Two years ago this month, the credit crisis erupted and the world banking system was moments from collapse. Governments carried out huge bank bailouts, pumped money into the economy and invested in order to stimulate the economy. There was even talk of reforming capitalism and ending the power of the speculators. The world economy was rescued from a slump.
Now, the stimulus packages have ended and governments are attacking workers and welfare, slashing wages and benefits, cutting health and pensions. The fear in Washington and London is of a double dip recession or a long period of stagnation caused by the huge cuts in state spending. All talk of global recovery in the short term has been postponed.
President Barack Obama was elected promising that he would turn the economy around but another 54,000 jobs were lost in August, the third month in a row. The official unemployment rate stands at 9.6 per cent, with millions more on short-time working or no longer included in the figures.
The period between April and June saw the economy grow at 1.6 per cent, insufficient to bring down the unemployment rate, and even that rate is expected to decline later in the year.
The housing market is in a slump again with sales of new houses down by 12 per cent and of existing homes down by 27 per cent.
Obama has claimed his nearly one trillion dollar stimulus package has “stopped the economy bleeding”.
But many disagree. Nobel prizewinner Paul Krugman, who advocates government spending, said: “The stimulus raised growth while it lasted, but it made only a small dent in unemployment…and now it’s fading out.”
Others are even more pessimistic. Nouriel Roubini, professor at New York University and who correctly predicted the crash in 2008, said: “The US has run out of bullets.” The government has already pumped money into the economy, slashed interest rates to zero and invested in infrastructure and tax breaks, he said.
There are few tools left to try even if Obama wanted to. He has now announced £50 billion of road and rail building but this is insufficient to turn around the economy.
Roubini predicted GDP growth would be less than one per cent later in the year and said the US economy is facing a double-dip recession.
Germany reported growth rates of 2.2 per cent in the last quarter, which while much better than its competitors, depended on replenishing stocks and increasing exports – it is the second biggest exporter in the world after China. German manufacturers took advantage of the fall in the value of the Euro. Also China, which has invested heavily to escape the world downturn, is an important destination for German goods. But most German exports still go to the EU, and most of the EU is slumping.
The Bundesbank (the central bank) expects exports to slow up as the euro appreciates against the falling dollar, making exports more expensive.
But Chancellor Merkel is intent on carrying out savage cuts worth Euros 80 billion on social welfare in Germany and imposing similar cuts on the rest of the Euro area, which will undermine exports and damage consumer confidence. And with Greece, Spain, Portugual and much of Eastern Europe in deep crisis, it is hard to see the German recovery lasting for long.
The Con-Dem government has embarked on a huge attack on welfare, jobs and services in order to cut £100 billion from the deficit in four years (see pages 8-9).
This level of cuts is already worrying economists. In the April to June period this year, the economy grew at a rate of 1.2 per cent but already this is declining. Most of the growth was from manufacturing and especially construction, which benefited from the Labour government’s investment last year in building programmes. Restocking and the fall in the value of the pound (about 25 per cent) also boosted manufacturing exports.
But the Con-Dems have slashed investment programmes in schools, hospitals and house building in order to cut the deficit, leaving manufacturing and construction in the doldrums.
The Construction Products Association warned that government cutbacks on investment would “cause a double-dip recession for the sector” as new orders have already declined by 14 per cent.
In addition, the service sector, which accounts for the majority of the UK economy, is also slowing up with the worst growth rates for 16 months as consumer spending stagnates; the housing market also reported lower sales and mortgages over the summer.
Furthermore, the money needed for a new round of private investment to boost the economy isn’t there, the British Banking Association reported that last year banks lent only £900 million to businesses, a quarter of the average annual rate, despite being pumped full of money by the government.
Economy analyst company Markit, which carries out surveys into UK economy, said that the recent data points to next quarter growth being only 0.5 per cent.
The chief economist at the British Chamber of Commerce put the blame squarely on the government: “The huge scale of the retrenchment that the government wants to implement, will inevitably increase dangers of double-dip recession.”
Another danger is that the economy will end up like Japan’s: stagnating for decades. A spokesperson for Barclays Wealth said: “Double dip is now on everyone’s mind. ‘Japanisation’, or a long hard slog…is the worry.”
The major governments have adopted austerity policies in order to cut the living standards of workers and poor in order to hand more wealth over to banks, multinationals and rich.
Han-Werner Sinn, head of Germany’s IFO Institute, put the ruling class position succinctly recently when he said the people of the USA: “Would just have to see their living standards go down.”
The New York Times recently reported that profits were up on Wall Street and that the average pay of managers had increased by 11 per cent on three years ago. But wages for non-mangers had fallen by 10 per cent over the same period.
More than a million families are losing their homes in the US every year while unemployment increases. And one in six Americans rely on some form of government hand-outs with more than 40 million receive food stamps.
Youth are particularly hard hit with more than half of 16-24 year olds unemployed while only one in seven African-Americans in the same age group has a job.
Similar cuts are being carried out across Europe as the imperialist economies such as Germany offload the crisis onto their own workers and the smaller economies. Iceland and Ireland were the first victims of the crisis with wage cuts between 10 and 15 per cent, Portugal and Hungary face wage freezes for two years minimum while Latvia and Lithuania have had wage cuts of 20 and up to 50 per cent respectively. Greek workers face a wage cut of a quarter and then a five-year freeze.
Workers are being forced to pay more for pensions with contributions rising across Europe and the retirement age being raised. In the UK pensions are being tied to the lower of the inflation indexes and retirement age increased, Greece has frozen all payments and raised the age of retirement to 67 while Romania has cut pensions by 15 per cent.
VAT is also being increased all over the continent, this is a regressive tax and hits the lowest paid the hardest.
Even for the two countries seen to have escaped the worst of the global meltdown, India and China, the future is turbulent. The Chinese government has had to invest hugely to restructure the economy while facing a huge upsurge in workers’ struggles against job losses and factory closures. India’s growth rate of more than 10 per cent looks impressive but not when the inflation rate is the same and undermines the economy.
These cuts programmes are now the general policy of the world’s ruling class. The initial Keynesian reflationary programmes have failed – now they are shifting to a more direct policy: drive down working class living standards, whatever it takes.
The crisis of 2008 was caused by the returns or profits on investments falling because there was too much capital in the form of money, shares, other wealth such as buildings and goods in the world – what Marxists call the over-accumulation of capital. To make the returns on investments profitable once more, the ruling class must destroy capital, slash wages costs, privatise state services, force some companies into bankruptcy and even destroy plant, machinery and surplus goods.
The crisis is long and deep. Even when the recovery does pick up, it will feel like a recession for the mass of people with high unemployment, falling wages, reduced benefits and services; the rich will siphon off the profits and bonuses.
The crisis brought to an end a long period in which the capitalists thought they could stave off a downturn simply by extending credit. Now the desperate measures that governments took to avoid a complete meltdown in 2008 have also run their course. Millions are discovering once again that capitalist crises and recessions are not caused by this or that wrong policy, or by this or that dodgy deal, but are necessary expressions of the contradictions of capital itself.
The expansion of capitalism all over the world in the aftermath of the collapse of the USSR nearly 20 years ago certainly expanded this system, but also expanded its contradictions and its crises. We have entered a period in which the industrial cycles of 7-10 years will not disappear, but in which the upturns will be weak and curtailed, the downturns long and bitter.
As the capitalists desperately seek to squeeze profitability out of a contracting system, they will turn not only on the workers but increasingly on one another. Rivalry between states which are already trying to undercut one another in global export markets will become ever sharper and will invariably take the form first of diplomatic and ultimately of ilitary clashes.
This is a world system in decline which brings a huge reduction in living standards and the threat of more terrible destruction ever closer. If the great crisis brings with it one lesson above all, it is the need for the anticapitalist workers of the world to combine their forces in the closest possible unity, so that we can unite the resistance in every country and across borders, and direct it towards a globally co-ordinated challenge to capitalism itself. The question of building a new world party of social revolution – a Fifth International – is posed by the crisis of global capitalism itself.
