The World Economy After 11 September
The first synchronised recession for 30 years
On the contrary, capitalism now existed in its most pure form for half a century, having achieved the most ideal circumstances for accumulation since the Second World War. Gone was the "mixed economy" forced on the bourgeoisie by the legacy of the World War, the strength of organised labour and the ongoing Cold War. Reagan and Thatcher had masterminded the cowing of the unions and the collapse of the Soviet Union.
Neoliberalism was the bourgeoisie’s reward – the expansion of the global market, free from government restriction or interference. Their triumphalism was everywhere heard. Capitalism had entered a new era, a golden period – the "end of history". The boldest foolishly went so far as to declare that capitalism had conquered the cycle of boom and bust.
In fact, capitalism had entered its second childhood, and as with every second childhood senility is the order of the day. What capitalist ideologues characterised as new was really old, what they characterised as original was really repetition. Before the emergence of the organised labour movement at the end of the 19th century, capitalism had existed in the form that we describe today as neoliberal, both nationally and internationally. With the exception of the USA, the relative weight of international trade and investment was greater at that time than it was for most of the late 20th century. In addition, the governments’ share of Gross Domestic Product was less than a quarter of what it is today.
Critics of capitalism who lack historical knowledge came to see the period from the mid-1980s as some form of capitalist aberration, an abnormal form. It was not. It was the post-war period with its barriers to accumulation that was abnormal.
It took two recessions – 1973 and 1980 – for the capitalist class to break the resistance of organised labour. In Europe, where workers were best organised, it took a third recession – that of 1990. The cruel conditions of the 1990s, with its heightened competition, financial insecurity and the erosion of the welfare state, represented the naked face of capitalism. We should never lose sight of this. To say that capitalism must and should be made kinder, more socially responsible, is backward looking, outdated, reformist sentimentality.
There can be no better barometer of the level of class conflict than inflation. Inflation rose at the end of the 1960s and only fell towards the end of the 1980s. This curve plots the change in the balance of class forces in favour of the bourgeoisie. The triumph over inflation had nothing to do with interest rates and control of the money supply. It had everything to do with the renewed ability of the capitalist class to impose its will on labour, to make workers work harder for less in the wake of the falling rate of profit.
In turn, the new "flexibility" of labour created the conditions for renewed and accelerated rounds of investment. This new investment was primarily in information technology. It was the growth in this sector that allowed the obscurantist Greenspan to claim that the US economy in particular had achieved a new paradigm, that it had entered a new period of sustained and rising productivity promising accelerated growth.
Recent research has cast doubt on the actual growth in productivity and the impact on it of information technology during the 1990s. It shows that productivity growth was not universal, but limited to those sectors of the economy than lent themselves to the reorganisation of labour. These new observations do not contradict the views held by this author. Productivity gains were greatest in those sectors best suited to the shedding of unproductive labour – managerial, supervisory, administrative etc. Secondly, information technology improved the monitoring of productive labour to ensure consistent exploitation. Thirdly, it allowed for the more rapid implementation of new techniques through improved feed back.
What is undisputed, however, is that these were one-off gains. Once management was thinned out, once workers on the line were being better observed, the potential of information technology, with the exception of feed back, was more or less exhausted. This “revolution” in production is notable primarily for how short lived it was. There are only so many times a corporation can reinvent itself, despite the best efforts of companies like General Electric. In fact we can talk of only a five year period in the USA, from 1995 through to the end of the century, during which this spike in productivity occurred.
This reorganisation of labour in the production process should not be confused with the reorganisation of labour in the distribution process. The debacle of the dot.com companies was due to their failure to reorganise distribution. They broke their backs on the rocks of domestic labour. After all, how could they compete with all that free labour – paying to transport goods to our home when we go unpaid to the shops, paying for picking goods when we do it for free going down the supermarket aisle, paying for packing goods when we do it ourselves at the till?
What the collapse of Nasdaq really meant was the collapse of the attempt to reorganise retail as well as the passing away of the one-time reorganisation of production. It would therefore be wrong to conclude that all the investment in information technology was wasted. It did raise the rate of profit in production to a higher level, without the promise of being able to continue to increase it further at the same rate.
Accordingly the stage was set for the onset of recession. The capitalist world was confronted by a mountain of capital, which could now no longer raise the rate of profit, most of which was paid out of debt. And yet few commentators were aware of the changes in economic circumstances, changes globally more significant than at any time since the 1930s.
Blinded by the absence of inflation
The explanation is to be found by comparing this recession to the three significant post-war recessions of 1973, 1980 and 1990. Then, the economies overheated. Price rises accelerated as capacity was used up. Governments stepped in by raising interest rates to cap price rises. The genesis of this latest recession took on a totally different appearance.
This time round, inflation was subdued and labour was held in check. Instead of having to step in to raise interest rates, central banks were forced to do the opposite. They intervened to reduce rates as stock markets fell. Instead of shortening the boom through tighter monetary conditions, they now sought to extend it through relaxing monetary conditions.
They succeeded only in confusing all the economic commentators, who, intoxicated by the power of interest rates, believed the economy could be slowed down, achieve a soft landing, rather than crash. And so, on the eve of one of the most significant economic events, the herd of economists were all facing the wrong way – leading to the wry comment that an economist is a person who cannot even predict the past.
In fact, what we have is the most classical of capitalist recessions – one which complements the ideal conditions for accumulation which capital forged for itself over the last two decades. It is a synchronised world recession based on the absolute over-accumulation of capital. Already the Economist magazine has pointed out that it is the first time since the 1930s that world industrial output has fallen for more than a year.
If we look globally at the contours of this recession two points stand out. Firstly, world capacity utilisation is at a post-war low. In every industry, on average over 25% of capacity, of fixed capital, lies idle. Secondly, debt levels, both corporate and personal, are at an all time high.
The strategy of central banks has been to address this second problem first, in order to buy time to solve the second. By reducing interest rates, the Federal Reserve hoped to ease the burden of debt, and, furthermore, to encourage consumers to continue to take on more debt in order to finance continued consumer spending. And so the governments of the world, with the exception of the European Central Bank, took a huge gamble. By the time consumer spending was exhausted, they hoped, industry would have reduced capacity, begun investing once more and so become the engine for renewed growth.
This ploy worked best in countries like Britain, where home ownership is high, because reduced mortgage payments fed into greater spending on other goods. And so, for a time, consumers held the economy together, but at the expense of reduced levels of savings. But what would happen if consumer spending exhausted itself before industry restructured itself? Then the capitalist economies would experience the worst of both worlds. The continued collapse of investment followed by the collapse in consumer spending. A crisis delayed, but at the expense of raising it to a higher level. A double crunch.
Here, then, lies the significance of 11 September. Not so much for what it did to the Twin Towers, but because it forced consumers to take stock of their financial affairs. Because it challenged the view that the future was rosy and it was safe to spend. Those two planes did in half an hour what rising unemployment would have taken half a year to accomplish. They ensured that consumer spending collapsed on top of the collapse in investment. The gamble had been lost.
September the 11th did not start a new process, but merely accelerated a process already underway. It brought closer the time that consumer spending would falter. What the dust in Manhattan should not obscure is that capitalism had already slid into an international economic crisis. This process was not started in a cave 6,000 miles away, but in the ornate boardrooms of thousands of companies, whose over-paid and under-brained executives had decided to stop investing because they could not make a profit.
How deep and how long?
The Reserve Bank in the USA has embarked on its most aggressive cutting of interest rates in living memory – ten cuts this year alone, to the point where real interest rates are below the current rate of inflation. This constant cutting of interest rates, with more promised, has continued to fuel the belief that recovery will happen next year. Quietly forgotten is the original view that the recovery should have commenced in the second half of this year, instead of which the United States is now officially in recession. Nevertheless the view remains that recovery is imminent.
So much for worshipping at the altar of interest rate cuts. In fact the problem is not and never was interest rates – it was profits. Interest is merely the mechanism whereby the lender of financial capital is able to share in the profits of industrial capital. High profits can sustain the deduction of high interest rates, but marginal profits cannot sustain the deduction of even low interest rates.
It is now understood that profitability during the boom was overstated in the USA and most probably elsewhere as well. Despite this overstatement, the growth in the mass of profits in the USA was only 13% despite some of it leaking to the rest of world because of the strong dollar. Since then it has collapsed and looks to be depressed for some time despite the valiant efforts of stock market analysts to predict rebounds in order to justify the continued over-inflated values on Wall Street.
Overshadowing this depressed level of profits towers a mountain of corporate debt, much of it wasted on wrong investment, over-investment and on manipulating share prices. Despite the reduced levels of interest rates, this debt has become more unmanageable, leading to downgradings of corporate paper by agencies like Standard and Poors. More and more companies have been consigned to the junk bond heap. Bankruptcies are mounting. The recession enters its ravine, accelerating, with obscuring spray everywhere and hidden rocks around the corners. One feature still remains. As yet we have not hit a financial crisis. But one is looming.
All eyes are on the banks, but it is not here that the first financial shockwaves will occur. It will be in the pension and insurance industry which relies on steady rises in share prises, robust dividends and high interest rates. Only later will the tremors hit the banks, who admittedly have built up larger reserves than they had prior to earlier recessions. Already the pension industries around the world are more or less bankrupt. Yet, despite that, Mr Brown the Clown still pushes stakeholder pensions when shortly governments will have to nationalise the pensions industry as bankruptcies devalue their policies. Already insurance companies have had their first dose of indirect state aid.
Not that governments are in such a good position to support the financial world any more. Within 24 months the US government has gone from a record budget surplus to deficit. Bush not only defrauded the voter, he has squandered the budget surplus on give-backs for the rich when he needed to conserve it to support the economy in the years to come. The US entered the recession with two areas of strength. Firstly interest rates that could be driven down, and secondly a budget in surplus. Much of those benefits have now been exhausted, the former through panic, the second through dogma.
A financial crisis is now imminent. It faces two triggers. The first is the recognition that interest rates have not averted a recession nor established the grounds for a recovery. Once that happens, Wall Street will join Nasdaq on the floor. Surprised by the depth and speed of interest rate falls, analysts are convinced that recovery will happen the middle of next year. That is now the absolute limit. If it does not happen, if profits do not recover by July stimulating investment, then the myth of future prosperity cannot be sustained and what is left of investor confidence will evaporate. At that point there will be panic.
The second is the effect of mass unemployment. Compelled by the needs of capital, companies now have no choice but to fire masses of workers. The first evidence of this came last month when unemployment in the USA shot up by the highest amount for 20 years. Despite the increased difficulty of claiming benefits and the fiddling of figures, it is clear that mass lay-offs are the order of the day. As excess capacity is closed down, as old capital is destroyed to make way for the new, workers are the casualties.
The effect on house prices and consumer debt will be profound. House prices like share prices – the fictitious Twin Towers – will collapse, making household debt unbearable. Until now households felt richer because the walls and roof around them seemed more valuable. This was the mainstay of their willingness to be suckered into debt. With that over, they will be forced to restore their savings. If history is any guide, this means nearly three percent of Gross National Product will be lost to savings from spending, a huge shock to industry.
Nor will the service sector survive unscathed. It was always the unacknowledged child of industry. With its parent sick, so too will the child be. Industry was always its main customer, along with the consumer intoxicated by the speculative bubble. The service sector stands to fall further than industry. What shall we call it? The rust belt of the 1980s, followed by the Silicon Death Valleys of the early millennium – and now the empty gourmet bowl.
What we are facing is an extensive Japanese-style recession. Just as the Japanese wasted their investments in the late 1980s, so too in the late 1990s did the USA. The major difference is the reliance of the world economy on the USA.
In addition, the world economy accumulated huge mountains of debt as it chased the biggest speculative bubble in history. It will take years to work through this mess, with mass unemployment and deflation constant companions. The slump in Japan is a salutary lesson – a wasted decade of productive potential and still no resolution of its debt problem. While it is true that counter-crisis policies in the USA are much more decisive than Japan, even this mighty economy will be ensnared by the broken chains of credit that will litter the economy.
On a world scale it will be a slump on the scale of the 1930s. In the West, given the balance of class forces in favour of the bourgeoisie, it may not exceed the recession of 1974. But it will bear the marks of a slump, deflation and stagnation – stagflation as we have not known it for nearly seven decades, and it will go on for years.
It will put enormous strains on globalisation. Already the growth in world trade has collapsed. What is so startling is the speed of reversal, from record growth to contraction in under two years! And this before the USA has even begun to tackle its huge deficit on trade. As long as the dollar retains its strength, this deficit can be ignored. But as soon as the dollar slides and the deficit cannot be sustained, world trade will take another pounding. Only then will we be able to see just how integrated this global economy is, as the US makes the rest of the world pay for its over-indulgence.
By its depth, length and reach, this recession will alter the political landscape. For two decades huge swathes of the world economy have been economically paralysed. One whole continent, Africa, has gone into reverse and two continents have gone sideways. The most graphic and tragic example of this has been the repeated waves of economic migrants seeking work. What the recession will mean, and this is its real significance, is that economic stagnation will creep into the capitalist heartlands of Europe and North America. What has been experienced in the periphery for over a generation will be experienced now in the centre.
When the USA got a bloody nose on 11 September, it was predictable that it would have to kick a small country to death in order to prove its superpower status. But the war against Afghanistan masks a deeper agenda. Afghanistan is not simply punishment for 11 September. It is a dress rehearsal for what is in effect the militarisation of the global economy. At a time of economic unravelling, it is a warning to any country, especially in the Arabian oil-rich regions, of what they can expect if they damage US economic interests. US military thinking at its highest strategic level is moving away from the perspective of fighting large conventional wars, to that of a policing role – smaller forces, with a global reach that can be rapidly deployed, and with weapons of terror to match.
Capitalism has nothing to offer this planet any more. This lesson still has not been learnt by the international working class, who remain immobilised by bourgeois ideology. However, it is likely that this recession will be the antidote to the capitalist bravado following the collapse of the Soviet Union 15 years ago. It will open up new waves of thought to challenge capitalism. In a world of technical possibilities like the internet, the channelling of such ideas will be more easily accomplished than ever before. It is the battle for ideas that will be decisive, not the battle for the passes of the Hindu Kush.