“The never-ending story” – this is how the Economist (14th November 2015) described the global economic crisis that has blighted society since 2008. Indeed, over seven years on since the beginning of this saga, there is still no end in sight. Talk of recovery is a sick joke at best, and deluded at worst. The reality is that a new – deeper – phase in the world crisis of capitalism is opening up.
“It is close to ten years since America’s housing bubble burst,” the Economist states. “It is six since Greece’s insolvency sparked the euro crisis. Linking these episodes was a rapid build-up of debt, followed by a bust.” But, as this reliable mouthpiece of the capitalist class ominously warns, “A third instalment in the chronicles of debt is now unfolding.” The setting for the third act of this seemingly never-ending drama? The so-called “emerging” markets in Africa, Latin America, and Asia – and, in particular, China.
“…just as the rich world seems to be getting shot of its dodgy legacy of indebtedness, it risks being dragged back into the mire by a third leg of the debt crisis. The debt that built up in emerging markets after the American bust is still there. It has continued to grow even as the economies have slowed, and now overhangs them ominously. In the past, the rich world had the muscle to shake off such problems elsewhere. But emerging markets now make up most of the world economy...They are quite capable of weighing down rich-world recoveries—especially if, as in Europe, they are already fragile ones. Taking full account of the effects of emerging-market debt makes the world economy look far less secure.”
The myth of “decoupling”
Whilst the Economist described these episodes – the 2007-08 US banking crash; the Eurozone sovereign debt crisis; and the emerging market debt build-up – as “three volumes” of a “debt trilogy”, the reality is that they are all manifestations of the same ongoing global crisis of capitalism. Although separated in time and space, they are all ultimately symptoms of the same process – an organic crisis of the senile and diseased capitalist system.
In 2008, as the financial system in the US and Europe collapsed and the advanced capitalist countries entered into recession, “emerging” markets seemed to have defied economic gravity. A blistering pace of growth was maintained in China and elsewhere. The concept of a “decoupling” in the world economy was raised: that the links between the booming ex-colonial countries and the crisis-ridden countries of the West had been broken.
The reality, however, is that – far from avoiding the crisis – countries like China were merely delaying the onset of the crisis in their economies. Prior to 2008, Chinese growth was export-led, reliant on the consumption of Chinese-manufactured commodities in the USA and Europe. But as the recession hit and demand in the West slumped, China’s exports were left without a market.
In stepped the Chinese government, which re-orientated the economy from exports to investment, carrying out the largest ever Keynesian programme in history, with unprecedented levels of public investment in housing, infrastructure, and large industry. In turn, economic growth in countries such as Australia, South Africa, Indonesia, and Brazil was tied to that in China, providing the raw materials, food, fuel, and steel, needed to fuel China’s expansion.
The result, as the Economist explains, has been a massive built of debt within emerging economies. “Overall, debt in emerging markets has risen from 150% of GDP in 2009 to 195%. Corporate debt has surged from less than 50% of GDP in 2008 to almost 75%. China’s debt-to-GDP ratio has risen by nearly 50 percentage points in the past four years.”
With attempts by the Chinese bureaucracy to deflate the credit bubble, the economy has slowed down. And as the demand for raw materials in China slows, so too do the economies of those countries that have ridden on the wave of Chinese growth. In Britain, Europe, and the US, the symptoms of this slowdown are clear – for example, in the form of the dumping of Chinese steel onto the world market, with a resultant crisis for steel industries outside of China.
In order to save face, the Chinese government has continued to release official figures indicating around 7% growth – conveniently, the same number as the government’s own target. Estimates by other economists, however, have put the true figure at nearer to 4% - a rate of growth that is widely considered too low to provide a decent level of jobs, wages, and public services for China’s urbanising and proletarianising population.
The Shanghai stock market crash earlier this year, meanwhile, sent an alarming warning sign to Chinese officials and to the capitalists across the world about the looming danger facing emerging economies, which have thus far largely escaped the impacts of the world crisis. The question of this third-phase of the crisis, therefore, is not so matter of if, but when.
Symptoms of capitalism’s disease
Just as the crisis facing the emerging economies is linked to the crisis in the advanced capitalist countries, likewise the financial crisis that began in the US in 2007-08 and the ongoing problems faced by Greece and the Eurozone are not isolated incidents, but are reflections of the same underlying contradictions in the capitalist system.
Many, for example, have tried to explain away the 2007-08 banking crisis as merely arising from lax regulation, greedy bankers, and excessive lending to “sub-prime” homeowners. Far from providing any answers, however, such superficial explanations in fact only raise further questions: surely bankers have always been greedy – why only now have they been able to inflict such damage upon society? Why did politicians feel the need to deregulate the financial sector and aid the expansion of credit to such excessive levels? Why was the housing bubble allowed to inflate to the extreme proportions seen prior to the crash?
Similarly, the crisis in Europe is often attributed to the single currency and the antagonism between monetary union and political discord. But again, what is identified by many as the cause of the problem is in fact only the catalyst. Inside or outside of the euro, countries such as Greece, Spain, and Portugal will continue to face austerity. Their real problem is their degenerate capitalist class, who have failed to invest in productivity for years, and a resultant lack of competitiveness relative to countries such as Germany.
In turn, the public debts amassed by the former – the so-called “PIIGS” of Portugal, Ireland, Italy, Greece, and Spain – are just the other side of the coin to the enormous surplus of trade built up by the latter, Germany, as a result of its superior competitiveness. In order that the German capitalists may produce and export, the peripheral countries of the Eurozone must consume and import.
The same inseparable relationship exists on a world scale in all countries: on the one hand, big business accumulates profits; on the other hand, governments and households accumulate debt. Without such debts, there would not be enough demand for the goods that the capitalists produce; without demand, there can be no realisation of profits; and without profits, the capitalists will not invest or produce. Hence the vicious cycle of recession, stagnation, and debt that society finds itself trapped in – a seemingly “permanent slump”.
Writing in the Financial Times (17th November 2015), Martin Wolf notes the enormous surpluses that corporations have built up as a result of increasing profits alongside decreasing investment – a trend that pre-dates the onset of the crisis in 2008. With the world market already saturated and enormous levels of “excess capacity” in the system, there is no room for further investment by big business. The result is a “savings glut” in the hands of the capitalists, alongside deficits in the budgets of public or household finances.
“Since the crisis, the corporate sectors of the big high-income economies have run surpluses of savings over investment…
“The rise in the surplus of corporate savings over investment is driven by a combination of strong profits and weakening investment. This weakening of investment is both structural and cyclical. Moreover, the weakening is widespread…
“The observation that a structural surplus of savings over investment appears to have emerged in the corporate sectors of the big high-income countries is highly significant. It is significant for the growth of potential supply, since it reflects relatively feeble investment, but it is also significant for the shape of aggregate demand.
“If the corporate sector runs a structural surplus of savings over investment, other sectors must run offsetting structural deficits. If the government is to be in financial balance, either households or foreigners must run these deficits. In the eurozone, this logic has led to huge current-account surpluses (a financial deficit for foreigners). For the UK and US, it is likely to mean renewed household deficits — a perilously destabilising possibility.”
In other words, whilst the working class are told to tighten their belts and take on the burden of austerity, the capitalist class is sitting on a pile of money that could be spent tomorrow, if the economy was run on the basis of society’s needs, and not on the basis of the one-percent’s profits.
All of these phenomena – excess capacity; the savings glut; credit bubbles; rising debt; and trade imbalances – are, in the final analysis, reflections of the same organic contradictions within the global capitalist system, which are now coming to the fore in one country after another.
Through inflationary measures such as the expansion of credit and Keynesian spending, the capitalists were for decades able to temporarily overcome the primary contradiction – that of overproduction – and allow the productive forces on a world scale to go far beyond the limits of the market. But now all of these drivers have turned into their opposite and are acting as an enormous barrier to the growth of the world economy and the development of industry, science and technology.
If the economy was to operate according to the textbooks of the bourgeois academics, then all of this excess capacity would be flushed out of system through a gigantic wave of “creative destruction”, involving the closure of whole sections of uncompetitive industry in order to free up capital for new, more productive ventures.
But, unfortunately for the writers of such textbooks, the theory does not match the facts. There is no lack of capital for investment; indeed, as Martin Wolf notes above, the world is awash with corporate savings that could be poured into new projects. But why would the capitalists invest in new production, when they already face a saturated world market?
Indeed, despite historically low interest rates, there has been no resurgence in investment by big business. Instead, the capitalists – in search for a source of profits – throw their money into purely speculative activities, causing bubbles in housing, asset prices, and the stock market.
Meanwhile, low wages – resulting from globalisation, the downward pressure of mass unemployment, and a full-frontal attack against the working class and its organisations – add a further disincentive for the capitalists to invest in automation and productivity. Why invest in machinery when you can employ an army of cheap labour instead? Hence the seeming contradiction of stagnating levels of productivity in society alongside a plethora of potential technological and scientific advances.
At the same time, these super-low interest rates have allowed for vast swathes of uncompetitive industry that should have died long ago to maintain a semi-living state of existence. The result is “zombie capitalism” and “secular stagnation” – economies that are stuck with permanently low levels of investment and growth, both in the advanced capitalist countries and the “emerging” countries, as the Economist notes:
“…the problems brought on by excess debt are likely to linger for years. With inflation absent interest rates can be kept low; that makes the carrying cost of debt manageable, at least for a while. And banks heavily influenced by governments may be unwilling to tackle non-performing corporate loans, because they will result in factory shutdowns. Instead the debt overhang is perpetuated as bad loans are rolled over, creating zombie companies and industries. Overcapacity pushes down factory-gate prices, which hurts profits and investment. Capital is trapped in underperforming businesses and sectors, which steadily saps GDP growth.”
Put simply, society is at an impasse. Capitalism – once able to “accomplish wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals” – is now no longer able to develop the productive forces. Competition, private ownership, and production for profit have become an enormous fetter. Collective ownership; a rational plan of production; democratic workers’ control – in short, socialism: this is the only way forward for humanity.
Tobogganing towards disaster…
“The bourgeoisie itself sees no way out…it now toboggans with closed eyes toward an economic and military catastrophe.”
These words were written by Leon Trotsky in 1938 as part of the Transitional Programme: The Death Agony of Capitalism and the Tasks of the Fourth International. These same words accurately summarise the position of the ruling class today, but with one small change: now they are tobogganing towards disaster with their eyes open!
The capitalists and their political representatives can see the grey clouds of the next world slump amassing on the horizon, but there is nothing they can do to avoid the thunderstorm that awaits them. For example, the bureaucracy in China can see their debts rising and the stock market crashing around them, but they have no option other than to continue inflating the bubble, as Robert Peston, the BBC economics editor, notes:
“…recent initiatives taken by Beijing to sustain growth are not wholly benign, or at least not for the long term.
“…there is reason to be mildly concerned that stimulus measures are directed towards spurring yet more lending: in the past year there have been five interest rate cuts, three cuts in so-called reserve ratios whose effect is to lessen constraints on the creation of credit by banks, facilitation of borrowing by local authorities to finance yet more "grand projects", and a speeding up of approvals for big infrastructure projects.
“Or to put it another way, the government may recognise that the country since 2008 has become dangerously hooked on investment financed by borrowing, but is refusing to go cold turkey on this addiction to debt-fuelled growth…
“But the risk of it all coming to a juddering and painful halt is heightened the more that the debt bubble is pumped up.”
Similarly, in the UK, despite all attempts by Osborne and co. to re-orientate the economy towards manufacturing and exports, British growth is still reliant on financial services, credit, and a housing bubble. Meanwhile, across the world, zombie companies continue to stalk the land.
In all these cases, as Trotsky describes, the bourgeoisie sees no way out. They are impotent in the face of the impending dangers. They have used up all the weapons in their arsenal – low interest rates, Keynesian stimulus, etc. – just to maintain the feeble levels of growth seen in the past few decades. The capitalists are left with no alternative but to implement austerity and maintain demand through credit.
At the same time, the ruling class fears the social ramifications that their full programme would provoke. Across the world, from China and Latin America, through to Europe and the USA, the measures needed to restore economic equilibrium are increasing inequality, sharpening class antagonisms, and creating ever greater social and political instability.
The next world slump
In this respect, the next world slump will not be like the last. Now the capitalists are faced with the prospect of a truly global crisis, as countries such as China enter into crisis also. Furthermore, as mentioned above, the resources available to the ruling class to get out of the next slump have been greatly diminished in getting out of the last one.
The most important change since the onset of the 2008 crisis, however, is that of consciousness. The reaction amongst workers then, initially, was one of stunned paralysis. After years of uninterrupted growth, the recession was understandably assumed by many to be a temporary phenomenon. Put your head down, tighten your belt, and hopefully you could ride out the storm.
But consciousness now is rapidly catching up with reality. Ordinary people are correctly drawing the conclusion that we have entered a “new normality” of permanent austerity. Many young people today have grown up knowing nothing but crisis. And having seen the limitations of spontaneous protests, and even of mass strikes and demonstrations, workers and youth in one country after another are seeking a political solution to their problems – hence the rise of mass radical left movements around SYRIZA, Podemos, Bernie Sanders, and Jeremy Corbyn.
For this reason, the next slump will not be a mechanical repetition of the last. Instead, it will open up a new period of intensified class struggle internationally. In such conditions, the revolutionary ideas of Marxism will find an increasing echo amongst the 99%, as people look for an alternative to austerity. We encourage our readers and supporters to join us in fighting for these revolutionary ideas – in fighting for a socialist future.