“We are now living in a totally new era.” Henry Kissinger, 9 May 2022
Share prices have been falling for weeks, as fear grips markets in response to war in Ukraine, rampant inflation, lockdowns in China, and the threat of a new slump.
The FTSE All-World index is now on its longest losing streak since the middle of 2008 – on a par with when the subprime mortgage crisis led to the collapse of Lehman Brothers.
Such erratic swings on the world’s stock exchanges are a reflection of the pessimism that haunts the ruling class. According to Warren Buffett, the billionaire investor: “We are not very far away from having something of a repeat of 2008, or even worse.”
“Markets are falling not just because of higher interest rates,” asserted Luca Paolini, chief strategist at Pictet Asset Management. “The risk of a recession [in major economies] is significant,” he added. “The reality is a big chunk of the global economy is basically contracting.”
Last year’s euphoria about a post-pandemic economic recovery has completely evaporated. Having seemingly overcome one crisis, another crisis has quickly appeared in its place. This has provoked panic in corporate boardrooms.
As the Financial Times, the mouthpiece of British capitalism, recently explained:
“Only last year, many economists were expecting 2022 to be a period of strong economic rebound. Businesses would return to full operation post-Covid. Consumers would be free to splash their accumulated savings on all the holidays and activities they had not been able to do during the pandemic. It would be a new ‘roaring twenties’, some said, in reference to the decade of consumerism that followed the 1918-21 influenza.” (2/5/22)
Such a boom, according to them, would open up a new epoch of growth and prosperity. But in a short space of time, this perspective has been reduced to rubble. Rather than a ‘roaring twenties’, capitalism is facing a new world slump.
We have entered a totally new era, to quote Kissinger – an era of deepening crisis, where the old norms have been turned upside down. “Reason has become unreason”. The underlying crisis of capitalism, which they thought they had contained, has resurfaced with a vengeance.
“This week, the economic mood music changed into a more anxious minor key, as recent shocks to developed world economies have echoed longer and louder than had been expected. Whatever you thought about the economy a week ago, you should be a little more worried than you were.”
Economic forecasts are being hastily downgraded. Many now expect global economic growth to average only 3.3 per cent this year, down from 4.1 in January, before the war.
Inflation, long considered dead, has again raised its ugly head, with the effect of devaluing currencies, pushing up costs, and cutting living standards.
Global inflation is now forecast at 6.2 percent – 2.25 percentage points higher than January’s forecast.
In the United States, inflation reached 8.3 percent in April, and it is expected to rise even higher. At the same time, the US economy also contracted in the first quarter, despite previous predictions to the contrary.
Many economies are facing ‘stagflation’ or even ‘slumpflation’. And this “stagflationary shock of 2022 is truly global,” explains the Financial Times.
This is a reflection of the increased integration of the world market, especially over the last 30 years. Countries are all bound together as never before, heightening the threat of contagion. This is the real meaning of ‘globalisation’.
Dismounting the tiger
Central bankers are desperately hoping that things will stabilise. But their predictions, as always, are overly optimistic. After all, they said the inflation would only be ‘transitional’ and ‘temporary’.
Their witch-doctor theories – whether Keynesianism or monetarism – have blinded them to the dire situation faced by capitalism. But now they are caught between the devil and the deep blue sea; or, more accurately, by the contradictions of capitalism.
For years, capitalism has been awash with cash, which has artificially kept the system afloat. From 2008 onwards, the ruling class pumped cheap money into the economy, keeping interest rates at historically low levels in order to stave off another depression.
Whilst they succeeded in their immediate goal, the capitalist system became addicted to this stimulus. But now we are seeing the consequences, with the ruling class belatedly being forced to take measures to dampen economic activity and reverse the policies of the last decade.
Normally, this excess liquidity would have long ago led to inflation. But this was held in check by the depressed state of the world economy. Everything has its limits, however. And the end of lockdown, followed in quick succession by the war in Ukraine, has served to ignite inflation.
The ruling class are therefore desperately trying to return to some kind of ‘normality’, by reining in the fiscal stimulus and rock-bottom interest rates, which have clearly become unsustainable.
Faced with an inflationary spiral, the Federal Reserve and the Bank of England have been forced to raise interest rates. Other central banks, starting with the European Central Bank, will inevitably follow suit.
Bloated balance sheets, laden with historic levels of debt, need to be reduced, but without causing a crash. Somehow, the era of cheap money must be brought to an end. But this will not be easy. It is like trying to dismount from the back of a hungry tiger without being eaten.
Given the situation, increasing interest rates and cutting back on the fiscal stimulus can clearly cause a deep slump. Many businesses have been kept alive by cheap money. And cutting back on this will push them over the edge, leading to widespread bankruptcies.
But this is the only way the bankers can ‘squeeze’ out inflation. To simply continue as before, pouring in liquidity, will also lead to disaster, provoking hyper-inflation and intensifying the crisis.
As Nouriel Roubini, professor at New York University Stern School of Business, warned: “Central bankers can take policy normalisation only so far before risking a financial crash in debt and equity markets.” But they have very little choice.
The prospects are looking increasingly bleak. As the Financial Times explained:
“The risk of recession on both sides of the Atlantic is now very high. Perhaps it is already too late, the inflation genie is out of the bottle and monetary policy needs to generate a recession to drive it out of the system. Alternatively, policymakers will be too cautious, too slow and allow inflation to persist and embed itself in the economy with the same ultimate consequences.
“The path we all desire is narrow and sits in between these economic disasters. It is possible we will eradicate high inflation without a deep economic downturn, but the odds on this favourable outcome are now low indeed.” (FT 15/4/22)
Rather than a ‘once-in-a-century event’, crises are becoming more frequent and more serious. This is the new rhythm of the boom-and-slump cycle.
Before the pandemic hit, the world capitalist economy was already slowing down, with increased protectionism and overproduction affecting different sectors. Coronavirus gave the crisis a new fatal twist, serving to sharpen and aggravate the contradictions in the system.
The chain of capitalism broke down at a whole series of points, disrupting both production and supply. This, in turn, led to the closure of large sectors of the economy, alongside a collapse in demand. Millions were laid off or furloughed, adding to the downward spiral.
This meant that markets, trade, and supply chains – the arteries of the world economy – were severely disrupted or completely paralysed.
What began as a developing crisis of overproduction ended with the physical lockdown and closure of many sectors of the capitalist economy.
As a result, in 2020, economic activity contracted in 90 percent of the world’s countries. This exceeded the proportion seen in both world wars, the Great Depression, and the global slump of 2008-09. The UK economy, for example, saw its biggest decline in 300 years.
Of course, such a collapse could not continue indefinitely. At a certain point, a recovery would inevitably take place, helped in large measure by unprecedented state stimulus.
This recovery was heralded as the beginning of a new era. Pent-up consumer demand, now being spent in bars and restaurants, and on holidays, was supposedly going to result in a robust economic revival.
Economies certainly rebounded for a time. Many reached pre-pandemic levels of output. But the recovery was continually cut across by disruption – or complete fractures – in supply chains, a legacy of the crisis.
‘Just-in-time’ production, which had boosted the capitalists’ profits in previous decades, became ‘nothing-in-time’ chaos, as key industries and sectors ran out of vital parts. These shortages, in turn, pushed up prices and provoked a new surge in inflation.
War and slump
The whole world situation has become exceedingly volatile. The very integration of world trade, which was a colossal boost in the past, has turned into its opposite. A single event in one country can have a massive knock-on effect elsewhere. The lockdowns in China, for example, which directly affect exports, are having an impact on world trade.
Equally, other factors – whether it is post-pandemic problems, war in Ukraine, political shocks, or other ‘accidents’ – can also have a decisive impact on the workings of the capitalist system.
Today, the conflict in Ukraine has set off a chain of events that is having far-reaching consequences – politically, diplomatically, socially, and economically.
The war has become a proxy war between Russia and the NATO countries, especially the USA, with billions of dollars worth of arms being poured into Ukraine by western imperialism.
This is having a massive impact everywhere. Economic sanctions imposed by the West, with the aim of isolating Russia from the world economy, will have grave implications.
The bone-headed American and British imperialists, in particular, appear blind to such consequences. They are prepared to risk everything to defeat Russia. But their actions are serving to exacerbate the crisis.
The surge in energy prices has pushed up costs and prices generally, as inflation takes hold everywhere. If Russian gas supplies to Europe are halted, which some are demanding, it will lead to an immediate slump, starting in Germany.
Economic sanctions – a war by other means – are intensifying the situation. In turn, consumer demand is being further eroded and capital investment halted, pushing the world economy further towards a new slump.
All these factors are dialectically interacting upon one another to drag things down. All the factors that contributed to the impetus of capitalism in the past are now the factors that are preparing the way for social and economic catastrophe.
“The war is in sum a multiplier of disruption in an already disrupted world,” states Martin Wolf, economics editor at the Financial Times. “Now alas, we are again on a downhill path to a world of division, disruption and danger.” (FT, 26/4/22)
The world economy is fracturing into blocs, and supply chains are being broken, as the West attempts to cut off Russian energy supplies and reduce the country’s access to currency markets.
We have entered a period of economic nationalism similar to the interwar period – a further reflection that private ownership and the nation state have become barriers to progress.
The consequences of these dramatic changes were highlighted by Pierre-Olivier Gourinchas, IMF chief economist:
“If we become a world of many different blocs, we will have to undo a lot of the integrated economies that we’ve built and supply chains that we’ve built…and build something else that is more narrow [and] smaller in scope.”
“There will be adjustment costs [and] there will be efficiency losses,” he added, “and that could lead to an increase in unit costs because things are not done as efficiently as before.”
“If we are in a world in which we have different blocs, then I don’t exactly know how the [IMF] can function. Does it become an institution that works for one bloc but not the others? How does it work across different parts of the world? It is certainly not something that would be desirable on many, many fronts.”
Limits of capitalism
The present crisis is undermining what is left of the postwar framework, clearly exposing the limits of the capitalist system.
“The weaponisation of finance has profound implications for the future of international politics and economics,” explained the Financial Times.
“Many of the basic assumptions about the post cold war era are being turned on their head. Globalisation was once sold as a barrier to conflict, a web of dependencies that would bring former foes ever closer together. Instead, it has become a new battleground.” (FT, 6/4/22)
The war in Ukraine has created havoc and shattered any hope of recovery. The dramatic rise in energy costs alone would be enough to upend the situation. On top of this, however, the fall in wheat and cereal production in Ukraine and Russia is sending food prices rocketing, with all the political implications that go with it.
As the Financial Times warned in March: “When food prices rose in 2008 it helped to spark the Arab spring and, eventually, civil war in Syria. Russia’s invasion of Ukraine has sown the seeds of a crisis that will be felt well beyond European borders.” (FT, 5/3/22)
By their actions, the bourgeoisie have opened up a Pandora’s Box. They have destroyed any semblance of stability or equilibrium, deepening capitalism’s contradictions everywhere.
Believing their own propaganda, they have intensified the capitalist crisis in ways that could not have been foreseen.
The whole scenario is laying the basis for a mighty upswing of the class struggle, in Britain and internationally. Inflation will cut living standards and dramatically push up the cost of living. The working class will have no alternative but to fight.
Following the First World War, Leon Trotsky explained that “the cost of living is the mightiest factor of revolutionary ferment in all countries”. It was this question that again served to raise the class struggle to new heights in the 1970s, placing revolutionary events on the agenda. This is about to be repeated – but on a far higher level.
As the IMF managing director Kristalina Georgieva warned: “History has shown that hunger often triggers social unrest and violence.”
It is not boom or slump that engenders revolution, but the shifts between one and the other, shaking up consciousness in the process. Plenty of inflammable material has accumulated in the recent period. And this is constantly increasing. The stability of the past is over.
Engels referred to the 40 years of sleep of the British working class, which was the prelude to the explosion of New Unionism in the 1890s. This opened up a new era of class struggle, war, and revolution.
Today, the ebb in the class struggle in the main capitalist countries – an ebb that lasted for more than three decades – is finally coming to an end.
As the fog of war lifts, and the reality of the capitalist crisis hits home, millions of workers and youth are going to be thrown into the class struggle. New fresh young layers are about to enter the struggle, untainted by the defeats of the past. Given the crisis, many are going to draw radical and even revolutionary conclusions.
The lament of Martin Wolf, a key strategist of capital, that we are “again on a downhill path to a world of division, disruption and danger” is a serious warning to the ruling class of what is coming.
What he is talking about, but dare not say by name, is revolution. For those who have eyes to see, this is exactly the nature of the period we have entered.