“Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.” Such ominous statements may sound familiar to our regular readers. However, these words are not those of a Marxist, but of the British Prime Minister, David Cameron, who returned from a meeting of political leaders at the G20 summit in Brisbane, Australia, with deep concerns about the state of the world economy. As the fires of capitalism crisis spread and continue to ignite in one country after another, optimistic talk of recovery amongst the ruling class has given way to a more sober assessment of the situation – to an understanding that stagnation, decline, and crisis are the new normality under capitalism.
Instability and uncertainty
The British PM, writing in the Guardian, accurately outlines the various sources of economic turmoil and trouble that exist, stating that “the problems [are] plain to see”: a potential triple-dip recession in Europe, “with high unemployment, falling growth and the real risk of falling prices too”; slowdown in the BRIC economies; and geo-political tensions created by the crises in Ukraine and the Middle East. All of these, Cameron rightly asserts, are “adding a dangerous backdrop of instability and uncertainty”.
The Tory leader, of course, is not attempting to provide a critique of capitalism with such warnings. Rather, such words are designed to cover his own backside.
In recent times, Cameron, Osborne and co. have triumphantly boasted about the current economic “success” of the British economy, which is one of the few amongst the advanced capitalist countries to be experiencing any notable level of growth. Clearly what economic growth Britain has seen, however, has not been translated into rising living standards, with the latest figures from the Resolution Foundation indicating that real average (median) weekly pay has been thrown back to levels last seen in the year 2000. As Paul Mason, economics editor for Channel 4, comments:
“You don’t have to be a genius in maths to work out that if the economy is growing at 3 per cent a year, and wages at just 0.1 per cent a year, people doing the work are not getting the upside of the recovery.”
Furthermore, data indicates that the basis for growth in Britain has largely been due to continued consumer spending, rather than from the investment, manufacturing, and exports that the coalition government had promised. But with real wages falling, where is this consumption coming from? There is no such thing as a free lunch. Clearly there is an unsustainable bubble being inflated somewhere. Such gravity-defying motion cannot last forever, and at some point the UK economy will fall back to Earth with an almighty bang.
Now it seems, in addition, that our esteemed political leader has experienced a lesson in dialectics and discovered that – as Marx and Engels explained in the Communist Manifesto over 165 years ago – capitalism has created a world market; a globally interconnected system in which the economies of different countries are inseparably interlinked. In other words, the growth that Cameron has been boasting about in the UK is fragile at best, and will not be able to withstand the headwinds of crisis, slowdown, and recession elsewhere.
“…the reality is”, Cameron states in his piece for the Guardian, “in our interconnected world, wider problems in the global economy pose a real risk to our recovery at home. We are already seeing that, with the impact of the eurozone slowdown on our manufacturing and our exports.”
One cannot escape the world crisis of capitalism so easily it seems.
No man is an island
Our northern European neighbours in Germany are now learning the same lesson also. Having built an economic powerhouse over the past decade on the basis of highly productive industry and competitive exports, the strengths of the Germany economy have now turned into their opposite and become a source of weakness, as Robert Peston, BBC economics editor, notes:
“This dependence on exports means of course that when growth in the rest of the world slows, as it has been doing, growth in Germany has to slow. And that of course is what has been happening for most of this year - as much of the eurozone has hit the buffers (again) and China's attempt to become less dependent on debt-fuelled investment has seen its growth decelerating.”
Just as no man is an island, so, in an interconnected world, no country exists in isolation. The German ruling class, having encouraged the peripheral economies of Europe – the so-called “PIIGS” of Portugal, Ireland, Italy, Greece, and Spain – to borrow (from German banks) and spend (on German exports) for years, now demand that these same “profligate” and “irresponsible” countries carry out austerity and “structural reforms” (read: attacks on workers’ pay, rights, and conditions) in order to emulate their own “success”.
But clearly not every economy can be a net-exporter. For every trade surplus, there must be a trade deficit. Competitiveness, ultimately, is relative. The actions of each country necessarily impact upon one-another. What is rational for any individual country therefore – to drive down wages and increase competitiveness – cuts away at the market for the exports of others, reduces global demand in general, and creates a situation that is irrational for the world economy as a whole. As Peston continues:
“The point is that the cuts they [the PIIGS] are forced to make aren't counterbalanced by extra demand for their goods and services from the likes of Germany.
“In those circumstances, getting the debt down in the weaker consuming economies leads to international beggar-my-neighbour. Everyone tightens their belts. Global growth slows down. And all countries ends up poorer than necessary - even Germany.
“So although German fiscal righteousness and attachment to prudence is completely understandable, it is not necessarily rational.”
And elsewhere:
“What the generally anaemic condition of the global economy shows - yet again - is the perils of national governments pursuing their putative national economic interests in this era of globalisation, of inescapable interconnectedness.”
Wolfgang Münchau, European columnist for the Financial Times, sums up the problem that this interconnectivity poses for the eurozone:
“And what about structural reforms?We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.” (our emphasis)
Heroes and villains
Germany, therefore, having recently been the darling of economic commentators, is now seen as the villain. Leading figures across the world now direct their anger towards Merkel, blaming the eurozone’s continued woes on her insistence on austerity, whilst admonishing her for her stubborn refusal to increase government spending and workers’ wages in Germany. “Fiscal delinquents in Europe must do their homework and reform,” comments the FT (14th November), “but German intransigence risks becoming a bigger problem for the world economy too.”
What these other world leaders wish to see is for Frau Merkel to encourage domestic consumption and “rebalance” the European economy, allowing for their own countries to increase their exports. In other words, the rest of the world wishes to export their crises back to Germany.
Understandably, Merkel refuses to endorse such suggestions. Why should “responsible” Germany pay for the bills of its reckless neighbours? Once again we see the limits of the nation state – a fundamental barrier to the development of society – as each country’s leaders seek to protect the profits of its own national bourgeoisie at the expense of others.
The relationship between Germany and the rest of Europe is echoed by the similar relationship between the USA and China. For years, Chinese growth was reliant on a competitive export-led economy. With crisis in Europe and falling demand in the USA, the market for such exports dried up, leading to a slowdown in the Chinese economy. The response by the Chinese government was a massive Keynesian investment binge, fuelled by a massive expansion in credit and build-up of debt, particularly by local governments.
Concerns about such a debt bubble have been raised, however, both inside and outside of China, as growth continues to slow. Meanwhile, other members of the BRICS, including Brazil and Russia, find themselves in dire straits. The Brazilian economy, also reliant on exports, has found itself in recession this year. At the same time, the Russian economy has been plunged into crisis, due to the economic sanctions against Putin over Ukraine and the fall in the price of oil – Russia’s main export – as a result of decreasing global demand due to the general slowdown in the world economy. Once again, with such examples, we see how the dreams for a “decoupled” global economy – with hopes that the BRIC countries would pull the rest of the world out its crisis – have been shattered.
Whither QE?
The USA and UK are being heralded for being the only countries to produce any significant growth, with many speculating that quantitative easing (QE) is responsible. From 2012 until last month, the US Federal Reserve – the central bank of America – was buying up mortgages and US treasury bonds (government debt) from banks and hedge funds with money that it has created itself, at a rate of around $85bn per month. The Bank of England (BoE) has been partaking in a similar process, buying up around £375bn worth of assets through QE in total (for comparison, the total government debt is around £1,450bn, and UK GDP is around £1,600bn).
The theory was that such a process would reduce the costs of borrowing for banks and corporations, who owned – and could thus sell – such assets. This, in turn, it was hoped, would stimulate these financial institutions and businesses to lend and invest, and thus help create economic growth.
Of course, theory and practice do not always align so neatly. It is true that banks and corporations have seen their costs of borrowing reduced. But, with enormous levels of excess capacity – i.e. overproduction – already existing in the world economy, the mood for businesses to invest has been dampened. As Robert Peston notes, “the cost of capital was cut for businesses, and should have stimulated investment by them - although what has been profoundly depressing, some would say, is the extent to which businesses have continued to buy and cancel their own shares, even when capital is so cheap, rather than investing in expanded productive capacity.”
Meanwhile, whilst there has been some increases lending by banks to households (hence the increase in mortgages and the re-inflation of the housing bubble), most banks just chose to reward themselves in the face of reduced borrowing costs, lending out at the same rate to customers as before and pocketing the difference as an increase in profits. In short, the money “created” by the Fed and the BoE has not filtered into the real economy, but is merely helping to line the pockets of the capitalists.
Added to this, QE, far from helping to stabilise the situation, has merely added to the general instability of the world economy, leaking out of the US and UK, and helping to inflate asset, credit, and housing bubbles across the globe. As Peston continues:
“[T]he fundamental problem with QE is that the money created by central banks leaked out all over the place, and ended up having all sorts of unexpected and unwanted effects.
“When launched it was billed as a big, bold and imaginative way of restarting the global economy after the 2008 crash.
“It probably helped prevent the Great Recession being deeper and longer.
“But by inflating the price of assets beyond what could be justified by the underlying strength of the economy, it may have sown the seeds of the next great markets disaster.”
Such words echo those of Marx and Engels in the Communist Manifesto, who explained that capitalist can always find a way out of a crisis, but only by “paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”
Despite the obvious failures of QE in providing a solid basis for economic, it has been lauded as a success, and European leaders – looking at this “success” in America and Britain – are even talking about it as being an essential requirement for the depressed eurozone economy. Having run out of options, those in charge are now willing to throw the kitchen sink at the problem. Far from helping, however, QE will only further destabilise the situation. As the Bible teaches us, “there are none so blind as those who will not see.”
Japan: a vision of the future
Added to the woes of the global economy is Japan, whose economy unexpectedly fell into recession earlier this month. Japan has been mired in economic stagnation for over 20 years, ever since the crash and collapse of the early 1990s. During the post-war boom, Japan experienced exceptional growth. Having seen its industry completely destroyed in the Second World War, the Japanese economy was rebuilt on the basis of the latest techniques and technologies, giving an enormous boost to manufacturing. With world trade expanding at an extraordinary pace, Japan was able to place itself as a leading competitive exporter, and Japanese firms became household names.
With huge levels of investment, Japan rose to become the second largest economy in the world. But the world market eventually became saturated, and by the 1980s profitable avenues for investment became scarce. Nevertheless, banks carried on lending to businesses and borrowers, regardless of their financial condition. Asset prices became completely divorced from any anchor in reality, and an enormous bubble was quickly inflated.
The whole house of cards came crashing down in the early 1990s as the Japanese government attempted to reduce speculation and deflate asset bubbles. Financial firms found themselves with books full of bad debts and were bailed out, leading to a number of “zombie banks” – banks that were neither dead nor alive. At the same time, these banks continued to lend to big businesses in Japan that were considered “too big to fail”, creating a whole host of zombie firms to accompany their undead banker brethren.
Japanese leaders have struggled to restore growth ever since, with massive public debts of nearly 230% of GDP – the highest in the world – being accumulated just in order to keep the economy going. Having been hit further by 2008 world crisis, Shinzō Abe was re-elected as Prime Minister in 2012 with a programme of “three arrows” to get the Japanese economy growing again – a combination of government stimulus, monetary expansion through QE, and “structural reform”.
On the surface of things, this so-called “Abenomics” seemed to be working for a while. The value of the yen decreased, helping exporters and pushing up their profits. However, rather than reinvesting their surpluses or raising wages to help consumption, corporations sat on their money. As with the rest of the world, this cash hoarding and lack of investment by big business is a symptom of the enormous overproduction that exists on a world scale. A recent rise in consumption tax in Japan was the straw that broke the camel’s back, hitting household demand and pushing the economy back into recession.
If any of this sounds eerily familiar to the world crisis of 2008 and the subsequent global economic rot, it’s because it is. With its abundance of skyscrapers, high-speed trains, and technological wizardry, Japan is often thought of as a science-fiction utopia. When looking at the Japanese economy, however, with its “lost decades” of zero growth, what we really see is a mirror that reflects back a dystopian vision of the future for the whole world – a future of economic stagnation and decay.
A spectre is haunting Europe
As Cameron was writing about “red warning lights”, the Italian economy returned to recession and the German economy recorded feeble growth of 0.1%, following negative growth in the previous quarter. The eurozone as a whole is grinding to a halt. Meanwhile, Washington is fearful that the combination of recession in Japan, slowdown in China, and stagnation in Europe will pull down the US economy too.
The OECD (Organisation for Economic Co-operation and Development), a forum for the advanced capitalist countries, wrote in advance of the recent G20 summit in Brisbane that “the global economy continues to run in a low gear...Global trade growth also remains below trend. Around the world, private business investment is still just idling along.”
“Today the eurozone has no mechanism to defend itself against a drawn-out depression,” writes Wolfgang Münchau in the FT. “These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.”
The fear of the ruling class now is that we face a “new normality” of “secular stagnation” – decades of low growth, austerity, and falling living standards. As the Guardian comments, paraphrasing the opening lines of the Communist Manifesto:
“His [Cameron’s] warning comes days after the Bank of England governor, Mark Carney, claimed a spectre of stagnation was haunting Europe. The International Monetary Fund managing director, Christine Lagarde, expressed fears [at the G20] in Brisbane that a diet of high debt, low growth and unemployment may yet become ‘the new normal in Europe’.”
As Martin Wolf, chief economics commentator for the Financial Times, explains, and as the Economist shows elsewhere, the current crisis and stagnation we have seen is, in fact, the result of a long-term process going back decades, involving, on the one hand, a reliance on credit to artificially maintain demand in the economy, and, on the other hand, a slowdown in potential growth due to a chronic lack of investment to increase productivity.
“…pre-crisis demand was unsustainable because it relied on huge accumulations of private and public …The implication of this is that economies suffer not just from a post-crisis balance-sheet recession, but from an inability to generate credit-driven demand on the pre-crisis scale. Behind the unsustainability of pre-crisis demand lie global imbalances, shifts in income distribution and structurally weak investment. A symptom is a chronic financial surplus (excess of income over spending) in the private sector, as in Japan and the eurozone.
“…[other] explanations point to a slowdown in potential growth, due to some combination of demographic changes,slowing rises in productivity and weak investment.”
Wolf, however, continues by explaining the interconnectivity between these demand-side problems and supply-side issues:
“But this last set of explanations feeds directly into the second. If growth of potential supply is expected to slow, consumption and investment will be weak. That will generate feeble growth in demand. If central banks fight this, they get bubbles. If they accept it, weak growth of supply turns into a self-fulfilling prophecy.”
The result is that politicians are powerless to act decisively. Whatever they try to do to resolve the situation is wrong. In running to put out one fire, they merely help to fan the flames elsewhere. In the final analysis, the ruling class is unable to resolve the fundamental contradiction that weighs down on the world economy: the enormous levels of overproduction that exist globally, which are holding back further investment in the productive forces – the only real motor force behind genuine economic growth. Hence the inability of world leaders to come up with any substantial promises at their recent G20 meeting. As the FT (16th November) noted, “such meetings are marked by grandiose promises that are seldom met.”
“The reason that extreme policy has been so ineffective,” Wolf states, “is that the economies suffer from such deep-seated ailments. It is not just about weak supply. But it is also not just about weak demand. Nor is it just about the debt overhang or financial shocks. Each economy also has a different combination of ailments.”
In other words, what we are seeing worldwide is not a problem with this-or-that individual country due to this-or-that specific set of conditions. Rather, what we see is a world crisis of capitalism – a general crisis of the entire interconnected system. Of course the crisis expresses itself in different ways in different places, dependent on the particular conditions of each country. Similarly, the crisis does not proceed in a linear and uniform manner; instead, we see a process of combined and uneven degeneration, in which the crisis breaks out in different places at different times. Nevertheless, the general trend is one of worldwide crisis, stagnation, and decline.
The death agony of capitalism
We are clearly in the epoch of capitalist decay. “Secular stagnation”, however, despite what the name implies, will not mean the slow death of capitalism. The death agony of capitalism will not be smooth and peaceful, but will be full of fits and convulsions. Above all, decades of crisis and stagnation will mean a sharpening of the class antagonisms and contradictions in society. As we have remarked many times, everything the ruling class does to restore economic stability will necessarily create immense political instability.
There is an enormous questioning taking place in society, with people losing any faith they may have had in the ability of capitalism to take humanity forward. As the Economist asks in a recent issue (15th November):
“Why don’t more people love capitalism?... even in America, capitalism’s spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. Another recent poll found that less than half the populations of Greece, Japan and Spain had faith in free markets; support for capitalism, on average, was higher in poor countries like Bangladesh and Ghana than in the advanced world. The recent financial crisis has intensified criticism of the system, from the Occupy Wall Street movement to the support for parties of the far right and left in Europe.”
Years of crisis and austerity, not to mention growing inequality, have taken their toll on consciousness, which is rapidly catching up with a bang. This has not gone unnoticed by the serious mouthpieces of the bourgeoisie, who wish to warn those that they speak on behalf of about the severity of the situation they face.
“What we have seen is a toxic combination of rising inequality, real wage declines, and a sense of unfairness that the financial elite that created the crisis is still getting away with murder,” the Economist continues elsewhere.
“What is underlying all this is that the global economy is changing rapidly. Globalisation and technology have eliminated many of the well-paid factory jobs that guaranteed a decent standard of living for blue-collar workers. For many people, the idea of a stable career path with one employer is going out of the window; life is a series of internships and short-term contracts.”
We can see this process taking place already, particularly in countries such as Spain and Greece that have been at the forefront of the crisis, where continued austerity by governments of all colours has resulted in rising class struggle, the collapse of the political centre ground, and a massive swing to the Left, with the immergence of PODEMOS and SYRIZA.
The most ardent supporters of capitalism demand “structural reforms” to solve the problems of the eurozone and elsewhere – that is, further attacks on labour rights, alongside continues austerity. But there is only so much blood one can squeeze from a stone. Eventually a tipping point will be reached and people will fight back. For every action, there will be an equal and opposite reaction.
It is this, the rise of potentially revolutionary political alternatives, backed up by mass movements and mobilisations behind them, that most frightens the ruling class. As Robert Peston comments, “It is ordinary people and their votes - not bankers and hedge funds with their devastating ability to withhold credit - which will decide the eurozone's fate.” Wolfgang Münchau, meanwhile, echoes Peston’s predictions: “The main protagonists today are not international investors, but insurrectional electorates.”
In their latest issue, the Economist issues a call to arms for bourgeois politicians, ordering them to stop dithering and trying to appease voters, and instead to take action to save the economy – i.e. guarantee the continued profits of the capitalists. “Let political leaders everywhere tell their publics the truth: the years of easy post-war growth are gone, replaced by competition that cannot be wished away…Time to wake up.”
We agree with this mouthpiece of capitalism, but from the opposite class perspective: it is time for a revolutionary leadership that tells the truth: the truth that the reforms of the past are gone under capitalism, replaced by a global race to the bottom in which the only winners are the bosses and bankers. It is time to wake up; to rise up, in the words of the great poet Shelley, “like lions after slumber, in unvanquishable number”; to educate, agitate, and organise to overthrow this senile capitalism system and sweep it into the dustbin of history where it belongs.