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A global shock to the system
Global capitalism faces its worst crisis since
1945. The collapse of the US housing bubble has triggered an economic
slowdown and the subprime finance crisis. These forces threaten a global
financial crisis and a serious downturn in the world economy. LYNN WALSH
analyses these developments and their implications.
GLOBAL CAPITALISM FACES its worse crisis since the
end of the second world war. "This is not a normal crisis", financier
George Soros told the gloomy delegates attending this year’s Davos forum
of big business leaders. "We are at the end of an era of credit
expansion…" The world economy faces a combination of financial crisis
and economic slowdown, both originating in the heartland of US
capitalism, with the two trends reinforcing each other. The fantasy of
‘decoupling’, according to which Europe, Asia and other economies could
grow independently of the US, has already been dispelled by the
beginnings of a slowdown in Europe and Asia. Instead, there is, in
reality, a ‘recoupling’, as the US slowdown impacts on the rest of the
world. Inevitably, if the US goes down it will drag the rest of the
world with it, to a greater or lesser extent. The forces that have
produced the US downturn have taken a year or so to develop, and the
effects of a US recession will take time to work through the world
economy.
The collapse of the subprime housing loan market in
the US is a major crisis in its own right. Major banks like Citicorp,
the world’s biggest bank, have announced record losses – Citicorp was
forced to write off $18 billion in dodgy housing loans. Altogether, US
and European banks have written off over $120 billion, and there is
undoubtedly much more to come.
More recently, the previously unknown ‘monolines’,
the bond insurers, which have come to play a key role in the bond and
securities markets, have been forced to announce huge losses, with the
US authorities now trying to mount a $15 billion rescue of a number of
these bodies.
In the week beginning 21 January, stock exchange
speculators around the world at last began to catch up with reality,
waking up to the growing evidence of a US and world recession. Shares
plunged between 6-10% on major exchanges, and are now between 15-20%
down on last October’s peak prices. A 20% fall is officially a ‘bear’
market.
The huge losses (€4.9bn, $7.2bn) incurred by the
French bank, Société Générale, as a result of a rogue trader, is another
symptom of the crisis. The forced sell-off of shares by the bank to
cover its losses may have contributed to the sharp fall on major stock
exchanges. But it is absurd to try to blame the crash on the hapless
Jérôme Kerviel. In reality, SocGen’s losses were just one symptom of a
general crisis, at most exacerbating the problem. It is predictable that
Kerviel’s fraud will only be the first of many that will be uncovered in
coming months, just as the Enron crisis in 2001 was followed by a series
of scandals involving big corporations like WorldCom and a whole string
of top investment banks.
Alarmed by worldwide stock exchange falls, Ben
Bernanke, chair of the US Federal Reserve, dramatically cut interest
rates by 0.75% to 3.5%, the biggest single rate cut since 1983. This
move stabilised stock markets, with many regaining their previous
levels. However, lower interest rates, while they may ease the immediate
liquidity crisis, will not overcome the paralysis of the financial
system – and stock exchanges will continue to be highly volatile.
These events were reflected at Davos, the annual
forum for capitalist leaders, where the optimism of last year –
stimulated by record profits and bonuses for the bankers – was replaced
by doom and gloom. Most Davos delegates considered Bernanke’s rate cuts
‘too little, too late’. "There are hardly any dissenters from the view
that the US is in recession – the debate is only over how deeply and for
how long". (Lex, Financial Times, 22 January) Beyond wealthy financial
circles, however, Bernanke’s move has reinforced the view that the Fed
is always ready to step in to help wealthy investors, but not so helpful
when it comes to helping working people.
Already, the financial crisis and the prospect of a
serious downturn have shaken confidence in the ‘magic of the
marketplace’. Global economic crisis will have a profound effect on the
consciousness of the working class and labouring poor around the world.
In the US, a pro-free market commentator, David Brooks, warned of "a
backlash against Wall Street and finance sweep[ing] across a recession
haunted country". (International Herald Tribune, 26 January)
US recession
AFTER SLOWING DOWN last year, US capitalism is now
sliding into recession. The only questions are how deep will it be and
how long will it last? Given the combination of a housing slump, a
severe credit squeeze and a crisis in the financial system, the downturn
will clearly be more serious than the relatively shallow recessions of
1990-91 and 2001. The credit crunch, which has only just begun, will
increasingly retard economic growth, while minimal or negative growth
will exacerbate the financial crisis. This vicious circle makes it most
likely there will be negative growth for two or more quarters (the
official definition of a recession), followed by a slow and painful
recovery.
The puncturing of the housing bubble is a key factor
in the US economic slowdown. House prices were pushed up by the flood of
cheap housing loans, allowing many home owners to convert part of their
equity into additional spending power. This boosted consumer spending
(even more than the ‘wealth effect’ from the 1990s share bubble) which
accounts for 70% of the US economy. At the peak of the bubble, home
owners were drawing $700 billion a year from their homes. This has now
fallen to under $200 billion.
To extend the scope of their highly profitable home
loans business, many of the banks and other dodgy mortgage lenders
developed the ‘subprime’ mortgage sector, lending to people who could
not really afford to purchase their homes. Borrowers were seduced with
low ‘teaser’ rates which subsequently shot up, interest-only repayment
schemes (which only work out when house prices continue to rise), no
down payments, etc. Now there are revelations of deception and outright
fraud by property agents, mortgage brokers, etc, who made huge fees out
of the subprime operation. The banks which ultimately financed the
operation convinced themselves that they had abolished the inherent
risks involved by securitising the loans, bundling them into complex
packages that were sold on to investors.
The excesses of the subprime mortgage market have
now rebounded on the finance sector, triggering a generalised liquidity
and credit crisis. Moreover, as the recession deepens, the loans crisis
is spreading to many ‘prime’ borrowers who are being hit by unemployment
and squeezed incomes. In fact, the piling up of housing debt is proving
to be a disaster for many working-class and middle-class families.
There is now a glut of unsold houses, and the rising
number of foreclosures will add to the problem. House prices are down 6%
from the peak (10% in real, inflation-adjusted terms). But the house
price ‘correction’ is far from complete: prices are likely to fall by
20% or 30%, which would wipe out between $4-6 trillion of housing
equity.
The subprime sector alone will result in about two
million foreclosures (repossessions), while a 30% fall in house prices
would plunge over ten million households into negative equity (owing
more than the value of their houses).
As mortgage borrowing has slowed, credit card and
other forms of consumer debt have risen. The household debt ratio is now
136%. At the same time, people have been hit by higher petrol and
heating fuel prices. Sales over the Christmas holiday were down, and
unemployment rose sharply in December. It was the biggest rise in the
unemployment rate since the 9/11 attacks in 2001. In December there was
an increase of only 18,000 jobs with the private sector actually losing
13,000 jobs. Despite the increase in manufacturing exports, the
manufacturing sector lost 31,000 jobs in December (bringing the total
lost for 2007 to 183,000). After growing about 2% in 2006, both hourly
and weekly earnings fell in 2007. The poor job figures, issued at the
beginning of January, were one of the signals which prepared the way for
the stock exchange plunge on 21 January.
The growth of corporate profits, which soared to
record levels in recent years, has also begun to slow down. For the S&P
500 companies, profits per share declined by 2.8% in the third quarter
of 2007 compared with the previous year. "An earnings recession is now
under way", commented a Morgan Stanley analyst in December (Morgan
Stanley GEF, 3 December 2007). "Pressures on profit margins will
contribute to weaker capital spending and perhaps depress hiring".
Clearly, the liquidity squeeze (shortage of ready
cash) that began last summer has turned into a full-blown credit squeeze
(shortage of capital) which is now affecting wider and wider sections of
the economy. A protracted credit squeeze is likely to produce a severe
downturn, but if this turns into a systemic breakdown of the financial
system, US capitalism could be plunged into an even deeper downturn.
Is there a way out?
CAN ACTION BY the Federal Reserve and US government
avert a recession? Bernanke’s 0.75% cut in the base rate on 22 January
was designed to further ease the credit crisis and reassure Wall Street
investors. The Fed may cut rates further over the next few months. But
the general view of capitalist policymakers (reflected in the reaction
at Davos) is that it is ‘too little, too late’. When overstretched banks
and financial institutions are facing a shortage of capital, a lower
base rate, in itself, will not solve the problem. Moreover, since the
subprime crisis erupted last August, all lenders have become much more
restrictive, imposing tighter conditions and higher interest rates on
both company and household borrowers. This situation could continue for
a prolonged period, even if the Fed further reduces rates.
On 23 January, George Bush and congressional leaders
agreed a stimulus package in an attempt to head off a recession. The
package amounts to around $150 billion or 1% of US GDP. Bush dropped his
earlier demand to make his previous tax cuts (for the super-rich and big
corporations) permanent but the ‘compromise’ negotiated with House of
Representatives Democrats is mainly based on tax rebates and other tax
concessions that will mainly benefit the wealthy and big business. Bush
conceded that every worker earning less than $75,000 would receive a
$300 rebate, including many who are currently paying no tax. At the same
time, the package will pay additional amounts to higher earners and
business. This means that most of the money will go to people who are
well off and are unlikely to spend the extra cash immediately. The
package does not include measures advocated by some Democrats, for
increased state spending on schools and infrastructure and emergency aid
to state and local governments (whose tax revenues are being undermined
by the property crash and economic slowdown).
The package has yet to be approved by the Senate
Democrats, but its main ingredients seem clear. The Democratic leader,
Nancy Pelosi, described it as "a remarkable package", but New York Times
columnist, Paul Krugman, commented: "The worst of it is that the
Democrats, who should have been in a strong position… appear to have
caved in almost completely… They extracted some concessions, increasing
rebates for people with low income while reducing giveaways to the
affluent…" (International Herald Tribune, 26 January 2008)
This fiscal stimulus package will not avert a
recession, which is already gaining momentum, though it may cushion the
downturn after a time lag.
Neither the Fed’s interest rate cut nor Bush’s
fiscal package will reverse the housing slump or rapidly overcome the
colossal debt burden of the financial sector. Even if interest rates are
reduced to a lower level (to a near-zero level in real terms, given
current inflation), they will not succeed in reviving the economy
through another credit-driven housing boom. In this respect, the lesson
of Japanese capitalism in the 1990s is clear. Japan’s massive
debt-overhang from its frenzied property boom of the late 1980s
paralysed the economy for over a decade, and still weighs to some extent
on the economy. Neither negative real interest rates nor a series of
massive government spending packages succeeded in stimulating sustained
growth in the Japanese economy. "In 2001", comments Wolfgang Munchau,
"the US got away with an unusually short recession helped by aggressive
interest rate cuts and an expansionary fiscal policy. But in Japan in
the early 1990s, and in Germany in the early part of this decade, it
took ages for low interest rates to help the real economy". (Financial
Times, 20 January 2008)
Nor will increased exports provide an easy way out
for US capitalism. Exports have grown faster recently, but they account
for only 12% of GDP. Such is the deindustrialisation which has taken
place over the last three decades, the US could only significantly
increase its export growth on the basis of large-scale capital
investment in new plant and equipment, which is unlikely to take place
under existing conditions. Moreover, a slowdown in the rest of the world
will cut the markets for US exports.
Financial crisis
US CAPITALISM IS gripped by a severe credit crisis,
which is spreading to Britain and other European economies. This
financial crisis was triggered by the US subprime meltdown, which
brought massive losses to major banks like Citicorp and investment banks
like Merrill Lynch. Over 200 US housing lenders have gone bankrupt, and
more will follow. The subprime losses in the US, Britain, Germany and
France already surpass $120 billion, and could rise to $250 billion or
$500 billion. As the credit crunch spreads to other sectors, the total
losses could be colossal.
The shaky housing loan sector, however, is only part
of the huge superstructure of inflated assets – shares, currencies,
derivatives, credit swaps, commodities, etc. The trading of these assets
was all based on the use of huge amounts of credit (leverage) and
reliance on complex financial instruments, such as derivatives, credit
swaps, etc. In the US, for instance, reliance on debt rose from $1.50
per dollar of GDP growth during the post-war upswing to $3 in the 1990s,
and to an unprecedented $4.50 per dollar of GDP growth in 2007. Now the
whole edifice is threatened with collapse. The crisis has already spread
to property investment companies (with Scottish Equitable recently
suspending withdrawals) and, more crucially, to the ‘monolines’, the
bond insurers who supposedly guarantee the investment grade quality of a
huge range of municipal and company bonds.
Measures taken by the central banks, cutting the
base interest rates and extending credit to the major banks, has eased
the immediate liquidity crisis. Interbank lending, which completely
seized up when the subprime crisis broke last August, has begun to
function again (though at higher rates of interest than before). But
this has not eased the credit crisis. The major banks are hoarding
capital, fearing further losses which they cannot at this stage fully
calculate. In recent years, the banks made loans to borrowers on a huge
scale and then packaged them into securities which were then sold on to
investors. This proved extremely profitable for the banks and other
financial intermediaries. The use of derivatives, it was claimed, spread
the risk of losses as a result of borrowers’ defaults, virtually
abolishing risk. Ultimately, however, the shadow banking system which
developed, largely free from any government or central bank regulation,
broke down under the impact of rising subprime housing defaults in the
US.
Suddenly, the big banks were forced to take direct
responsibility for their ‘off balance-sheet operations’, conducted
through various arms-length investment vehicles. Now, even though the
immediate liquidity crisis has eased, the banks have become much more
restrictive in their lending, imposing tighter conditions and charging
higher interest rates (despite the fall in central bank rates).
Chain reaction
WHEN THE CRISIS came in the form of the subprime
crisis, there was panic throughout the banks and other financial
institutions. No one knew where the risk was – in fact, risk was
generalised, the whole credit system was contaminated by toxic loans,
many of them as yet unidentified.
The subprime crisis marked the beginning of a chain
reaction which is still continuing. The crisis of the monolines, the
bond insurers, has now come to the fore. Altogether, the monolines are
estimated to be insuring $2,400 billion-worth of bonds. However, the
increased risk of defaults on the insured bonds has raised the spectre
that the monolines have insufficient capital to cover all likely losses.
Ironically, the credit ratings of some of these monolines have now been
downgraded, effectively making them insolvent. Two of the biggest, Ambac
and NBIA, have combined losses of $8.5 billion – and there is currently
a desperate rescue operation, mounted by Eric Dinallo, the New York
State insurance supervisor, to raise $15 billion from major banks in
order to prevent a collapse of the monoline sector. This hangs in the
balance. If the rescue fails and a series of monoline insurers
collapses, a systemic financial crisis could be triggered.
Some of the major banks, like Citicorp and Merrill
Lynch, have gone with their begging bowls to the sovereign wealth funds,
the investment funds set up by oil producers, China, etc, to channel
their huge foreign currency reserves into investments in the advanced
capitalist countries. This may prevent the bankruptcies of the major
banks, but this source of additional capital is not available to the
smaller banks, which are desperately hoarding cash and imposing tighter
credit conditions on businesses and household borrowers.
The present crisis marks the end of the recent phase
of globalisation, which has been dominated by frenzied financial
speculation. This was fuelled by a tidal wave of cheap credit. This
originated (as we have previously explained) in the surpluses of the oil
exporters, China (with its huge trade surplus), and the excessive
profits of the big corporations (based on the intensified exploitation
of the proletariat combined with low levels of capital investment). This
orgy of credit-fuelled speculation and profiteering inevitably reached
its limits and has now resulted in a massive credit crunch. The massive
burden of debt will now be a dead weight on the world economy, dragging
the whole world economy into a recession.
An economic downturn is under way, and the only
question is how serious it will be. However, there is also the
possibility of a series of major financial crises, or even a systemic
breakdown of the global system.
So far, the collapse of a major bank or finance
house has been averted. But it is clear that a number of major
institutions are facing not merely a credit crisis but the possibility
of insolvency. However, the massive sell-off of shares by Société
Générale, triggered by the discovery of a $7.2 billion (€4.9bn) fraud,
apparently played a role in triggering the stock exchange falls in mid
January. So far, Société Générale has been shored up, but there remains
the possibility of a series of major banks or finance houses facing
insolvency, which could trigger a much more serious crisis. The
situation is far worse, for instance, than the collapse of the hedge
fund, Long Term Capital Management, in 1998, which was rescued by a
consortium of major US banks. Fortunately for US capitalism, LTCM turned
out to be an isolated case.
Government and central banks are now calling for
tighter regulation of a whole range of activities, especially the
operations of the shadow banking system. But the damage has already been
done, and it is too late to eradicate the effects of all the dubious
operations of recent years, including outright fraud which will
undoubtedly emerge. Central banks will undoubtedly attempt to prop up
banks and ease the credit squeeze with lower interest rates. They may
also try to collaborate in controlling wild gyrations in the world
monetary system. But it is much harder for them to influence capital
flows and currency alignments than in the past. Currently (according to
the Bank for International Settlements), over $3.2 trillion is traded
every day on world currency exchanges, a 70% increase from 2004.
Global outlook
THE US RECESSION will bring a global economic
downturn. The crisis in the US financial system will in itself have a
major impact. But from the point of view of production and trade, the US
still has an immense influence. It accounts for 25% of world GDP and its
consumer market is six times as big as those of India and China
combined. When the US sneezes the rest of the world inevitably catches a
cold. If the US gets a bad dose of flu, however, the rest of the world
may well get pneumonia.
Over the last few years, the idea of ‘decoupling’
has been popular among both speculators and government policymakers.
Europe and Asia, it was claimed, were increasing their own internal
trade, becoming less reliant on the US market. This illusion arose on
the basis of the slowdown of the US economy during 2007, while China,
India and other economies were still accelerating. It was inevitable,
however, that when the US went into recession, it would have a major
impact on the Asian economies, as well as Europe and other regions. This
has already been borne out by current trends.
Ironically, the decoupling argument was promoted by
financial wizards at the investment bank, Goldman Sachs. Recently,
however, a Goldman Sachs economist, Peter Berezin, announced an
about-face: "What began as a US-specific shock is morphing into a global
shock". (Bloomberg, 7 December 2007) Of the 38 countries they monitor,
Goldman expects growth to weaken in 26. Stephen Roach of Morgan Stanley,
always sceptical about decoupling, commented: "The American consumer is
the big gorilla on the demand side of the global economy. As the
slowdown goes from housing to consumption, we will find the world is not
as decoupled as it thinks".
A recent report confirmed the impact that slower US
growth is already having on Asian exporters. "From Chinese garment
companies to Japanese equipment manufacturers, Asian exporters say they
see weakening demand from the United States, a development with
potentially wide-ranging effects for Asian economies". (Exporters across
Asia Brace for US Downturn, International Herald Tribune, 25 January)
A Chinese garment producer, for instance, reported a
20% fall in US demand this winter. "We anticipate that this year, 10-20%
of the knitwear factories will have to close due to the inability to
compete", commented the sales manager of Evergreen Knitting, Ningbo,
China.
Japan is also being hit: "Now we see ‘recoupling’.
The economy of Japan is proving disappointingly fragile to external
shocks", commented a Goldman Sachs economist based in Tokyo. In
November, exports to the US dropped in dollar terms compared with
November 2006 for Japan, Malaysia, Thailand, Australia, Bangladesh, Sri
Lanka, Cambodia and Indonesia.
Europe will also be hit by the US slowdown (apart
from the impact of the financial crisis). Moreover, the housing bubbles
in Britain, Spain, Ireland and other European countries are also in the
process of deflating. Given the crucial role the housing bubble has
played in driving consumer spending, there will undoubtedly be a
slowdown in Europe, though it may not be so severe as the US and will
vary from country to country.
The Chinese economy grew by 11.4% in 2007, the
highest growth rate in 13 years. The trend of declining exports,
however, will mean slowing growth in the next period. The idea that
China could rapidly switch to stimulating domestic demand is fanciful.
Low wage levels and huge inequalities mean that domestic purchasing
power is extremely low. The rapid growth of the Chinese economy over
recent decades has been structurally dependent on export growth, using
the foreign currency revenue from exports to finance investment and the
purchase of raw materials. The switch to dependence on internal demand
would mean a painful readjustment, which could only take place over a
considerable period of time.
Moreover, a collapse of China’s stock market as a
result of the world financial crisis could have a major political impact
in China. Paradoxically, the stock markets play very little part in
China’s real economy. However, over 100 million people have invested in
shares, mostly during the last few years of booming prices. A massive
sell-off would wipe out the household savings, pension provision, etc,
of millions of families who were encouraged to invest in the stock
exchange by the Chinese government. "Large-scale public protest is a
possibility: thousands of irate investors demonstrated at the
headquarters of the ministry of finance the day after the increase in
trading tax by 0.2% last May, precipitating an instant sell-off".
(Financial Times, 21 January)
It is also fanciful to believe, as some western
commentators do, that household savings in China, and for that matter
India and other Asian countries, can be used to finance a new growth
cycle in the advanced capitalist countries. The lack of a social safety
net, for instance, with the elimination of village communes and the
‘iron rice bowl’ provided by state-owned enterprises to their workers,
has meant that families have tended to save more in order to provide for
ill health and old age. They are not easily going to hand over their
vital family savings to western capitalists, especially if they see
investors burn their fingers in a crash of the Chinese stock exchanges.
World export growth will also be hit by a decline in
the price of oil and other commodities, as world demand slackens. This
will cause major problems for regimes that overwhelmingly depend on the
revenue from commodity exports, for instance Putin in Russia, the
Iranian regime, and the Chávez government in Venezuela. Moreover, their
demand for imported manufactured goods will be severely reduced.
The Federal Reserve has cut US interest rates to
3.5% and other central banks (Bank of England, European Central Bank,
etc) are likely to follow with rate cuts, though probably not so
drastically. Lower interest rates will ease the liquidity problems of
banks and businesses, but will not themselves overcome the credit
crunch, or stimulate a revival of demand for goods and services.
Leaders of the Bank of England (Mervyn King) and the
European Central Bank (Jean-Claude Trichet) have so far been reluctant
to cut interest rates to the same extent as the Federal Reserve. They
argue that there is still a serious danger of inflation, fearing the
prospect of a return to ‘stagflation’ (as in the 1970s), combining slow
or even negative growth with accelerating inflation.
How likely is this? In the short run, it appears
that capitalism faces a more serious threat from recession or slump than
from a revival of inflation. The main ingredients of inflation in the
last period have been soaring oil and gas prices, commodity prices, food
prices, etc. This is a product of rapid growth in China, India, etc. The
prices of these commodities will decline as growth slows. At the same
time, a slowdown of growth has a deflationary effect, with increased
unemployment and lower wage levels accompanied by overcapacity and
overproduction of goods.
Wage levels cannot seriously be blamed for higher
inflation, as real wages have generally trailed behind rises in the cost
of living. In the future, the threat of inflation could re-emerge,
especially if US capitalism attempts to pay off its international debts
by printing dollars, flooding the world with devalued dollars. However,
in the short term it seems more likely that world capitalism faces a
period of stagnation and deflationary trends similar to the position of
Japan during its decade-long stagnation in the 1990s.
Major economies, particularly those with balance of
payments deficits, will attempt to revive domestic growth through the
growth of exports. But they will all be competing with one another in a
shrinking world market. This may lead to competitive devaluation of
their currencies in an effort to boost their export sales.
The incipient trade wars of the last few years,
moreover, will escalate, with the adoption of more and more
protectionist measures. The US, for instance, has had a certain growth
of exports and may well encourage the decline of the dollar in order to
promote its exports. However, a collapse of the dollar would provoke
turmoil in the world currency system, aggravating the crisis in the
world finance system.
Whatever the precise character of the unfolding
downturn, whatever its duration, the coming period will be one of
growing difficulties for world capitalism. The ‘successes’ of
globalisation will evaporate, to be replaced by sharpened antagonisms
between rival capitalist powers and intensified social and political
crises.
Political consequences
LAST YEAR, WE said that the subprime crisis and its
repercussions marked a turning point, and this has now been amply
confirmed. Global capitalism now faces a combined financial crisis and
economic slowdown, which will interact and deepen the crisis. This marks
the end of the recent phase of globalisation, which has been dominated
by finance capital and a frenzied short-term drive for profit. For a few
years, this promoted rapid growth in China and to a lesser extent the
United States, the binary axis of the world economy. Now it has turned
into its opposite, with a recession in the US that will drag China and
the rest of the world down with it.
How has the crisis come about? The capitalists can
blame nobody but themselves. The ‘success’ of globalisation has been
undermined by the system’s inner contradictions.
In the last period the capitalists have surely had
everything they could wish for. There has been the largely unfettered
working of the free market, with little or no regulation of the shadowy
financial networks that flourished in the period of securitisation,
derivatives, etc. Governments of both ‘left’ and ‘right’ have promoted
the interests of the banks, big corporations and the super-rich. The
share of wages in the wealth produced has been reduced to record lows,
while there has been an unprecedented surge in profits. Facing minimal
taxation, the super-rich have enormously increased their share of the
wealth.
Yet their system is once again in deep crisis and
the working class and poor labourers internationally will pay the price.
Millions will lose their jobs, their houses, and their modest savings. A
serious recession – or to put it bluntly, a slump – possibly followed by
a period of stagnation, will impose terrible hardships on the working
class and the poor. In the case of a serious slump, workers can
initially be shocked, preoccupied by the struggle for daily existence.
But there can also be defensive struggles against attempts by the
capitalists to offload the crisis onto the working class, such as the
strikes we have seen in the recent period in Latin America, Germany,
France and elsewhere.
The world economic crisis of capitalism, however,
will also provoke a political crisis. The economic downturn, financial
crises, and the events through which they will unfold, will have a
profound effect on the consciousness of the working class, especially
its advanced layers. Already there is a questioning of the viability and
legitimacy of the free-market capitalist economy. The Financial Times
columnist, Martin Wolf, a fervent advocate of globalisation and
neo-liberal policies, recently wrote: "I now fear that the combination
of the fragility of the financial system with the huge rewards it
generates for insiders will destroy something even more important – the
political legitimacy of the market economy itself".
The more politicised workers will also increasingly
challenge trade union and labour leaders who have embraced the market
economy and support neo-liberal economic policies, who now act as a
barrier against working-class struggle. There will be intensified
battles to reclaim trade unions as democratic organisations of mass
struggle, and renewed moves to establish new mass workers’ parties that
can mobilise workers and give them a class voice.
Increasingly, rejection of a crisis-ridden
capitalism will be reinforced among the conscious layers of workers by
support for an alternative to capitalism based on democratic socialist
planning on an international scale, together with workers’ democracy.
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