The economic crisis deepens

October 2008 has seen the most extraordinary and abrupt deepening of the world economic crisis of overproduction.

The Deputy Governor of the Bank of England, as he contemplated the financial system crashing round him, was forced to conclude: “This is … possibly the largest financial crisis of its kind in human history”.

The fact is that although trillions of dollars were being poured into the system to try to calm the financial maelstrom, even these unimaginably huge sums of money were having little or no effect.  Alistair Osborne, writing in the Daily Telegraph of 18 October (‘There is no end in sight for this particular storm’), calculated that “Tot it all up and the world’s leaders – acting in concert after last weekend’s G7 meeting – had thrown more than £2 trillion at the problem.  And, for almost two days, the markets roared their approval”.

Less than 48 hours later, however, stock markets, which had briefly staged a recovery, were plummeting again.  Suzy Jagger, writing in The Times of 25 October (‘Wall Street halts futures trading as panic grips global markets’) noted:

“Stock markets across the world cracked yesterday, forcing Wall Street to suspend trading of key futures contracts to stem panic-selling, while Moscow shut for business altogether.

“Sharp losses in New York, London, Europe and the Far East raised the spectre that governments may be forced to impose emergency holidays to avert a meltdown across world stock markets …

“In New York, the Dow Jones industrial average plunged … 3.6 per cent … In London the FTSE 100 fell to its lowest level for five years, sinking.. 5 per cent…”

This was on top of falls in share prices that had already taken place earlier in the month in the week commencing 6 October when in response to the $700bn bailout announced by the US to protect its banks, stock markets fell by 21% in London, Tokyo by 23% and New York by 18%.  The direct consequence of this was the collapse of Iceland’s entire banking system.

Why are stock markets falling?

Part of the reason they are falling is because the speculative bubble in stocks and shares, and indeed in many other avenues of investment, that has been building up for years has burst.

For a long time, people were prepared to pay for shares a great deal more than they were worth, simply because they expected to be able to sell them for an even higher price to a purchaser who judges the value of investments not on the basis of their underlying profitability, but on the basis of past share movements as tracked by computer.  Of course, this was never a wise path for investors to take, but because of overproduction there has been for many years a dearth of possibilities for sound investment.

Although a Marxist training in economics, or even the application of a little logic and some basic understanding of market history, would have warned the economic pundits of the world that sooner or later every bubble bursts, it must be remembered that the hired ideologues of the bourgeoisie, the professors and the economics experts who have access to the bourgeois media, have diligently been weaving fairy stories of limitless wealth creation for the benefit of every human being on the planet thanks to the greatness of the capitalist system.  Every ‘respectable’ economist knew that ‘Marx got it wrong’, unable to foresee the genius of bourgeois economic science that was able to prove that the laws of capitalist production discovered by Marx were not laws at all![1]

In the end the bubble burst because of the credit crunch which was forcing people to sell assets such as shares in order to be able to pay their debts.

An excess of sellers over purchasers forces down the price, the falling price then triggers more sellers – all of this aggravated by the fact that just as previously rising prices triggered purchases regardless of underlying value, falling prices had the same effect in reverse.

The effects have been still further aggravated by the fact that the underlying value of shares has plummeted.  Even very large multinationals are expecting hard times ahead that will challenge their profitability, not only as regards their ability to pay dividends to their shareholders but even perhaps to remain in business at all – so although stocks and shares have already fallen massively, there is every possibility that they still have a long way further to fall.

The cause of capitalist economic crisis

Crisis is inseparable from capitalism.  The reason for this is that in its search for profit, capitalism reduces to the maximum all expenditure on wages and the provision of benefits such as health and education services to the vast majority of humanity, the working people.  It is driven to introduce more and better technology in order to replace workers by machines and thus save money. Because of this, there are always unemployed masses, both at home and abroad, competing for such jobs as there are, enabling the capitalists to pay relatively low wages.  The relatively impoverished masses, however, are unable because of their poverty to buy the vast mass of goods and services thrown onto the market by the various capitalist enterprises.  This drives many sellers out of business, and even more workers into the ranks of the unemployed, all of which makes matters worse, until gradually crisis point is reached, when all hell is let loose.  To overcome crisis, which after all bankrupts many of the great and good bourgeois, not just the exploited and oppressed millions, bourgeois economists have come up with all kinds of devices.  Keynes famously proposed a period of heavy public spending financed by borrowing to try to kick start the economy into recovery, a remedy that Gordon Brown now proposes to resort to in the UK.  Application of Keynesianism, however, appears to cause hyperinflation, so that although buyers are created for the capitalist market, and sellers can therefore for a while continue to sell their products, the profits they make are eaten away by inflation, which also reduces the purchasing power of wages, so that the ultimate effect is much the same as if the Keynesian tricks had not been tried.

For the last 40 years, however, the bourgeoisie has resorted to lending people money to enable them to buy, hoping to have all the benefits of Keynesianism without the downside.  At the end of the day, however, the need to service and repay the loans hits purchasing power to such an extent that crisis can be held off no longer, which is what is at the root of the subprime mortgage debacle which triggered the credit crunch, with forced the crisis of overproduction which had been simmering under the surface for decades out into the open with an almighty bang.

Crisis spreading to the “real economy”

Once the floodgates of crisis have been opened, nothing can prevent its awful consequences.  In a capitalist economy, all production and distribution of necessities and luxuries alike depends on somebody undertaking the responsibility in the hope of profit.  In a crisis of overproduction there is a total glut relative to buyers’ ability to pay, as a result of which prices fall below even the cost of production.  Capitalists therefore give up producing even the most essential items, and throw their employees on the scrap heap, thus aggravating the crisis by reducing still further the purchasing power of the masses.  It is only when sufficient enterprises have been driven out of business, and existing stocks have been consumed or destroyed, to create a shortage of supply relative to the few who are still able to buy, that those who are still in business can start making profits again.  This may not happen for some years.

The present crisis is unfolding in classic manner.  Economies are contracting (i.e., capitalist enterprises are producing less), while unemployment is rising.  A survey of 100 finance directors in October conducted by accountants Baker Tilly found that 43% of firms plan to cut jobs this year.  63% have in the last 6 months revised or halted their growth plans. On 1 October, Chris Giles in the Financial Times (‘Factory data show world economy suffering’) reported:

In the eurozone, the purchasing managers index [PMI] for September was confirmed at 45, down from 53.2 a year ago.  Any figure above 50 indicate a majority of the survey’s respondents are reporting rising output while lower figures suggest contraction.

“In Britain, a sudden drop in the equivalent PMI index from 45.3 in August to 41 last month, the weakest on record, highlighted the fragility of the economic outlook at the vulnerability of UK manufacturers to global events in spite of a fall of 15% in sterling over the past year … China’s PMI index increased to 51.2 from 48.4 in both August and July, although it was still well down on the 59.2 reading of April”.

And Jonathan Sibun in the Sunday Telegraph of 26 October 2008 (‘Real economy takes a hit’) reports:

‘There is every possibility that the downturn in activity may be as severe as the one the UK experienced in the early 1980’s, when unemployment reached almost 12 pc of the labour force, warned David Shepherd, professor of economics at Westminster Business School.

“‘The pessimists would argue that things may get even worse than that.

In the three months to the end of August unemployment jumped the most in 17 years, up 164,000 to 1.79 million.

Economists now see 2 million unemployed as a best case scenario – 12 per cent would leave some 3.8 million people out of work.

The collapse in house prices around the world will also take their toll on employment, as Myra Butterworth reports in the Daily Telegraph of 22 October (‘House prices will fall 35 pc from their peak, say economists’):

House prices are expected to register their biggest decline on record by autumn next year, and consumer spending, which is closely linked to property prices, is expected to plunge.

The prediction comes as government data disclosed yesterday that the number of completed housing transactions dropped to a record low in September of 59,000, compared with 154,000 at its height in December 2006.

This is expected to have a major impact on the wider economy as each house sale triggers about £4,000 in spending on household goods …

An equivalent amount is also spent on solicitors, surveys and other house purchase costs.

The lack of spending in these areas will affect employment, with some analysts forecasting that the construction sector alone could see a loss of up to 350,000 jobs within the next five years.

Another factor that will aggravate the present crisis is the fact that people’s savings will have been drastically reduced as a result of falling stock markets.  The most important savings people have are their pensions, and these have been suffering hammer blows for many years now, not only as a result of stock market losses, but also as a result of the insolvency of former employers and also employers’ moving away from final salary schemes that guarantee a minimum level of pension to schemes where the pension depends on the value the savings happen to have on the date of retirement.  In the current crisis, pensions have again suffered badly.  According to Yvette Essen in The Daily Telegraph of 27 October, ‘Pension funds take a £150bn hit’, “Pension funds have seen £157bn wiped off their value in the past 12 months due to the rout on the global stock markets.

“The value of defined contribution pension scheme assets has plummeted by nearly a third … in the past year …

“…although more than 3.7 UK workers have been setting aside money towards their retirement every month, the value of their pension pots had tumbled by 28 pc. …”

Clearly those retiring this year will not be able to contribute much by their spending to lifting capitalism out of crisis!

Measures to solve crisis in fact aggravate it

The staggering amounts of money being “found” by the various bourgeois governments around the world to try to rescue the world’s financial system will not in the long run help matters, mainly because it will burden the masses in the various capitalist countries with debts that will have to be repaid through taxes, thus reducing purchasing power to a considerable extent:

The Centre for Policy Studies (a right-wing think tank) has estimated the true scale of public debt at £1.8 trillion – more than 3 times official estimates, nearly £76,000 for every household in the country. Official figures – which put the national debt at £645 billion – do not include the cost of public sector pension liabilities or projects funded under the government’s public finance initiative, the debt incurred by national rail and the recent nationalisation of Bradford & Bingley.  Furthermore, the recent banking bail-out could add up to £500 billion of the debt figure, it claims.  This would take the national debt to £2.3 trillion – the equivalent of over £96,475 per household.

If one adds this public debt to the private debts that households are struggling to repay, then again it is hard to escape from the inevitable conclusion that it will be years before the capitalist markets see a resurgence of purchasing power.

Worldwide, according to Philip Aldrick (‘Taxpayers cough up £4,473 bn to save the world’), Daily Telegraph 29 October 2008, “The size of the unprecedented rescue is equivalent to 12 pc of the entire global economy.  Of the sum, £395 bn will be used to recapitalise banks, and £397 bn will be spent buying up their ‘toxic’ assets. State guarantees to get the wholesale markets moving again come to £2,927 bn and another £754 bn has been provided in loans and through bank nationalisations.”  Again, these debts will weigh down like massive lumps of lead on the ability to spend.

Crisis in non-imperialist countries

If imperialist countries like the US, the UK, continental Europe and Japan are suffering as a result of the crisis, one can be sure that in non-imperialist countries matters will be much worse.  If Gordon Brown can calmly draw up plans for public spending his way out of the crisis (for all the good that will do!), this is not an option available to oppressed countries that have to approach the International Monetary Fund for a bail-out.  They invariably face demands that they curb public spending drastically in order to ensure that whatever economic output they do manage to keep operative is used to the maximum extent possible to repay the IMF loans.  Many non-imperialist countries have benefited in the past few years from high commodity prices that has enabled many to improve to some extent the living standards of their populations.  There was even the impression that countries like Brazil and India were ceasing to be oppressed countries.  However, the present crisis is highlighting the fact that the recent high commodity prices were the exception that prove the rule.  Their economies remain highly dependent on serving the interests of imperialism, particularly through the production of so-called ‘commodities’, the raw materials of capitalist industries, and as soon as the imperialist countries are in economic decline, they drag the oppressed countries down, just as the ruin of the bourgeoisie also drags down the proletariat, who suffer to a far greater extent from the crisis although it was not of their making.

Again, however, the impoverishment of the oppressed countries, just like the impoverishment of the working masses, exacerbates the crisis, and the bankruptcy of the debtor not infrequently bankrupts the creditor:

Ambrose Evans-Pritchard, ‘Europe on the brink of currency crisis meltdown’, Sunday Telegraph, 26 October 2008: Western European banks hold almost all the exposure to the emerging market [‘emerging market’ being the bourgeois term for an oppressed country] bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion … in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Europe has already had its first foretaste of what this may mean.  Iceland’s demised has left them nursing likely losses of $74 bn.  The Germans have lost $22 bn. …

Austria’s bank exposure to emerging markets is equal to 85 pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up … for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 24pc for Sweden, 24pc for the UK, and 23 pc for Spain.  The US figure is just 4pc. ..

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined …. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global deleveragingcauses the dollar to rocket.  Nowhere has this been more extreme than in the ex-Soviet bloc. 

The region has borrowed $1.6 trillion in dollars, euros and Swiss francs.  A few daredevil homeowners in Hungary and Latvia took out mortgages in Japanese yen.  They have just suffered a 40 pc rise in their debt since July …

Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

It is just blood in the water for hedge funds sharks, eying a long line of currency kills …

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel.

The foreign debt of the oligarchs ($530 bn) has surpassed the country’s foreign reserves.  Some $47bn has to be repaid over the next two months…

A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.

The threat to Britain lies in emerging Asia, where banks have lent $329 bn, almost as much as the Americans and Japanese combined.  Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates.  Didn’t they tell you?


The only ‘solution’ for a capitalist crisis under capitalism is to sit it out, even if you and your whole family starve to death in the process.  The bourgeois media are full of assurances that it will only be for a year or two that life is really uncomfortable – in fact recovery will start before there has really been time to suffer too badly.  Experience of other crises since that of 1929 also suggests that the pain is unpleasant but short-term.  However, these other crises have succumbed to measures postponing their worst effects.  In 1929 the postponement measures came to the end of the road.  This is quite probably the case again, and if so, if the crisis is going to strike the world definitively as it did in 1929 brooking no obstacle placed in its path, then if we wait for capitalism to recover, the wait is likely to be a long one.

An anonymous Associated Press author wrote in ‘It takes a long time for a market recovery’:

When the market crashed Oct 19, 1987, sending the Dow Jones industrial average down 508 points to 1,738.34, the blue chips had lost 938 points, or 36.1 percent, since reaching a then-record close of 2,722.42 on Aug 25, 1987.  It took just over 15 months for the Dow to get back to its pre-crash level, and almost two years … to reach a new closing high…

“The recovery from the 1929 crash was more difficult – and spanned a quarter of a century.  The Dow had reached a high of 381.17 on Sept 1 and then began drifting downward  Although the date of Oct 29, 1929, Black Tuesday, is probably best-known by the public, many market historians say the crash began on Thursday, Oct 24, and accelerated the following Monday and Tuesday.

“From its close … on Oct 23, the Dow tumbled … 24.8 percent, by the time it ended… on Black Tuesday.  It continued its decline to a low … on Nov 13, giving it a drop of … 35 percent.

“That also made for a drop of … 47.9% from the September high.  But stocks kept on falling as the Great Depression wore on, and the Dow fell to 41.22 on July 8, 1932, giving it a loss of … 89.2 percent from the September 1929 high.

“The Dow did not close above 305.5 again until 1 April, 1954, more than 24 years after the crash, and it didn’t return to 381.17 until Nov. 23, 1954, a quarter of a century after Black Monday and Tuesday.

“The Dow has a large percentage drop to regain this time.  By Friday’s close, the average had fallen … 40.3 percent from its record finish … a year earlier, on Oct. 9, 2007. … With Monday’s advance … the Dow is still nearly … 33.7% below its record close.”[2]

It must be added to this that capitalist “recovery” was really only made possible by the wholesale worldwide destruction and devastation brought about by the Second World War, and the reconstruction demand following that war.  Does anyone seriously expect the working masses to have to wait quarter of a century and to go through another world war before a small modicum of prosperity is temporarily restored in a few patches on the globe?

The working class has the power to put an end not only to this economic crisis, but to the very concept of economic crisis.  All it has to do is to seize the means of production from the capitalist class, cancel all indebtedness to the capitalist class and its financial institutions, set up state planning authorities to organise how much should be produced and how it should be distributed.  Only two things can prevent the working class from saving itself in this way: ignorance and fear.  Thanks to bourgeois propaganda most workers are unaware of the causes of the crisis, and have been shamelessly brainwashed into believing that communism – i.e., their own class rule – can never be anything other than inefficient, dictatorial, arbitrary and useless.  In addition, the bourgeoisie is quite prepared to exterminate physically anybody who tries to dispossess them, notwithstanding that it is their capitalist system that is inefficient, dictatorial, arbitrary and useless.  History proves that there is no limit to the brutality and barbarity to which they will resort to keep themselves in power.  The working class, however, far outnumbers the bourgeoisie, and will in due course be able to overwhelm their resistance.

To do this, however, will depend on the working class having a sufficiently clear understanding of what needs to be done, and it is the role of Communist Parties all over the world to be bringing that understanding to the working masses.  It has to be admitted, however, that very many of these parties are sadly failing even to make an effort to help workers understand.  While prepared to wring their hands and describe in lurid detail the current economic crisis and the devastating effects it is having and will in the future have on working people, the cause of the crisis – overproduction – is ignored absolutely, all the better to palm off some bourgeois rescue measure as ‘socialism’.  They even present bank nationalisation by bourgeois governments (i.e., adoption of bank debt as national debt, payable by the taxpayers) as a step that might make it ‘easier’ to bring about socialism!  Rather than pointing out the need to organise to expropriate the capitalist class and organise production according to a state plan (NOT profit!), while fighting off the furious resistance of the capitalist class, they make coy references to democratising parliament!  They buy into the thesis that rather than crisis being inherent in capitalism, it is just mismanagement by greedy fat cats – a problem that should be dealt with by introducing more supervision and regulation.  Heaven forfend that capitalism should be overthrown!


[1] At the “University” held by the revisionist Communist Party of Britain this month in Croydon, Mary Davis got up and sang this vulgar bourgeois refrain as her introduction to the subject of the present economic crisis!

[2] See International Herald Tribune, 13 October 2008.

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