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The World Economy: Towards the Millennium

Brian Green

October ’98: the absent slump
The liquidity crisis in October 1998, precipitated by the Russian default, sparked panic in the ranks of the bourgeoisie and jubilation in the ranks of the left. After a decade of raw capitalist triumph, here was a moment of vulnerability. Some on the left went so far as to predict a slump and even a rerun of 1929.

Only it did not happen (and this author warned against such a view). Today bourgeois commentators are predicting not a slow-down but a resumption of growth as the Pacific Rim countries reverse their decline. The US economy continues to thunder on and even the German economy is stirring, helped by the fall in the Euro.

I have always criticised the left for their failure to address the world economy as political economy. This means a failure to investigate the balance of class forces. Without this dimension it is impossible to evaluate the potential of capitalist counter-crisis policies. The sober fact is that at the close of the 20th century, the century of lost proletarian revolutions, the capitalist class is more in control that at any time in modern history.

In the USA the economy is popularly known as the "Goldilocks Economy", one which is not too hot and not too cold. In reality, beyond Wall Street the economy is really the Count Dracula Economy, one which is hot on job losses and cold on wage rises. A brief trip around the world reveals just how much the balance of class forces favours the bosses.

In Japan, senior white collar workers can expect a 40% wage cut when looking for a new job, the unemployment norm is 5% and jobs for life is a fond memory. Predictably suicide rates have shot up 35% this year to a post-war high. In South Korea, Samsung has already fired 30% of its staff. In Germany roughly 2 million jobs have been lost in the past few years as the economy slims down. In the United States not one cent of the 4% increase in productivity in manufacturing has gone to wages. It has all been swallowed up in profits. And the list goes on.

The fact is that we are seeing a trend, first established in Britain and the USA at the time of the 1989 recession, being further extended around the world. That trend is the ability of the capitalists to cut jobs and wages as soon as sales begin to falter. This means that the "value added" per worker does not fall as costs are reduced in line with the fall in company income.

This process of cost reduction in real time is unprecedented. It would never have been allowed to happen a decade ago due to union strength. And it is this prompt and constant cost cutting that is giving rise to the shallow elliptical shape of the recent recessions compared to the traditional deeper V shape of past recessions.

It also tells us about pricing phenomena. Inflation is always a barometer of the balance of class forces. When the balance favours workers, or tends towards equilibrium, then inflation is the norm. During these times the capitalists are forced to cut wages by reducing the value of the money in workers’ pay packets. Of course this is not their preferred option, as depreciating money undermines the use of money as a store of value and upsets the relation between debtor and creditor.

Their preferred option is defending their currency while at the same time holding down and even depressing monetary wages. That is what has been happening over the last decade. Productivity has been rising while wages have been lagging. During the 1990s manufacturing growth in the USA was at least 50% higher than the 1.5% growth achieved between 1949 and 1973. Yet despite this huge growth in productivity wages have barely risen, resulting in price stability.

It is this fact, not monetary policy, that lies behind the absence of inflation in most countries and even deflation in others. Money and credit growth is robust despite price stability, because it is all flooding into speculation. In the USA the turnover of the stock exchange has grown from 10% of GNP to 100% of GNP, so there is now $1 being spent in the never never land of speculation for every $1 spent in the real economy.

The world economy remains vulnerable
World output is expected to grow 2% over the next two years. This depends in its entirety on the USA continuing to grow at a rate above 3% over these two years. Any investigation of the world economy has to begin with the investigation of this economy.

Until now the US economy has provided a market for the rest of the world, particularly over the last two years when many parts of it have sharply contracted. The result has been an unsustainably large trade deficit. The flood of cheap imports has depressed corporate profits despite the growth in productivity. These profits fell from a high of 12.5% of GNP in 1997 to 11.5% in 1998. In 1998 manufacturing profitability declined to a three and a half year low.

With the economies outside the US now picking up, it is projected that corporate and manufacturing profits will rebound in 1999. This is one of the recent cues for the rise in share prices.

The US economy continues its restructuring. This continuous erosion of decent jobs would normally act as a brake on the economy as demand is reduced through the loss of better paid wages. What is driving the US economy is speculative fever and the imagined wealth effect it creates. Between a quarter and two-fifths of the growth in demand is being fuelled by it. If we include the jobs and bonuses around Wall Street, that increases it to close to half of the growth in demand. It has been this phenomenon that has made the difference between a low growth or a contracting world economy during the last 24 months.

The question is how much longer this speculative boom can continue. Has the economy moved out of the shadow of October 1998 when a small crisis caused such a huge drain of liquidity from the markets? In fact conditions are now more extreme than ever.

The savings rate has now fallen into negative territory (-0.7%) which means that North Americans are spending more than they are earning. Personal bankruptcies, despite this peak of growth and job creation, have already reached the record high of 1.4 millions last year. The price to earnings ratio of the top 500 companies is now nearly 35 (or 60% higher than pre-crash 1987). This means that a share costing $35 lays claim to only $1 in profits.

This yield of less than 3% barely exceeds inflation and if adjusted for dividend is actually below inflation. With dividends below inflation, holding shares means losing money were it not for the fact that share prices are soaring, so if need be they can be sold at a profit. Nonetheless, such poor returns describe a bubble economy, similar to that which occurred in Japan towards the end of the 1980s.

What could prick this bubble? Rising inflation fuelling rising interest rates is the obvious needle. However, the class struggle remains subdued. The wages front is silent. The profit outlook is improving. It is unlikely that inflation will take off despite the tightening market for raw materials from the pick up of demand in the Far East.

Interest rates could rise for another reason and that is a fall in the Dollar. With the large trade deficit, the US Dollar remains vulnerable. A sharp fall in its exchange value could force up interest rates. While this is more likely than a rise due to inflation, the weakness of economies outside the US as well as EMU weakness makes this improbable.

Localised financial crises cannot be excluded. China is the obvious candidate. The restructuring of the economy raises the possibility of social convulsion and potential defaults. Closer to home, Brazil and with it much of Latin America are in the economic mire. Finally, pressures in the European Monetary Union could ripple across the Atlantic.

The economic climate remains calm to improving. Nonetheless, Alan Greenspan, that inarticulate mumbler and doyen of the investing fraternity, should have raised interest rates more aggressively. The recent quarter percent rise was thumbed at by Wall Street. The longer the Federal Reserve dithers the greater the potential for crash. It will come but not just yet, and when it does come it will be bigger.

Moving to Japan, the restructuring continues at an accelerating pace. Japan is still two years away from putting its economy in order, a period that falls within the shadow of a potential Wall Street collapse. Despite positive noises coming out of recent government statistics the economy continues to contract. In addition the ability of the government to pump money into the economy is being exhausted after eight rounds of stimuli. Government debt is now the highest of all the major economies.

The bosses continue to score successes against workers, robbing them of their jobs and wages. Summer bonuses are expected to fall 6% this year, the biggest fall since records began in 1975. Despite the accelerating restructuring, Japan continues to lag behind the USA. Wage costs have risen 5 times faster, so that Japan’s labour costs have risen from 84 US cents in 1980 to 110 cents in 1998. From being 16% more competitive than the USA in 1980 Japan is now 10% less competitive.

More ominously for Japan, its restructuring is lagging behind that of regional competitors like South Korea. The pressure for more rapid change is building up in Japan and the capitalists are beginning to take society by the scruff of the neck. Japanese society, noted for its order and passivity, may soon be undergoing a political metamorphosis.

Europe lies between the USA and Japan. Its economic growth is faltering and the pressure within the EMU is rising. The fall in the Euro against the Dollar testifies to lagging productivity and higher wage costs. In Europe, the capitalist class faces its most organised resistance, particularly in Germany, France and Italy. German bosses have not won the recent wages round and so the attack on jobs is intensifying. Only Britain has Americanised its economy. The other European economies have a long way to go. The potential for class struggle is highest here of all the major world economies.

This author predicted in November that the world did not face a slump but a 6-year tendency towards stagnation. Despite the hoopla of recent years, world growth has not been sparkling. It will be less so in the future.

The US bull market run will be sustained for the next 6 months unless the rebound in profits does not materialise. Once profit growth has stalled, it will be vulnerable to even the smallest shock. Its ending will remove the "wealth factor". With investment already slowing, this will seriously undermine growth in the USA. This slow-down will hobble any attempt by Japan to revive its economy, but have less of an impact on Europe.

However, any fall in the US stock market will not be precipitous. Capitalism has built up substantial financial resources. The US state is now running a surplus, while the major banks and companies have large reserves. Interest rates, particularly in the USA, could be sharply lowered to inject liquidity into the world economy. It is therefore unlikely that we will see an economic catastrophe like 1929, as much as we may wish it, and if a big fall occurs, its duration will not be as extended.

This low growth outlook will deepen the immiseration of the world’s population. A greater percentage will be pauperised as wealth concentrates in fewer hands. Whole continents like Africa have already become an economic and environmental desert and more will follow. We are now talking of poverty in the billions. It is an unrecorded tragedy unparalleled in human history costing more lives than all the world wars coming before us. But it is silent, for those who suffer do so without protest for now.

The countries experiencing economic expansion can be counted on one’s fingers. They happen to be some of the major economies of the world. But even here the pockets of poverty increase as the new jobs created pay less than the older jobs lost.

The capitalist class may have society in its grip, but that society has become very brittle. Capitalism has stripped away much of the reforms it had earlier conceded. Its economic aggression is now much more naked.

It is also cannibalising its own institutions, like the family. Just as in capitalism’s first years, more members of each family are forced to work, resulting in the growing breakdown of this, its most important institution. Work and regional mobility is increasing the alienation of workers from their jobs and communities. This is damaging both physically and mentally. A recent survey in London showed that two-thirds of white collar workers were depressed by their jobs.

The memory of Eastern Europe still serves the capitalist class, repelling any ideological attack on the market. Nevertheless, the deterioration in economic and social life will continue. Most importantly, the projection of low growth into the foreseeable future means a future of unrelenting job cuts and wage restraint.

By degrees the thirst for an alternative to this inhuman society will grow. For that reason we should celebrate the new millennium not as the passing of defeats and disappointments, but as the prospect of future struggles and victories. However, in order that the new century may belong to the working class, the theoretical tasks thrown up by the old must first be conquered.