Whatever official optimism is expressed in bourgeois circles whenever there is a scrap of countervailing good news on the economic front, the crisis is becoming more severe, with 2010 already being a year of new records in financial disaster, despite what Martin Wolf refers to as “fiscal and monetary stimuli that are unprecedented in peacetime” (‘What the world must do to sustain its convalescence’, Financial Times, 2 February 2010).
· The US trade deficit is expected to be $150 billion higher than last year’s, a total annual deficit of $1.6 tr – the highest since the Second World War. It amounts to almost 11% of GDP, as compared to the 3% generally considered to be the maximum that is sustainable.
· “The non-partisan Congressional Budget Office just projected that over 10 years, cumulative deficits will reach $9,700bn and federal debt 90 per cent of gross domestic product … The size of federal debt will increase by nearly 250 per cent over 10 years, from $7,500bn to $20,000 bn. Other than during the second world war, such a rise in indebtedness has not occurred since recordkeeping began in 1792 [NOT a misprint]. It is so rapid that, by 2020, the Treasury may borrow about $5,000bn per year to refinance maturing debt and raise new money …” (Roger Altman, ‘America’s disastrous debt is Obama’s biggest test’, New York Times, 20 April 2010).
· “The number of problem banks in the US continued to soar in last year’s fourth quarter, hitting their highest level since 1993. … 702 banks were considered troubled at the end of 2009, up from 552 three months earlier. Problem assets totalled £260bn” (Suzanne Kapner, ‘Number of US “problem” banks soars’, Financial Times, 23 February 2010).
· New home sales in the US fell a further 11.2% in January from the month earlier to … a record low.
· Also in the US “state tax collections shrank at the end of 2009 for a fifth consecutive quarter, the longest period of continuing state revenue declines since at least the Great Depression … The revenue decline comes despite the tax increases imposed by many states since the recession began” (Michael Cooper, ‘Recession tightens grip on state tax revenues’, New York Times, 22 February 2010).
· Eurozone government have borrowed €110 bn from the markets – also a record which also partly accounts for the record interest rates that Greece has to pay for its long-term borrowing.
· “Greek government bond yields are at their highest levels since the country joined the eurozone 12 years ago, with the yield on 10-year bonds climbing … to 8.28 per cent … Portugal continued to suffer in the shadow of Greece. Its 10-year government bond yields hit highs of 4.82 per cent …” (Kerin Hope and Anousha Sakoui, ‘Greek bond yields hit in spite of debt talks’, Financial Times, 22 April 2010).
· “Unemployment in the UK rose 43,000 in the three months to February to 2.5m, the highest for 16 years … The increase … took the unemployment rate to 8 per cent of the workforce, the highest since 1996 … The number of people classed as economically inactive – including students, people looking after a sick relative or those who have given up seeking work – rose 110,000 to 8.16m, the highest since records began in 1971” (Brian Groom, ‘UK unemployment at 16-year high’, Financial Times, 22 April 2010).
Basis for economic recovery
Although capitalist economic crises occur because of the impoverishment of the working masses relative to the ever expanding production of commodities offered for sale, and the crisis causes their ever more grievous impoverishment, nevertheless capitalism does recover from crises. It then gallops towards a new boom, before once again relapsing into crisis, going round and round in circles. What clever economic management on the part of imperialism has achieved, however, is to make the cycles of boom and bust longer lasting. The use of Keynesian interventions of various kinds to prop up demand for capitalist commodities when due to impoverishment of the masses it is waning has been successful in postponing the onset of recession. The use of unrestrained lending to prop up demand led to the growth of bubbles in the economy, for instance, which have now burst.
As Martin Wolf put it (‘The world economy has no easy way out of the mire’, Financial Times, 24 February 2010), “… a series of bubbles helped keep the world economy driving forward over the past three decades. Behind these, however, lay a credit super-bubble, which burst in 2008. This is why private spending imploded and fiscal deficits exploded”.
In other words, in the end not only can recession not be held off indefinitely, but when it does finally break out, it is even more severe than would otherwise be the case as the purchasing power of both individuals and governments is severely hampered by the need to repay indebtedness built up in the years of Keynesian-style interventions. In the jargon used today, governments are forced sooner or later to find ways of exiting from their commitment to Keynesian measures (“fiscal stimulus”) or face “paralysing debts” and sovereign default that will make it impossible for the government to continue borrowing to sustain essential expenditure.
Moreover, just as in boom years there are still, notwithstanding the boom, no shortage of examples of the negative effects of capitalism (unemployment, mass starvation, wars), in years of recession, even when the recession is still deepening, there are still plenty of examples of people going against the trend and doing rather well. For instance, the Sunday Times of 25 April reports:
“The richest people in Britain have seen a record boom in wealth over the past year. Their fortunes have soared by 30% even though much of the UK is struggling to recover from recession and the near-collapse of the banking system … The number of billionaires has risen from 43 to 53, with nine seeing their wealth rise by £1 billion or more during the past 12 months”.
People who are relatively well off despite the recession have been increasing their consumption: the market for luxury goods is apparently buoyant. The Daily Telegraph of 14 April (James Hall, ‘LVMH sales jump as demand for luxury goods rebounds’) reports that “Sales of TAG Heuer and Hublot watches increased by a third over the first quarter of 2010 following a surge in global demand for luxury products”. And further that “Champagne sales also rebounded strongly, suggesting that the ravages of the recession are behind most [rich] consumers”. This is all undoubtedly helped by the fact that the speculative gains of financial institutions such as Goldman Sachs are once again being distributed in the form of million pound bonuses to the scions of the City.
Indirectly, however, the Sunday Times also gives a glimpse of how the recession has in fact decimated even a good proportion of the wealthy, even if those that remain have got richer: “Remarkable though the recovery is, the gains still leave the 1,000 richest short of the peak they reached in 2008. Then, there were 75 billionaires … (Richard Woods, ‘Fortunes of the super-rich soar by a third’). Their number is down by a third!
Likewise, while we are told that “The United States economy grew at its fastest pace in more than six years at the end of 2009”, it is immediately pointed out that this was despite the fact that “businesses resisted hiring …” and despite the fact that “…the unemployment rate rose to 10 percent, from 9.7 percent” (Catherine Rampell, ‘US economy grew at vigorous pace in last quarter’, New York Times, 30 January 2010). Yet we know that the only way an economy can genuinely grow is by more people being more economically active, i.e., by more wealth being produced. If, however, unemployment is still on the increase, so that if the US economy has managed to grow, it is because “productivity grew at a robust rate of 8.1 percent in the third quarter of 2009”. However, increased productivity implies greater unemployment and ultimately, because the unemployed are unable to buy, the crisis worsens.
Signs of recovery
For recovery from crisis to be effected under capitalism, the situation must be reached where supply once again lags behind demand, notwithstanding the reduced general demand that the crisis has caused. There are a number of ways in which this can begin to happen:
Production has been so severely cut back over such a long period, both as a result of closed production lines and disappearance from the scene of various producers as a result of business failure, that the commodities are no longer sufficient to meet even the enfeebled demands of the market;
Capitalists realise that if they are to stay in business they must modernise with the acquisition of new technology in order to be able to produce more cheaply and thus be able to undersell their rivals. Hence one can expect during a crisis that there will be some evidence around of increased capital expenditure, although it is of course only the wealthier capitalists who will have sufficient resources to be able to upgrade themselves.
Through lack of opportunities for productive investment, vast sums of capital are roaming the globe looking for possibilities for profitable speculation. From time to time there will be a stampede into stocks and shares, or real property, or precious metals or other such commodities, which will cause a temporary bubble of rising prices. Believing their assets to be worth more, consumers may feel themselves to be rich enough to purchase more. However, by its very nature, one person’s successful speculation is another person’s loss, and all speculative gains will sooner or later be countered by speculative losses, so clearly there is no permanent solution here. At most their can be a temporary boost in demand which could set off a flurry of productive economic activity.
Thus today, if the Financial Times is to be believed, “Manufacturing activity soared around the world in January [2010] … Industrial growth was led [in the eurozone] by the region’s healthiest economies, especially France, where manufacturing expanded at the fastest pace in almost a decade. Germany and Italy were also strong, as was the UK, where weaker sterling helped manufacturing activity increase to a 15-year high last month” (James Politi, Stanley Pignal and Justine Lau, ‘Global manufacturing surges back’, 3 February 2010). The authors do not spell out just what is being manufactured and sold so successfully, and one suspects that armaments figure prominently. However, the authors do mention that US increases in output “at an annualised rate of 5.7 per cent” in the fourth quarter of last year are down to “higher business spending and much slower inventory reductions”.
This tends to indicate that businesses that have so far survived the recession are rushing to invest in new technology in order to become even more competitive by replacing as much of their workforce as possible with machines. In a situation such as the present where supply so hugely outstrips demand, only the leanest and meanest survive, as they are the ones able to mop up what little demand there is. It will readily be seen, however, that this leanness and meanness will tend to lead in the long run to a further deterioration of demand and an aggravation of the crisis.
When we look at the “signs of recovery” that are cited in the bourgeois media as evidence that the recession is drawing to a close, it is hard to avoid noticing the stamp of parasitism firmly marked on them. For instance, in the US “Asset price gains boosted the net financial wealth of US consumers by $2,000bn in the last quarter”. As a result of this, Ben Funnell, chief equity strategist at GLG Partners, writing in the New York Times of 27 January 2010 (‘Recovery at risk if contradictory forces collide’) considers that “If asset prices continue to rise, the wealth effect will turn positive. And the labour market could also turn into a plus…” The question, however, is how asset prices can continue to rise. Either the higher asset “values” will have to be realised so that the money can be used in a way that boosts demand for commodities produced for consumption (and the sales would force the “values” down); or the assets in question would have to be used as security for loans … But the need to repay the loans sooner or later results in the need for the assets to be sold, often hurriedly, from which would follow a renewed downward spiral of asset prices such as we saw at the start of the current crisis.
Bad news from Greece
The most important indication that despite any chinks of daylight that might be illuminating odd corners of the grey capitalist economic scenario, the crisis is still getting a great deal worse, is the steady march towards sovereign default of Greece, that is dragging in its wake several other European countries, in particular Portugal, Spain, Italy and Ireland, but is also raising important questions of the sustainability of the finances of various eastern European countries, as well as the UK and the US. There is no question that several countries in the world are under threat of being forced to attempt drastically to slash living standards of the masses through lack of access to borrowing because they have borrowed far too much relative to what now turns out to be their ability to pay.
The situation of the Greek economy has been critical for some time. As Greece is a member of the eurozone (i.e., a country whose currency is the euro) its economic problems affect the rest of the countries which use that currency. When, however, the imperialists of western Europe decided to form the EU bloc in order to put together a home market large enough to enable them to compete effectively against their US rivals, realising that without that it was only a question of time before they lost all economic clout, each imperialist power was far more focused on what it wanted to gain rather than what would need to be sacrificed in the interests of economic unity. Since the whole purpose of the Union was to create large and efficient trusts and monopolies, of necessity these would drive out smaller producers. The major sacrifice that each national bourgeois needed to make was its exclusive economic, social and political control over its national territory. None of the national bourgeoisies were willing to make this sacrifice, but it was hoped that such would be the advantages of the EU that gradually over the years the various national bourgeoisies would merge into one, like, for instance, the bourgeoisies of England, Scotland and Wales, and national contradictions between them would disappear. The Greek debacle, however, has proved that any bourgeois optimism in this direction has been sadly misplaced. All the major European imperialist powers were happy to enlarge the EU to include poorer countries such as Greece, so long as in doing so the dominant aspect was securing these countries’ markets for preferential access for the leading countries’ commodities. But when it comes to supporting what amounts to a region of the EU which is economically relatively backward, then there are those who baulk at their responsibilities, the chief culprit being Germany.
When it became clear towards the start of this year that Greece was heading towards sovereign default as its debts were becoming due for payment at a time when lenders were reluctant to lend to it because of the fact its economy was not generating sufficient income to guarantee future repayment, it was necessary in the interests of sustaining the borrowing powers of all remaining Eurozone countries (at least) that other member states came to Greece’s rescue. For if Greece was not helped to borrow at reasonable rates of interest (which was only possible if other EU countries effectively guaranteed the lending), it would be forced to offer to pay even more unsustainably high rates of interest than it is paying at present. These would be such a burden on an already weakened economy that it was bound to collapse, causing serious losses to other EU countries, and provoking the Greek masses to resist and maybe even to proletarian revolution. Furthermore, Greece would have to such an extent to moderate both its private and public spending that this would have an adverse impact on EU companies supplying to the Greek market. To most European economists, therefore, the case for supporting Greece financially was self-evident. However, under EU arrangements, European expenses are met by the various member states in proportion to the size of their economies, which means that Germany pays rather more than any other country – and Germany has been proving recalcitrant. Even the strongest European economies are struggling with recession, bank bail-outs, burgeoning indebtedness, mounting unemployment, business failures and popular discontent. It is in these circumstances that Germany wants to hang on to its resources for use in heading off its domestic disasters. The result is that “The eurozone area and wider European Union” was “‘on the brink’ of disintegration …” , according to George Soros, the hedge fund manager, because of German reluctance to provide to Greece loans at below-market markets. (See Gillian Tett and Chris Giles, ‘Soros warns Europe of disintegration’, Financial Times, 12 April 2010). This is because of a widening policy gap between France and Germany, as explained by Steven Erlanger in the New York Times of the same date (‘French and German ties fray over Greek crisis’):
“The French and Germans, with different domestic constituencies and different attitudes toward economic policy, have a different view of how Europe and the euro zone, the 16 nations that have adopted the euro as their currency, should be managed. Germany, long the financier of the European Union, has made it clear that it will not pay for the mistakes and frauds of others.
“France has put a much stronger emphasis on European unity and pride, trying to avoid involving multilateral institutions like the International Monetary Fund in the future of the euro, a prominent symbol of Europe’s challenge to the supremacy of the United States.
“’Germany is no longer, as a matter of course or of principle, the motor, heart and saviour of Europe’, said Constanze Stelzenmüller, a senior fellow of the German Marshall Fund in Berlin. ‘This isn’t the Europe we signed up for. It’s much larger, much poorer, and we have to take care of our own’.
“Germany always acted in its interests, Ms [Ulrike] Guérot [a senior research fellow with the European Council on Foreign Relations] said, but those were perceived as sublimated within the European Union and NATO, the two postwar multilateral institutions that both protected the new democratic Germany and kept its ambitions in check. Now Germany is turning more obviously to Russia for energy and commercial interests, she said, making its European and American partners uneasy.
“’We sublimated hegemony,’ said Ms Guérot, a German … ‘But we’re dropping the sublimation now’. She laughed, then said: ‘Of course, this doesn’t sound nice to others’”.
On 14 April, spurred on by frightening news of the deteriorating situation of Greek bonds, the EU did appear to have agreed “the basic conditions for the joint International Monetary Fund/European Union rescue operation for Greece … The size of the (still only putative) rescue package amounts to £40bn of which less than a third will come from the IMF … The interest rate to be charged to Greece … has now been fixed at 5 per cent” (Daniel Gros, ‘Only Athens can rescue Greece’, Financial Times, 15 April 2010).
Despite the fact that even this rescue package was not a done deal, the financial press for the most part treated it as though it was. The consensus, however, was that it was not enough:
“The European Union finally agrees a bail-out, and the much-predicted rally of Greek bonds turns into a rout. A week later, spreads on Greek bonds [i.e., the interest rates that have to be paid] had reached their highest levels since the outbreak of the crisis. The financial markets have recognised that, bail-out or no bail-out, Greece is in effect broke.
“The bail-out prevents a default this year, but makes no difference whatsoever to the likelihood of a subsequent default. Just do the maths: Greece has a debt-to-gross domestic product ratio of 125 per cent. Greece needs to raise around £44bn in finance for each of the next five years to roll over existing debt and pay interest. That adds up to approximately €250bn, or about 100 per cent of Greek annual GDP.
“In 2010, the Greek economy will contract, on the most credible estimates, by between 3 and 5 per cent. Inflation will fall towards zero, so nominal growth will also contract sharply. Nominal GDP will probably contract even more sharply in 2011 and will continue to contract … in 2012 and the following years. The reason for the persistent contraction in nominal GDP is that Greece needs to turn a primary deficit of more than 7 per cent into a primary surplus – before interest payments – of at least 5 per cent, a turnaround of more than 12 percentage points, while at the same time improving its competitiveness through wage cuts. The latter implies deflation. As the Greek economy goes through the adjustment process, the debt-to-GDP ratio will deteriorate towards 150 per cent or so” (Wolfgang Munchau, ‘Greece’s bail-out only delays the inevitable’, Financial Times, 19 April 2010).
Concluding that Greek default is sooner or later inevitable, a rush to offload Greek bonds inevitably ensued. The result was record high interest rates, as well as a rush on the part of those with money in Greek banks to withdraw it fast. Finally the credit rating agency Standard & Poor’s, notwithstanding the expectation of the European rescue package that had been supposed to calm the markets, on 27 April downgraded Greek bonds to junk status. The high rates of interest Greece will have to pay in order to borrow as a result of this cannot but precipitate the road to ruin.
Meanwhile there has been some indication from Germany that it may not participate in advancing to Greece even the £40 billion that had been the tentatively agreed rescue package. After all, on 9 May the German Chancellor Angela Merkel needs to win a regional election if she is to maintain a majority in the Bundesrat (parliament’s upper house), so she cannot afford to offend the susceptibilities of the German national imperialist bourgeoisie!
Contagion
The downgrading of Greek bonds has certainly put the cat among the pigeons, as explained by Sean Grady, the Economics editor of The Independent:
“The Eurozone ‘lurched towards the endgame’ yesterday as Standard & Poor’s finally relegated Greece’s sovereign credit rating to ‘junk’ status, downgraded Portugal by two steps to A-, and the yields on Greek debt climbed beyond 15 per cent, a signal that the market regards a default as virtually certain.
“The contagion that many feared is threatening to overwhelm the entire single currency area in a remarkably short time. The course of events has parallels with the banking crisis of the autumn of 2008, when successive institutions came under attack and their interrelationships and size devastated the confidence in the financial system, famously so after the failure of Lehman’s.
“For many observers yesterday, it was a matter of ‘for Lehman’s, read Greece’ as sovereign debt became the new subprime. Again there was classic domino effect: bond yields also rose in the other so-called PIIGS group of highly indebted nations – Ireland, Spain and even Italy, as investors demanded higher risk premia to take on these government’s debts. It raises fears of a sovereign debt crisis on a pan-eurozone scale, and beyond even the resources of Germany and France to resolve, and could leave the very future of the euro in doubt, a little past its tenth birthday celebrations”. (‘Eurozone edges to endgame as Greek contagion catches Portugal’, 28 April 2010).
The repercussions of the Greek crisis go even further:
“British banks have a near-£100bn exposure to the struggling European economies, of which £8bn is in Greece …
“There will also be a capital loss for the European Central Bank, which has taken an undisclosed sum in Greek government bonds as collateral for loans.
“A more substantial worry would be if there was an indiscriminate dumping of PIIGS paper, freezing the market in much the same way the interbank market closed down in 2008. Banks, insurance companies and fund managers that hold vast quantities of these bonds [not so long ago considered safe investments!] would find them effectively unmarketable and valueless – hence ‘the new subprime’ label.”
Conclusion
All in all, it is clear that continuing catastrophe continues heavily to outweigh any minor bits of good news for capitalism that may emerge here and there.
Whatever the outcome of the Greek debacle the proletariat of all capitalist countries needs to be aware that their living standards are about to come under an unprecedented level of attack, compared to which the cuts inflicted on the Greek working class at present will soon seem trivial.
The proletariat must prepare itself to overthrow capitalism for within its confines the future is nothing short of barbaric.
Comments are closed, but trackbacks and pingbacks are open.