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Issue 53

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Issue 53, Jan/Feb 2001

Presiding over the downturn

    'Market falls worst in decade'
    World-wide consequences
    Searching for a political alternative

'HERE COMES THE SLUMP', warns the front cover of Time magazine (8 January 2001). 'Is Bush's team up to the task?', they ask. The cover picture shows a stereotypical working 'middle-class' family taking shelter behind sandbags, looking anxiously into the future. Dollar bills, automobiles and houses fall from the sky as the economic storm approaches.

How they have changed their tune! How many times in the past few years have Time, Newsweek and other popular journals extolled the wonders of the 'new economy'? They all helped to promote the fantasy that 'free markets' combined with new technology will ensure uninterrupted growth, unlimited rises in prosperity, and an end to the business cycle of boom and slump.

Now, much more frankly than the capitalist leaders of the United States and other advanced capitalist countries, Time bluntly points to the prospects for a slump, including the collapse of the technology sector.

"Karl Marx", comments their main feature, "theorised that capitalism was condemned to repeat depressions because of 'cycles of overproduction'." Marx, they say, may have got some of the details wrong, but if he viewed the US economy in the first week of January, "he would no doubt have felt vindicated".

We might also point out that developments of recent weeks also vindicate the analysis and prognosis made by this journal - as may be seen from a review of Socialism Today articles on the world economy (which now may be easily located through the comprehensive index for issues 1-50 published in this issue).


There have regrettably been many on the left, including self-ascribed Marxists, who succumbed to the new-economy delusions generated by the speculative boom of the late 1990s.

top     'Market falls worst in decade'

2001 OPENED WITH gloomy headlines in leading capitalist papers throughout the world. "Market falls are worst in decade", said the Financial Times (1 January), referring to major stock exchanges in New York, London and Tokyo. The Nasdaq market for high-technology shares, which led the expansion of the bubble until March last year, were down over 50% from their peak.

The most recent economic data amply confirms a downturn in the US economy. Growth of GDP was down from the 5.2% annualised rate of the first half of 2000 to 2.2% in the third quarter, and is probably still falling. The Index of Manufacturing Activity fell to its lowest level since April 1991. Though, as yet, there is no marked increase in unemployment, consumer spending is down and company profits continue to fall. The decline in the real economy has clearly accelerated the deflation of the stock exchange bubble.

Last year, total returns on US stocks, minus 11.6%, were the lowest since 1974. This contrasted to the staggering 270% cumulative return enjoyed by speculators over the previous five years (a compound rate of 30% a year). But share prices were grossly inflated in relation to company assets and profits, a bubble effect even more exaggerated than the bubble which preceded the 1929 crash.


Recent falls, moreover, are almost certainly just the beginning. As in 1929-33 there is likely to be a series of falls, punctuated by brief recoveries, giving way to further falls. Many business leaders and economic commentators are still clinging to the idea of a 'soft landing'. But the decline of share prices will help undermine manufacturing, the service sector, and construction.

The 'wealth effect', through which a portion of stock exchange profits are used to boost consumer spending, the locomotive of the US economy, will fade away. At the same time, the enormous mountain of debt which now exceeds the levels of the late 1980s will be exposed. Faltering companies will no longer be able to service their debt and will sink into bankruptcy, creating in turn a problem for some of the big lenders, especially finance houses which based their lending activities on massive borrowing on financial markets. Households who have piled up mortgage and consumer debt on the basis of optimism about jobs and incomes will find themselves in deep trouble. Then, further decline in the real economy will make the financial bubble, even after a few partial 'corrections', completely unsustainable. And so on. Worse is undoubtedly yet to come.

The working class in the US - and the same applies to the other advanced countries when they enter recession - will pay a heavy price for the speculative excesses of recent years. The bubble was fuelled by the super-profits gained through the intensified exploitation of the working class at home and in the underdeveloped countries. This was facilitated by the neo-liberal policies and practices implemented since the early 1980s. In recent years, workers got a few crumbs from the table of the Wall Street feast, but nothing compared to the banquets of the hyper-rich speculators. But it is the working class that will bear the brunt of mass unemployment, slashed incomes, intolerable debt and increased social tension.


There will be an explosion of discontent that will rock the corrupt political system which has just displayed all its worse features in the 2000 US elections. Sections of workers, and especially oppressed minorities, will be pushed into struggle. The most politically conscious layers, especially young people, will seek anti-capitalist ideas and will begin to rediscover the genuine ideas of socialism. As Marx said, a major capitalist downturn inevitably delivers a political blow to the system.

top     World-wide consequences

WHAT OF THE world economy? Again, many commentators, determined to be optimistic, assert that the world will not necessarily catch a cold just because the US sneezes. This view, in our opinion, is seriously mistaken.

First, it is not a question of a US 'sneeze' but of an episode of acute sickness afflicting an economy whose performance and policy dominate the world economy. Second, many regions of the world are already in a state of chronic malaise. Latin America, Africa, and most of the former Stalinist states of Eastern and Central Europe, are experiencing prolonged economic and social crisis.

Third, those regions which have experienced faster growth in the last few years, notably Europe (benefiting from the weakness of the euro) and some South-East Asian economies (which have apparently rebounded from the 1997 crisis), have only managed to go forward because they have been able to sell increasing quantities of relatively cheap exports to the US.


The US's massive trade deficit, pushed up by debt-propelled consumption and a 20% overvalued dollar, has been a crucial factor in the rapid growth of the world economy in the last two or three years. Any shrinkage of this 'market of last resort' through the contraction of the US economy will severely hit not only East Asia but also Europe, not to mention the rest of the world.

Japan, moreover, the world's second economic power, is still mired in stagnation despite a series of massive government spending programmes. Denied a significant portion of its export markets in the US, Japan too would be tipped from stagnation into slump. Apart from the effects on the Japanese working class, a worse crisis in Japan, whose continuing trade surplus is still being recycled to finance a big share of the US's foreign debt, would have enormous repercussions on the world economy.

US financial policy has also been crucial to the recent international growth spurt. Despite the faster world growth of 1998-2000, the onset of the Asian currency crisis in 1997 marked the beginning of a new period of crisis. This was followed by the meltdown of the Russian currency in 1998 and the near collapse of the US-based hedge fund, Long Term Capital Management, which brought the world financial system within a heartbeat of a systemic collapse. The US Federal Reserve intervened to avert a slump, bailing-out LTCM and enormously expanding world liquidity through lowering interest rates and expanding the supply of money and credit. This appeared to cut across the slump that gripped between a third and half the world in 1997-98.


There is a partial analogy with the Federal Reserve's reaction to the 1987 stock exchange collapse, when the injection of liquidity into world financial markets (on the basis of the Japanese and German surpluses) not only postponed a downturn until 1990 but gave another upward twist to the speculative boom of the 1980s. Similarly, US policy after 1998 pushed the US bubble up to even dizzier heights, accompanied by similar bubbles in Europe and elsewhere. The bubbles themselves, through the inflation of financial asset values, significantly expanded world liquidity.

But with the deflation of the US bubble this effect is coming to an end. It is possible that the further lowering of US interest rates by Greenspan could give another, final twist to the present speculative market. But this is not certain. The euphoria that accompanied the recent Federal Reserve's 0.5% cut was very short lived, followed by further falls on US and world bourses. Monetary policy alone cannot sustain swollen financial markets when the real economy and corporate profits are sliding down a slippery slope.

There is also the strong possibility that as the stock exchange bubble deflates the dollar bubble will also collapse. The overvalued dollar reflects the flood of overseas capital into the US, attracted by high profits and speculative gains. The inflow is essential to finance the trade deficit and ever increasing US corporate and household debt. At a certain point, the decline of the US economy will bring a severe crisis in 'confidence', leading overseas investors to withdraw their assets from the US (selling shares, bonds, businesses etc). This will inevitably lead to a fall in the dollar, and historically every episode of serious dollar weakness has precipitated a period of turmoil in the world currency system. This will threaten the eurozone and provoke chaos in world financial markets, which will especially destabilise the world's weaker economies.


If the life support flow of overseas capital to the US is turned off, or even drastically reduced, the US will no longer be able to sustain consumption in excess of production or finance the resulting trade and payments deficit. This in itself would force a severe contraction of the US economy. Even worse, whole swathes of US manufacturing and services will be threatened by the withdrawal of overseas investors.

Under such conditions the US is more than likely to turn back to some forms of capital controls and the protection of trade. When the world economy is expanding, US capitalism clearly has an interest in free trade. But when it begins to contract, the US (like Chile, Malaysia and some other countries in the recent period) will move to protect its own national interests - while no doubt continuing to preach free trade for the rest of the world.

There will not be an exact rerun of the 1930s. Because of the increased international interpenetration of production, trade and finance in the last two decades, regional blocs will play a much greater role than in the inter-war period. Nevertheless, the phase of globalisation which began in the late 1970s and accelerated through the 1990s - and introduced new features into the world economy - will reach its limits. It will give way to new variants of beggar-thy-neighbour policies through which the bigger economies will try to offload their problems onto their weaker rivals. Far from providing a way out for world capitalism, this will aggravate the economic and social contradictions.


top     Searching for a political alternative

UNFORTUNATELY, IT IS not possible even on the basis of Marxist analysis to predict the precise course of the downturn, the timing of the processes, its duration, or the depths it will reach. There are too many complex factors involved, which interact as events unfold and can only be fully delineated long after the event.

Nevertheless, we can make a general prognosis. The US is at the beginning of a downturn which is likely to be deeper than 1990-91 and will probably be much more severe in its international repercussions. Because of the pivotal role played by US capitalism, a US downturn will over a period pull the world into a recession. Some countries will be hit harder than others, undoubtedly, but the weakest economies will be devastated.

Processes of social upheaval and political turmoil, which have already produced insurgencies and revolutionary movements in countries like Indonesia and a number of Latin American countries, will unfold on an even bigger scale. There will be big movements of the working class, exploited layers of the peasantry, small producers and the dispossessed.

This time, unlike 1990-91, the events will not be taking place under the shadow of the collapse of the Stalinist states, which gave an enormous ideological boost to capitalism and produced a massive disorientation and fragmentation of the world labour movement. Nor will US imperialism, though still possessing enormous military power, exercise the unchallenged ascendancy it enjoyed at the time of the Gulf war.


Even the popular capitalist weekly Time has to confess that Marx would feel vindicated today. But the validity of Marx's ideas will be confirmed not only on the economic front but in the political sphere, too. Mass movements against the catastrophic effects of a world capitalist crisis will stimulate a search for a better form of society. And it is only the theory and programme of socialism, articulated through genuine Marxism (freed from Stalinist and reformist distortions), which can provide a viable alternative.

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