the astounding figure of $16.7 trillion, which is the limit agreed by Congress. The severity of the crisis is shown by an open split in the US ruling class and its political representatives. In the boom period, the two parties of capital, broadly representing two different wings of US capitalism, could bargain their way to a compromise on most issues. Now, when the cupboard is bare, the old political set up becomes a complete fetter on the further development of society and the capitalist system, with disastrous consequences. The need to increase the US debt limit brought this split to a crisis point. Failure to do so would have meant pushing the USA into default. This would have provoked an estimated 6.8 percent drop in US GDP and five million job losses in the OECD. Yet the right-wing “Tea Party” Republicans in Congress, propelled by their hatred of Obama, Obamacare, and their narrow-minded obsession with deficit reduction, were quite prepared to bring the US and the world economy crashing down. The Keynesians point out, that reducing living standards in the middle of a recession will only deepen and prolong the slump. That is correct, as far as it goes. But the monetarists are equally correct in pointing out that the Keynesian policies of deficit financing are a recipe for inflation and will ultimately make a bad situation worse still. In a capitalist economy there are few levers to pull on private investment when interest rates are close to zero and there is a massive public deficit. It is ironic that an economist like Jeff Sachs—the man who unleashed neo-liberalism onto East Europe—is now calling for a worldwide version of the New Deal. This is a reflection of the desperation of the bourgeoisie, which feels it is in an impasse. The ruling class is split over what action to take over the huge debt that is hanging over the US economy like a terrifying sword of Damocles. The US government shutdown caused alarm in bourgeois circles internationally. The head of the World Bank, Jim Yong Kim, called it “a very dangerous moment… Inaction could result in interest rates rising, confidence falling and growth slowing”. The head of the IMF, Christine Lagarde, delivered an even clearer warning when she said that the stalemate in the US Congress threatened tipping the word into a new recession. The dollar began to slide against other countries as investors lost confidence. The insane policy of sequestration led to cuts to investment in scientific research, education and infrastructure, actively reducing the very things that America needs more of in order to achieve a minimal reduction to the budget deficit. The Republican right demanded that Obama abandon his timid health reforms. The deadlock in Congress was a graphic expression of the split in the ruling class, which has been papered over but not resolved. Another section of the bourgeois economists are now speaking in favour of moderating or abandoning austerity, protecting the poor, raising their skills, focusing the investment flow towards green energy, etc. This is intended to boost demand by increasing consumption. But such proposals immediately clash with the bitter resistance of the bosses, the Republicans and the monetarists. This is a very risky policy, which some economists have compared with the situation facing Roosevelt in 1938, when Congress forced him to rein in stimulus, prompting a new downturn. As a matter of fact, it was not Roosevelt’s New Deal policies that ended the Great Depression but the Second World War. But this option is no longer possible at a time when the American President cannot even order a bombing raid on Syria. In his 2009 speech, Obama chose not to mention what becomes of the house built on sand: “And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it”. [End of part one]
Posted on: Thu, 30 Jan 2014 15:31:48 +0000
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