The threat of double dip recession

Throughout the capitalist world, countries are said to be in recovery, as economic growth has been restored after several quarters of shrinkage. Thus:

In April 2009, at the time of the London G20 summit, the consensus of forecasts for global economic growth this year was 1.9 per cent. By last September it had reached 2.6 per cent. By June 2010, it was 3.5 per cent. In the US, the consensus forecasts for 2010 were 1.8 per cent in April 2009, 2.4 per cent last September and 3.3 per cent in June 2010. Even for the eurozone, the consensus of forecasts has moved a little, from 0.3 per cent in April 2009, to 1 per cent last September and 1.1 per cent in June 2010.” (Martin Wolf, ‘Why the battle is joined over tightening’, Financial Times, 19 July 2010).

That economic growth, however, is going hand in hand with very high levels of unemployment and massive retrenchment in public spending that cannot but severely depress the level of effective demand for commodities – be they goods or services – especially in western imperialist countries.  For instance, in the United States:

Over all, the nation lost 131,000 jobs last month, according to the Department of Labor, which also said that June was far weaker than previously indicated.

“Private employers added 71,000 jobs last month, but those figures were overtaken by the 143,000 cut as the Census wound down. It is also about half the number that economists say is needed to simply accommodate population growth, so the tepid job increases cannot begin to plug the hole created by the loss of more than eight million jobs during the recession. The unemployment rate, in fact, remained stuck at 9.5 percent in July.  …

“The government’s broadest definition of the unemployment rate, incorporating people who want jobs but did not search during the month, was unchanged at 16.5 percent.” (Motoko Rich, ‘U.S. Lost 131,000 Jobs as Governments Cut Back’, New York Times, 6 August 2010).

How growth is possible despite unemployment

How can economies be growing while unemployment remains so high? How can economies be growing when opportunities for sale of commodities are shrinking so comprehensively?

It is of course theoretically possible for there to be higher economic output in a given country even though unemployment is rising.  This could, and often does, happen by the employers increasing the length and intensity of the working day of those who remain in employment to such an extent that it more than compensates for the hours of labour lost to the economy.  It is understood that under pressure from the threat of unemployment, workers in the US, as well as elsewhere in the western imperialist world, are prepared to work harder and for longer hours in the hope of hanging on to their jobs.

Growth unsustainable in the face of market decline

However, although it is possible to increase economic output while maintaining high levels of unemployment, that increase is going to be unsustainable if the commodities produced cannot be sold.  If throughout the world market both individuals and governments are cutting back on spending, as is very much the case at the present time, then the funds are not going to be generated that are necessary to keep the production process turning. Capitalists will not keep on producing if they are not making profits – but in any event they may be quite unable to keep on producing if they are not even able to recover their capital expenditure – i.e., if they suffer substantial losses – as a result of inability to find a market for their products.

It seems probable that if there has been in recent quarters some modest ‘recovery’, then this is for the most part due to the huge sums deployed since the beginning of 2009 by various governments to stimulate the world economy. By consensus between various governments, enormous stimulus packages were approved, designed to compensate for the fall in demand that was due to the relative impoverishment of the world’s working class and peasantry that is an inevitable feature of capitalism.  The sums involved were impressive – $787 billion in the US, equivalent to 2% of US GDP in 2009, and the largest stimulus package in US history; 1.5% of GDP in Britain, 1.7% in Canada, 2.4% in Japan, 2.6% in China and 2.9% in Russia (see David R Francis, ‘Did Obama’s stimulus plan work, Christian Science Monitor, 6 October 2009).  This gigantic effort was expected to enable these governments to reverse the laws of capitalism.  The poor would not get poorer, because historically unprecedented and co-ordinated stimulus packages would provide workers with jobs and peasants with buyers for their produce and boost world demand to a healthy level.  What has happened, however, is proving yet again that the law of capitalism cannot be gainsaid.  Yes, government intervention can delay the inevitable, much as good medicine can delay a person’s death, but in the end the inevitable is just that.

The statistics emerging from the US in July loudly proclaim the failure of Obama’s much vaunted stimulus. The dire unemployment statistics have already been quoted above.  There is no shortage of further bad news for believers in Keynesian fixes:  Barry Grey refers to the last week of August 2010 as “… a week of economic data confirming that the worst economic crisis since the Great Depression is continuing and, if anything, deepening. Reports issued Tuesday and Wednesday on existing home sales and new home sales in July reflected a housing market that is in free-fall. Existing home sales plummeted a record 27.2 percent from June to hit their lowest levels since 1995. New home sales fell 12 percent from the prior month and were down 32.4 percent from July of 2009 to their lowest levels since records began in 1963.

“On Wednesday, the Commerce Department reported that orders for durable goods rose from June to July by a mere 0.3 percent. Economists had forecast a 3.0 percent rise. Core orders, excluding transportation items, fell 3.8 percent, the biggest decline since January 2009. Orders for machinery fell 15 percent and those for computers and electronics also fell by 2.4 percent.

“On Thursday, the Federal Reserve Bank of Kansas City released its manufacturing index, showing a fall from 14 in July to zero in August. The report’s employment index fell into negative territory and the bank said expectations for the next six months had weakened. This followed a report last week by the Philadelphia Fed showing a similar decline in manufacturing in the Mid-Atlantic region.

“Until the past few months, manufacturing had been a relative bright spot in the US economy. But as Michelle Girard, an economist at RBS Economics Research, told the Financial Times, ‘These figures will no doubt fuel concern that the manufacturing sector is losing momentum quickly’.” (‘U.S. Grim Economic Realities, GDP Report Confirms Worst Economic Crisis since the Great Depression’,, 29 August 2010).

And sure enough, because of these appalling figures, economic forecasts of future growth have had hastily to be downsized: “The Commerce Department on Friday [27 August] sharply cut its estimate of US economic growth in the second quarter of 2010. The department revised downward its initial estimate, issued July 30, of a 2.4 percent increase in the gross domestic product (GDP) to the even more anaemic figure of 1.6 percent.

A 2.4 percent growth rate would already represent a sharp slowdown from previous quarters. US GDP rose 5 percent in the fourth quarter of 2009 and 3.7 percent in the first quarter of this year. A growth rate of 1.6 percent is below the minimum pace of 2.0-2.5 percent which economists consider necessary to prevent a further rise in unemployment.” (ibid.).

Remembering that these are the figures while stimulus spending is still occurring, the horrors that lie ahead when the stimulus spending comes to an end can just be imagined. “The White House says the multiyear $814 billion stimulus program passed by Congress in 2009 boosted employment by 2.5 million to 3.6 million jobs and raised the nation’s annual economic output by almost $400 billion…” (David J. Lynch, ‘Economists agree: Stimulus created nearly 3 million jobs’, USA TODAY, 29 August 2010).

With electoral considerations in mind, the Obama administration obviously has the motivation to talk up its economic measures, but there is apparently general agreement among economists that without the stimulus unemployment in the US today would have been in the region of 11% (as opposed to 9.5%) and that GDP has been boosted by some $400 billion.

Given that the stimulus has not achieved its aim of putting the economy back on the track of continuous expansion, it is obvious that when the stimulus is withdrawn unemployment will skyrocket in inverse ratio to the slump in GDP.  Without the stimulus, any growth would seem to be out of the question, and the dreaded ‘double dip’ recession is unavoidable.

Reversing the stimulus

Given the dire consequences of bringing the stimulus to an end there is an urgent debate among bourgeois economists as to whether this is really necessary, an issue on which the Financial Times in August ran a series of articles by distinguished economists arguing either side of the case. The case against continuing the stimulus is that the stimulus has to be financed by government borrowing of dizzying proportions, hobbling the countries that have participated with a massive debt (and debt servicing obligation) that will cripple competitivity for years to come. Others believe that governments are in a position to keep on borrowing indefinitely, and that they should not be afraid to run up debts, however astronomic, if that will avert a slump.  However, as we have seen from US figures, even incurring enormous debts has not really solved the problem.  Instead it has created new ones.

Indeed, terrorised by the prospect of spiralling indebtedness, the Obama administration even as it was dispensing the stimulus package was simultaneously implementing cut backs: “Plenty of businesses and governments furloughed workers this year, but Hawaii went further — it furloughed its schoolchildren. Public schools across the state closed on 17 Fridays during the past school year to save money, giving students the shortest academic year in the nation and sending working parents scrambling to find care for them.

“Many transit systems have cut service to make ends meet, but Clayton County, Ga., a suburb of Atlanta, decided to cut all the way, and shut down its entire public bus system. Its last buses ran on March 31, stranding 8,400 daily riders.

“Even public safety has not been immune to the budget ax. In Colorado Springs, the downturn will be remembered, quite literally, as a dark age: the city switched off a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.

“Faced with the steepest and longest decline in tax collections on record, state, county and city governments have resorted to major life-changing cuts in core services like education, transportation and public safety that, not too long ago, would have been unthinkable. And services in many areas could get worse before they get better.

“The length of the downturn means that many places have used up all their budget gimmicks, cut services, raised taxes, spent their stimulus money — and remained in the hole. Even with Congress set to approve extra stimulus aid, some analysts say states are still facing huge shortfalls.

“Cities and states are notorious for crying wolf around budget time, and for issuing dire warnings about draconian cuts that never seem to materialize. But the Great Recession has been different. Around the country, there have already been drastic cuts in core services like education, transportation and public safety, and there are likely to be more before the downturn ends. The cuts that have disrupted lives in Hawaii, Georgia and Colorado may be extreme, but they reflect the kinds of cuts being made nationwide, disrupting the lives of millions of people in ways large and small.” (Michael Cooper, ‘Governments go to extremes as the downturn wears on’, New York Times, 6 August 2010).

If the US has already started implementing drastic cuts, so have other countries.  In Britain, “Last month, the British government abolished the U.K. Film Council, the Health Protection Agency and dozens of other groups that regulate, advise and distribute money in the arts, health care, industry and other areas.

It seemed shockingly abrupt, a mass execution without appeal. But it was just a tiny taste of what was to come.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be ‘the longest, deepest sustained period of cuts to public services spending’ since World War II.” (Sarah Lyall, ‘Britain reels as austerity cuts begin, New York Times, 9 August 2010).

And all other countries are doing likewise.  In Germany, they have turned off the fountains in public parks, for instance, in order to save money.

The idea is that by cutting public expenditure to the bone, they will be able to reduce taxes, making the country’s commodities cheaper to produce.  It might be thought that such a measure would at the same time free up people’s incomes and thereby boost demand, but that cannot work because the cutting of public expenditure implies a vast increase of unemployment in the public sector, which would obviously have the effect of reducing demand at least as much as any tax cuts would boost it.  What every country seeks to do is to produce more cheaply in order to beat the competition in its export markets.  Likewise, every country wants to end its own stimulus spending while other countries continue theirs, although perhaps it is only the US which is prepared to admit this. 

It is seriously argued by the New York Times that other countries should increase their deficits in order to rescue Uncle Sam: “The world economy is falling back on very dangerous habits. The United States is tentatively emerging from recession but is still at risk of another dip. Yet trade statistics released last week indicate that American consumers are sucking in large quantities of imports as spending recovers, while weak demand in the rest of the world is crimping American exports. ..

The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home. The American economy is too weak to carry this load. The recent trade data led economists to slash growth estimates for this year.

For the global recovery to continue, domestic demand must revive around the world. Other leading countries must do more to stimulate their own demand…” (Editorial, 15 August 2010).

However, all the other countries are just as desperate to sell their exports as the US is, so they are not, if they can help it, going to take up this helpful suggestion!  For other countries, too, failure to sell means loss of jobs and a discontented electorate, possibly even social unrest.  They can no more afford to lose out to US exports than the US can afford to lose out to theirs.

More evidence that economic power is shifting east and south

Having said that, it has to be admitted that in this crisis the old imperialist powers (US, Europe and Japan) are gradually, despite their huge military and economic power, losing out against the more economically efficient producers of the BRICS countries and even Turkey. 

Martin Wolf of the Financial Times has recognised this trend: “We already know that the earthquake of the past few years has damaged western economies, while leaving those of emerging countries, particularly Asia, standing. It has also destroyed western prestige. The west has dominated the world economically and intellectually for at least two centuries. That epoch is over … Hitherto, the rulers of emerging countries disliked the west’s pretensions, but respected its competence. This is true no longer. Never again will the west have the sole word. The rise of the Group of 20 leading economies reflects new realities of power and authority.” (‘Three years and new fault lines threaten’, 14 July 2010).

China in particular is resented by the US authorities because it is able to undersell US products quite comprehensively: “Meanwhile, China is mopping up demand everywhere you look with its artificially cheap supply of goods. Germany, the world’s other exporting power, is cutting its budget and relying on foreign demand to drive its economic rebound. This isn’t sustainable. … China cannot keep hogging the global export market.” (New York Times, Editorial, 15 August 2010).

China for its part is perfectly legitimately flexing its muscle as the old imperialist powers decline: “China has become increasingly adept at translating its rising economic power into political and diplomatic influence, especially in regions such as Latin America and Africa where there is resentment towards western policies and interests.

“As the owner of the world’s largest pile of foreign exchange reserves, Beijing has also publicly challenged the role of the US dollar as the main global reserve currency and has led the drive for more equitable representation on global bodies such as the International Monetary Fund.” (Jamil Anderlini, ‘China’s jump signals shift in global power’, Financial Times, 17 August 2010).

Rather than the crisis being a spur to modernisation, enabling old imperialist concerns to produce more efficiently with more advanced equipment, it seems that old capital has largely thrown in the towel: “Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.

“The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.

“Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.” (Yves Smith and Rob Parenteau, ‘Are profits hurting capitalism?’, New York Times, 2 July 2010).

So while American capital resists modernisation, there are rumblings to the effect that to protect jobs in America, trade barriers should be put up, especially against goods from China.  However, employment in China is also very dependent on sales in the US, so China certainly has no motivation in seeing the value of the dollar fall significantly – with such large holdings in dollar denominated assets, a cheaper dollar would not only make US produced goods more competitive, but in addition Chinese funds invested in the US would lose value to a considerable extent.  However it is being seriously argued that China ought to revalue its currency against the dollar because if it failed to do so, the US would be forced to resort to protectionism and a trade war would follow.

If the roles were reversed, however, everybody knows there would be no question of imperialist powers foregoing their advantage at the cost of jobs at home, leading to rising discontent, to say nothing of profits!  As Global Research points out in an article posted on the internet, it is extraordinary how the various imperialist hacks are presuming to advise China to pay higher wages and further increase government spending, generally act in a way designed to reduce profitability, when there would never have been any question of any capitalist country ever doing such a thing.

The loudest support for workers’ struggle is coming from those who are normally the most ardent advocates of market capitalism, including The Economist and the Financial Times.

Anyone who thinks this is all made up should take a look at the 29 July issue of The Economist, the cover of which featured smiling workers holding wads of cash in their clenched fists. Inside, the lead editorial argued that: ‘Letting wages rise at the expense of profits would allow workers to enjoy more of the fruits of their labour’. The Economist calling for higher wages despite the impact on profit margins? What’s going on here? 

“That’s the thing: the workers in question being supported by The Economist are Chinese rather than Western.”  (Daniel Ben-Ami, ‘Why is the bible of capitalism cheering on Chinese workers?’, Spiked on line, 11 August 2010).

Mr Ben Ami goes on to point out that exactly at the same time that the Economist and Financial Times are asking for better wages for the Chinese, they are also for the most part demanding reduced wages and benefits for workers in the UK.  It is part of the necessary ‘logic’ of capitalism that every capitalist wants the lowest possible wages for his employees but high spending power for all other employees.  Obviously these two wishes are totally self-annihilatory and incompatible and can never be fulfilled.

What is also interesting is that because of their financial trouble the old imperialist powers are having to give serious consideration to cutting their military spending, the military being the whole basis of their ability to dominate the world.  Yet now, for instance, it seems that: “Military planners are examining cutting Britain’s land forces from eight to five brigades, in a radical restructuring option that would hand the army operational command of the Royal Marines.

The proposed overhaul, which would slash army numbers by up to 30,000, is an extreme scenario that underlines how a fierce budget squeeze is shaping the defence review.” (Alex Barker and James Blitz, ‘MoD looks at cutting 30,000 troops’, Financial Times, 20 July 2010).

Similar plans are afoot in the US: “Robert Gates, US defence secretary, on Monday announced what could be the biggest cuts to the Pentagon bureaucracy since September 11, as he declared that the era of “endless money” had come to an end.

“Mr Gates announced cuts of almost 30 per cent on outside contractors, and curbs on military intelligence agencies and his own staff, as well as the proposed abolition of a military command and a reduction in the ranks of generals and admirals in Europe and beyond.

“The cuts would lead to the loss of thousands of jobs but could be fiercely resisted in Congress.

“‘The culture of endless money that has taken hold must be replaced by a culture of savings and restraint’,  Mr Gates told a press conference. But he added: ‘My greatest fear is that in economic tough times people will see the defence budget as the place to solve the nation’s deficit problems, to find money for other parts of the government.’

“The US’s looming fiscal crunch is almost certain to end the breakneck expansion in military expenditure that has nearly doubled the base defence budget in 10 years to $549bn (€414bn, £345bn) for 2011. When the wars in Iraq and Afghanistan are taken into account, total spending is more than $700bn a year.” (Daniel Dombey and Jeremy Lemer, ‘Pentagon’s “endless money” era ends’, Financial Times, 10 August 2010).

Past experience shows, however, that in the desperate times ahead, the old imperialist powers will have no hesitation to resort to quite reckless military spending to pursue war against their rivals for the rapidly declining world market.  Current demilitarisation is unlikely to be maintained over time.

World war in the making

The BRICs countries have undertaken the role of the workshops of the world.  They are asserting their economic strength at the expense of imperialist parasitism.  The imperialist powers are desperate to hold on to their world domination, dependent as it is on their economic might.  But that economic might is dissipating in a mountain of debt.  In their desperation to hang on to power, the imperialist countries are bound to resort to more and more military intervention, which in fact results in bankrupting them even further.  Moreover, it will soon be impossible to confine the war zones to countries overseas – and it can be expected that in its desperation the old imperialist powers will attack countries capable of retaliating against the imperialist countries with the same kind of devastating weaponry as imperialism has been using against Iraq and Afghanistan.

There is a danger in all this that the ecology of our planet will be irretrievably damaged.  Hence the need to work hard for proletarian revolution, to enable the human race to move on to the next, civilised, stage of its development, i.e., socialism, a stage in which all motivation for war has vanished forever.

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