British capitalism is in big
trouble. The official annual inflation
rate has hit 3.3%, its highest level for 16 years. The governor of the Bank of England, Mervyn
King, has been forced to send a letter to the Chancellor of Exchequer, Alastair
Darling, to explain why the Bank has been unable to keep inflation from rising
at more than 2%, which is the target set by the government for the Bank.
In the letter, King explains
that inflation has got completely out of control. Global fuel and food prices have
rocketed. World agricultural prices have
risen 60% in the last year; oil prices are up 80% and wholesale gas prices are
up 160%! That has meant significant
increases in living costs for average working family in the UK. For example, the average gas bill is up 7%,
electricity bill up 10%, the water bill up 6%; rail season tickets up 5% and,
above all, the cost of an average tank of petrol or diesel to fill the car or
lorry is up 20-35% in a year. Overall,
the weekly shopping basket is up 8%.
Inflation is recorded at only over 3% because the cost of other items
like clothing or electrical goods has fallen.
And it is going to get
worse. Mervyn King forecasts that the
inflation rate will climb to over 4% a year and stay up there through most of
2009, at best. And the acceleration in
inflation is happening at the same time as the UK economy is heading into slump as
a result of the global credit crunch and the collapse of the housing market.
Most economic forecasters are
now admitting that British capitalism is grinding to a halt. The bosses’ ‘union’, the CBI, reckons that
economic growth this year will be just 1.3% and next year not much better. That would be the lowest rate of growth since
1992, the last great economic recession.
Even this forecast is
probably optimistic. That’s because a
key factor driving British capitalism over the last decade or so has not been
investment in manufacturing and other productive sectors of the economy, but in
real estate (housing) and unproductive speculation in stock and shares, bonds
and money in the City of London.
Now the credit crunch is
causing huge losses in the financial sector and the UK housing market is collapsing
like a pack of cards. House prices on
most measures are falling by around 5-7% a year now and most forecasts suggest
that this rate of decline could accelerate up to 20-30% by end of 2009.
Young people and others who
joined the ‘housing ladder’ at its peak in summer 2007 will find that their
property is worth only 70% of what they paid for it by then. And many will have taken out large mortgages
to pay for their flat, many up to 100%.
So their home will be worth less than the debt they owe. That’s what is called ‘negative equity’.
And with mortgage rates
rising all the time, hundreds of thousands of British families are going to be
unable to meet their payments over the next couple of years and will be forced
to sell or have to walk away from their homes.
So the great consumer
spending binge is over. Everybody will
be tightening their belts as wage rises fail to keep up with inflation and
unemployment rises. That’s a recipe for
outright slump, not just an economic slowdown.
Unemployment is already
starting to rise. The number of
claimants for unemployment benefit in May rose for the fourth consecutive month
and the official unemployment rate rose for the first time in years to 5.3%.
With unemployment heading
above 6% and inflation towards 5%, the misery index (the addition of the two
rates) will be in double figures soon.
And the last time that happened, British capitalism was reduced to its
knees.
What can the Bank of England
and the government do about this to avoid a slump? The short answer is nothing. Mervyn King is in a deep quandary. If he raises interest rates in order to drive
down inflation, he will just make it worse for British businesses and
households to fund their investment and spending. That will deepen the oncoming recession. On the other hand, if he lowers interest rates,
he could inspire more borrowing and more inflation. So he will do nothing.
The truth is that the
spectre of ‘stagflation’ is now hanging over the UK economy. That is where the economy stagnates and does
not grow, but the economic slowdown does not get inflation down either. Such a situation has not existed since the
1970s and early 1980s and the strategists of capital are now really worried
that it could reappear, proving yet again that capitalism cannot avoid the
continual cycle of boom and slump, which is inherent in the capitalist mode of
production for profit, not need.
The supposed solution of the
politicians (including New Labour ministers), the bankers and the bosses to
this dilemma should be no surprise to Marxists.
It is not that the bankers and financiers that got the economy into this
mess should be penalised. Oh no. The answer is that workers and their families
should take the hit.
The cry of the politicians
and economists is that workers must accept lower or no wage rises to stem inflation. Public sector workers are being forced to
accept less than a 2% pay rise when inflation is now well above that and
accelerating, and employers in the private sector are trying to do the same. And yet we know that the reason for inflation
is nothing to do with wage rises and that is admitted by the economists and the
Bank of England! So the capitalist
solution is blatant – working-class families must be forced to reduce their
already low standards of living.
The economic crisis is not
the result of workers like the oil tanker drivers asking for too much (they had
not had a pay rise since 1992!). It is a
product of the failure of capitalism globally.
The housing slump is not confined to Britain,
but started earlier in the US
and has spread to Spain, Ireland, Australia and elsewhere. The financial crisis is not confined to Britain, but started in America and has spread to the UK, Europe and Asia. Nothing is clearer: capitalism is destroying
people’s hard-won living built up over the last decade or so and the leaders of
capitalism want the working-class to pay for their losses.
There is a theory doing the
rounds of capitalist economists at the moment.
It is called the Black Swan theory, developed by an American financial
analyst, Nicholas Taleb. Before people
discovered Australia,
it was thought that all swans were white.
But the discovery in the 18th century that there were black swans in Australia
dispelled that notion.
Taleb argues that many
events are like that. It is assumed that
something just cannot happen: it is ruled out.
But Taleb says, even though the chance is small, the unlikely can happen
and when it does it will have a big impact.
Taleb cited the 9/11 Twin
Towers attack as a modern
example. The global credit crunch and
the ensuing economic crisis have been suggested as another example of the Black
Swan theory.
From a Marxist dialectical
point of view, the Black Swan theory has some attraction. After all, revolution is a rare event in
history. So rare that many (mainly apologists
of the existing order) would rule it out as impossible. But it can and does happen, as we know. And its impact, when it does, is profound. In that sense, revolution can be described as
a Black Swan event, as a unique historical event.
But where Marxists would
disagree with Taleb is that he argues that chance is what rules history. Randomness without cause is how to view the
world. This is far too one-sided and
undialectical. Sure, chance plays a role
in history, but only in the context of necessity.
The credit crunch and the
current economic slump could have been triggered by some unpredictable event
like the collapse of some financial institution last August or the loss of bets
on bond markets by a ‘rogue trader’ in a French bank last December. For that matter, the recent food price
explosion may have started with a tsunami or an unexpected drought in Australia. And the oil price explosion may have been the
product of the ‘arbitary’ decision of President Bush to attack Iraq.
But those things happened
because the laws of motion of capitalism were being played out towards a
crisis. As we have argued in this column
many times before, capitalism only grows if profitability is rising. And corporate profitability peaked in 1997,
fell back to 2002, recovered somewhat up to 2006, but began falling again after
that. With profitability declining, the
huge expansion of credit (or what Marx called fictitious capital) could not be
sustained because it was not bringing enough profit from the real economy. Eventually, the housing and financial sectors
(the most unproductive parts of capitalist investment) stopped booming and
reversed.
Similarly, the food price
explosion was man-made, not an act of God.
Global warming, droughts and floods are man-made. The food and energy deficits are due to weak
capitalist production combined strong demand from China and other fast-growing
economies and the failure of capitalism to diversify into clean alternative
energy production.
So the current economic
crisis was no chance event that nobody could have predicted. Marxists and even some capitalist theorists
forecast it. The economic slump that
British capitalism is now entering (along with many other capitalist economies
around the world) is no Black Swan. It is
an inevitable consequence of the capitalist system of production.
