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World Economic Perspectives

posted 2 Feb 2011, 16:35 by Admin uk   [ updated 2 Feb 2011, 16:37 ]

First published on

We have just come through the most severe crisis of capitalism since the Second World War. Though the Great Recession has been declared by economists to be at an end, in fact the crisis is still rolling on, destroying the livelihoods of millions of workers all round the world in its progress. It will continue to do so for years to come.  

The crisis represents a fundamental change in the objective situation and for the opportunities opening up for Marxists. It is bound to produce a mood of questioning, a profound transformation in the consciousness of the working class, a whole series of struggles against cuts in living standards and public services, and ultimately against the capitalist system itself.  

A Credit Crunch?  

The Great Recession, which we saw the first signs of in 2007 and began in earnest in 2008, is usually described as a financial crisis. At its outset it was dubbed ‘the credit crunch’. In fact it was a classic crisis of capitalism, but there is no doubt that the crisis first made its appearance in the financial arena.

The reason a crisis of capitalism is bound to affect the financial sector stems from the very nature of the capitalist system. It is an unplanned system in which commodity production is generalised. Everything is swapped around, and the division of labour established, with the aid of money. The financial sector handles the system of monetary circulation and payments. So a financial crisis becomes a general crisis of capitalism.

The outbreak of the credit crunch meant that banks were unprepared to lend to one another, and also that lending to capitalist firms and other customers ground to a halt. This has happened before. In the quote below Marx predicted precisely what happened in the Great Recession of 2007:

“In a system of production where the entire interconnection of the reproduction process rests on credit, a crisis must evidently break out if credit is suddenly withdrawn and only cash payment is accepted, in the form of a violent scramble for means of payment.” (Capital Vol III, p.621)

The credit crunch burst out because of subterranean currents rooted in the explosion of consumer credit during the preceding boom and, in particular, in the bubble in housing in some advanced capitalist countries  – prices kept rising up to an unsustainable level.

The reason the crisis has been so serious lies in the fact that the ‘real economy’ was in such an unstable and weakened condition when the credit crunch broke out.

The credit crunch was a trigger rather than the root cause of the crisis. A crisis of some sort was latent in any case as a result of the fundamental tendencies of capitalist production. Capitalism naturally and inevitably goes through cycles of boom and slump.

The unstable, lopsided boom

The 2001 recession was followed as ever by a recovery. The subsequent boom was however quite anaemic, particularly in the advanced capitalist countries. For instance, in the USA growth has only been about 1.9% p.a. over the past decade, the lowest rate since the 1930s. The new millennium economy grew far slower than in the golden age in the post-War boom (1948-73), which can now be seen as a unique period of capitalist prosperity, relatively full employment and steadily rising working class living standards, at least for the advanced capitalist countries.

Optimism grew along with the economic boom after 2001. The Governor of the Bank of England, Mervyn King, referred to this decade as NICE, ten years of Non Inflationary Constant Expansion. He was a little premature in this prediction. The British Chancellor of the Exchequer and later Prime Minister Gordon Brown assured us there would be “no return to boom and bust”. Ben Bernanke, Chair of the Fed, the US central bank, operating with a longer time scale, talked of the Great Moderation in recent decades. He meant that, though there have still been economic fluctuations, they have been milder and no longer threatened the capitalist system like the convulsions in the 1970s and early 1980s. They were all proved wrong.

The rate of profit in the boom

If the credit crunch was the trigger for the crisis, the underlying cause was movements in the rate of profit. This is because of tendency for the rate of profit to fall, analysed by Marx. The tendency does not work itself in a straightforward decline, but in rises in the rate of profit that produce an economic upturn and falls that presage the coming of recession. The rate of profit revived after the 2000-01 crash and rose till 2005 or 2006, when it collapsed again.

In a crisis the ruling class struggles to restore the rate of profit by using mass unemployment to increase the rate of exploitation of the working class. It wages a one-sided war on wages and conditions on the shop floor. Also the destruction of capital eventually paves the way for a reduction in the organic composition of capital, a revival in the rate of profit and an economic recovery. Capitalists in the end cannot resist the working out of the objective laws of capitalism, however much they try to squeeze the workers. Falling profit rates have returned to haunt world capitalism.

As the rate of profit declines for productive capitals, more and more capitalists will opt to speculate instead of investing. Since speculation does not produce surplus value, this speculative flurry will make the situation worse for the capitalist system as a whole. That is what has happened in the recent boom.

More than any upturn in history the recent boom has been supported by a gigantic bubble, mainly in house prices. This bubble only occurred in a few advanced capitalist countries, most notably the USA. But the recession began in America with the bursting of the bubble and was transmitted to the rest of the world through the US banking system. America showed by its devastating effect on the world economy that it remained a hegemonic power within world capitalism. This was despite fashionable talk at the beginning of the recession that countries such as China could decouple from the gravitational pull of the US economy.

Global imbalances

The house price bubble was not the only ‘imbalance’ in the boom. During the boom we had the unusual situation that China (a relatively poor country) was exporting capital on the grand scale to prop up consumption in the dominant imperialist power in the world, the USA. Throughout the decade the rising Chinese economy was running a huge bilateral surplus with America, exporting far more than it was importing from the States. China then channelled a large part of this money back into the USA by buying Treasury Bonds and other government securities. In effect China was lending the US the money it needed to buy Chinese goods. Clearly that was not sustainable in the long term either.

Boom and bust are not caused by global imbalances. Imbalances are a permanent feature of capitalism. Rather than seeing these imbalances as aberrant, Marxists see combined and uneven development as the way capitalism naturally develops. Global imbalances are just an expression of the law of combined and uneven development.

Consumer credit and housing bubble

The consequence of this monetary inflow was that the Fed under Alan Greenspan was able to hold interest rates in the USA at a very low level. This fuelled the explosion of credit and the housing bubble. This in turn fed a consumer boom in the USA which was not based on rising working class living standards, which were largely stagnant or only growing slowly there. By 2005 Americans were head over heels in debt. The boom and the bubble fed on one another. As long as the bubble kept inflating, all was well.

Artificially expanding the market with easy credit can feed growth, as long as the capitalists are faced with profitable investment opportunities. When the rate of profit turns down, the apparently miraculous possibilities for expansion provided by consumer credit will suddenly dry up.

Sub-prime mortgages

The iceberg on which the unsound, unstable boom finally foundered was the development of sub-prime mortgages (loans to buy a house), particularly in the USA. ‘Sub-prime’ means that agents were targeting people with no income, no job and no assets and offering them loans. These predatory lenders did not care that the people to whom they were offering the mortgages could not possibly keep up the payments. It was a gigantic swindle. Swindling on this scale is always a sign that the opportunities for the capitalists to make profits by creating more surplus value in production are becoming narrower.

When the housing bubble burst, house prices went into reverse. People began to default – and lose their homes – and these loans suddenly became worthless.

Over this period almost all the mortgages were securitised (incorporated into pieces of paper) and sold on into the banking system. Financiers boast of leverage – of the way they can multiply the effect of their money. During the boom banks were routinely lending fifty times as much as they actually held in backing assets. That’s leverage! In fact this was just a game of pass the parcel. Risk had not been eliminated, as the speculators argued at the time; it had been generalised. The securities passed all round the earth. These financial instruments became part of the circulation and payment system of world capitalism as a whole.

The financial ‘innovations’ of the new millennium made it possible to multiply the toxic effect of the sub-prime mortgages so they poisoned the whole world’s supply of credit.

Fictitious capital

These securities (pieces of paper) are a form of what Marx called fictitious capital.  Since the 1990s the creation of securities exploded. While production advanced at an average rate of 3% p.a. fictitious capital was growing at 25% a year. This represented a classic pyramid of paper claims.

The edifice would survive as long as the production of surplus value went ahead. But at the first stumble, the whole pyramid was bound to collapse. The credit crunch reverberated throughout the world. This is because money and finance are the bloodstream of a capitalist country. The banks operate as the beating heart of the system. Injecting these toxic derivatives into the banking system was the direct equivalent of poisoning the system’s bloodstream.

The US housing market seems to have peaked in 2005-6, at almost exactly the same time as the rate of profit turned decisively down. From early 2007 the stock exchange proved jittery and volatile. In late summer of 2007 the credit crunch struck.

Into recession

By the autumn of 2007 it was obvious that the banks were in big trouble all over the world. Record profits were melting away. Now the phantom nature of these mysterious bits of paper that made up bank assets was clearly shown for what they were really worth – nothing. They were dissolving, disappearing in a puff of smoke. All this was bound to have predictable, profoundly adverse effects on the rest of the economy.

Banks and the other financial institutions control the circulation of money. Capitalism cannot go on without the circulation of commodities through the medium of money. The big freeze of bank lending meant that recession was definitely on its way.

Underlying all this was the fall in the rate of profit. Eventually this must cause a fall in the actual mass of profit. This is what happened. The US Bureau of Economic Affairs shows that in the 3rd quarter of 2006 the mass of profits stood at $1,655bn. By the 4th quarter of 2008 it bottomed out at $1,124bn. The collapse in profits that the BEA records from 2006 would have caused a recession in any case, with or without a banking crisis. A 32% fall in the mass of profits is catastrophic for capitalism and explains on its own the severity of the Great Recession.

Even without the financial meltdown that came in 2008, by the end of 2007 the world economy was clearly moving into recession. Important firms such as Microsoft were making it known that they were also in difficulties. Their profits were down too. This was much more than a financial crisis.

Quite apart from the financial fireworks, by 2008 the Great Recession was in unstoppable spate, rampaging through the world wrecking jobs and livelihoods. Profits and share prices of all the bastions of capitalism, not just the banks, were sinking throughout the year.


But the complete financial meltdown that began in September 2008 still came as a shock. Major props of the financial establishment were on the verge of collapse. The Lehman Brothers, an old-established bank and longstanding pillar of Wall Street, actually crashed. It was found to be up to its neck even deeper than the other big banks in toxic securities.

Lehman’s collapse provoked panic and a financial catastrophe. Next to fall was AIG, the world’s largest insurance company. It was quite clear that AIG was doomed on Monday 15th September after it was announced that Lehman was dead in the water. AIG was effectively nationalised.

All the institutions that fell were links in a chain. Meanwhile as share ‘values’ melted away millions of people who held their wealth in the form of shares were suddenly much poorer – $32trn poorer in fact. That was how much was wiped off the face value of global share prices in a year. The share price collapse was just collateral damage in the maelstrom of the meltdown.

Were the bankers guilty? No doubt about it. For years they had strutted the economic stage as ‘wealth creators’. They had awarded themselves obscene bonuses since they plainly regarded themselves as superior in intelligence to the rest of humanity. Now it had become clear that these half-wits were no more in charge of the forces they had summoned up than the sorcerer’s apprentice. Were the bankers guilty? Yes. Were they the only guilty ones? No – they were just the instruments that triggered a crisis that had been long in preparation below the surface of events.


The capitalist monetary and credit system was in danger of disappearing into thin air. The authorities in Britain, the USA and elsewhere had no alternative but to step in to save capitalism from itself. Capitalism cannot function without banks.

Now the banks have recapitalised themselves at the public expense, are making bumper profits and handing out obscene bonuses. They are shrugging off with contempt any suggestion that they should be reformed so that such a crash could never happen again. The whole incident shows that, rather than elected politicians dictating to the banks, the financial interests have dictated to the governments.

In response to the crisis President Bush’s right-wing Treasury Secretary Hank Paulson immediately began to formulate a plan to bail out the capitalist system at the public expense. He produced his first draft plan within a week of the Lehman collapse. The Troubled Asset Recovery Programme (TARP) involved spending the unprecedented sum of $700bn on buying troubled (toxic) assets, which the banks had acquired voluntarily to make money, in order to clean up their balance sheets for them.

Correctly, the cry went up that the bail-out was socialism for the rich. Losses were being socialised (in other words distributed to the common people) while profits continued to be regarded as the reward for private enterprise. The TARP was eventually pushed through Congress in a bipartisan manner in order to rescue capitalism. It was signed off by Bush in one of his last acts as President.

This hugely expensive rescue has been described as a return to Keynesianism. It is nothing of the sort. Certainly a programme of state intervention, bail-outs and virtual nationalisation runs counter to the principles of neoliberalism. But neoliberalism is an ideology and, in these desperate straits, the capitalist class abandoned their longstanding economic ideology in order to protect their vital interests. Keynes advocated that, in a crisis, the government should spend money to boost aggregate demand. The government spent money all right, but it was a handout to the banks to acquire toxic assets and, in effect, bury them in the ground.

A new stage in the crisis

The crisis of capitalism, which first manifested itself as a financial crisis appears later as a fiscal crisis of the state. Governments all over the world find themselves head over heels in debt. Their deficits, the difference between what they receive as tax etc. and the outgoings needed to feed the unemployed and prop up tottering capitalism, are soaring.

The crisis of government finance has also shown up as a sovereign debt crisis, particularly for small countries such as Greece and Ireland. All governments routinely borrow to finance their expenditure. For Greece, Ireland and other small countries most of these bonds were owned by foreigners, foreign banks in particular. The financial crisis, the crisis of state finance and the sovereign debt crisis are all part of the unfolding of the same capitalist crisis.

In fact the recession seems to have bottomed out by the end of 2008. Output stopped falling. By the beginning of 2009 the rate of profit had revived a little, heralding a fragile recovery. The desperate, and desperately expensive, attempts of capitalist governments to prevent another crisis of the scale of 1929-33 seem to have at least put a floor under the collapse.

But that does not mean the capitalist world economy will return to a situation of relatively full employment and rising living standards for most workers any time soon. Capitalism has gone through a near death experience. We are entering a new, darker period of capitalist development. The aftershocks of the crisis will reverberate throughout the system for years to come.

What about the workers?

The ruling class in all capitalist countries has determined to put the burden of the crisis on to the backs of the working class.

What has happened to wages? The most favourable situation for the working class is at the crest of a boom when labour power is in heavy demand and may exceed supply for a while. That is when real wages are most likely to go up. In a recession the boot is on the other foot.

We have seen that process unfold dramatically over the past three years. Dole queues soared all over the world. Involuntary part-time working, wage cuts, prolonged wage freezes, ‘give back’ contracts, short time working, layoffs, redundancies, mass unemployment and a complete drying up of job vacancies – this has been the lot of the working class all over the world. The recession was a signal for an all-out assault on workers’ wages and conditions.

This was quite unexpected for a new generation of workers who had not experienced hard times before. So the assault did not immediately provoke a concerted coun ter-attack from the working class who, after all, had few weapons to fight back with. All the same it has produced a hardening of attitudes and a profound change in mood.

We must remind ourselves that unemployment is a lagging indicator of crisis. Austerity, and with it mass joblessness, looms for years ahead. This makes it difficult, but all the more important, for workers to fight back and defend their standards of living as best they can.

Working class determination to resist is growing worldwide, and we have already seen the first lightning bolts of class struggle. The Great Recession will be remembered as the opening of a new period of working class struggle against capitalism.

Other effects of the recession


The USA showed that it is still the hegemonic power of world capitalism. The crisis began there, and it was clear that the world was in recovery when the recession came to an end there. The downturn has caused long term damage to the economy and to the conditions of the working class. Officially nearly10% of US workers, 15 million Americans, are unemployed. Really 17% have no work, according to the broadest and most correct measure of unemployment – U6. The conditions for American jobless are severe. At the end of 2010 two million American workers face being cut off from benefits completely. These are the so-called 99ers who, through no fault of their own, lost their jobs as the Great Recession hit and, as far as US statisticians and the ruling class are concerned, will disappear off the face of the earth when their benefits are cut off. Millions of Americans have had their homes repossessed and sleep in their cars or in hostels for the homeless.

In contrast to the hard right wing line taken by the G20 in June 2010, which made cutting the state deficit the overriding priority for all capitalist governments, there have been attempts in the USA during the course of the recession to save capitalist firms, and workers’ jobs with them. US car makers, particularly GM and Chrysler, have long been in trouble. Apart from handing out huge sums of taxpayers’ money to save the banks, the Bush administration dished out $26bn to the US auto industry. It was not enough. GM was back to beg Obama for another $20bn in 2009.

On coming to office Obama tried to implement a genuine Keynesian programme of public spending. His policies had no effect on the economy as a whole. They were neutralised by the State, city and local governments, who all hacked away at jobs and services. US unemployment remains stubbornly high. Meanwhile the Fed continued the Bush era policy of handing out enormous sums to favoured firms in order to prop up capitalism.

Latin America, despite the early boasts of Chavez and others who pursue a leftist course on the continent, was not immune to the pressures of the world crisis. Venezuela remains a capitalist country and therefore subject to the laws of the system. Whether Chavez takes advantage of the crisis to break with capitalism remains to be seen. The alternative is that his government will progressively lose popularity as it fails to deal with the problems of the workers that are exacerbated by the economic downturn.


Commodity prices often collapse in a slump. They have by and large stayed buoyed up throughout the Great Recession. There are two reasons for this. The first is that there is a speculative element in the trade for commodities. There is plenty of idle money slopping around with time on its hands to do mischief. Despite the depressed conditions in the world economy, 2011 could well see a spike in food prices fuelled by speculators. This would obviously hit workers in the poor countries hardest.

The second reason raw material prices have stayed high is because of demand from China, a densely populated resource-poor country. Chinese industry is an economic powerhouse. All its trading partners have been lifted by demand for raw materials and components being sucked in to China.  China has hardly been touched by the downturn at all. It is true that the Chinese economy is only responsible for about 8% of global impact, but the regional impact of its continued growth has been immense, as is the effect it has had on raw materials suppliers as far away as Africa. Australia, a country of continental dimensions, is in boom because it is an important supplier of raw materials and minerals to China.

World trade

Trade is by far the most important and volatile element of national income for poor and peripheral countries. They are dependent upon markets in the advanced capitalist countries. Their economies went into a tailspin because their export markets dried up. Trade-led growth has also been a way for capitalist countries such as Japan and Korea to develop. Of course we should not see trade as an independent factor in economic development. Usually world trade develops rapidly when profit-making opportunities abound and accumulation is proceeding fast. And countries develop on the back of growing world trade because they have developed a competitive advantage in production.

So trade is volatile. Precisely for this reason the Eichengreen O’Rourke index, which tracked the downward path of the Great Recession against figures from 1929-33, showed that for the first year of the Great Recession, world trade was actually collapsing faster than it had done from 1929 to 1930. Then it slowed and reversed after one year.

The turnaround can be attributed to the revival in profits, which was noticeable by the end of 2008. It is also due in part shown by capitalist governments to rescue capitalism, by hurling enormous sums of ordinary people’s money at the banks. Movements in the rate of profit are at the heart of the Great Recession and of the partial recovery we have seen since. But world trade can augment the fluctuations in capitalist production.

The cost of the recession

We don’t know what the recession will cost us all. We’ll be counting the cost for years to come. The headline costs are the huge sums devoted to bailing out the banks. But this is just the tip of the iceberg. Much more significant is the permanent loss of output as a result of the recession. Likewise the severity of the crisis has caused government tax revenues to plummet and outgoings to soar. This burden of excess government debt will be another factor slowing down economic growth for years to come. The best estimates of output, income and jobs lost as a result of the Great Recession (derived from the work of the Reinharts and Rogoff, including their book This time is different) can be summarised as follows:

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years


This seems to be what is in store for us based on analysing the past experience of crises of the proportions of the Great Depression in the 1930s.

An age of austerity


 Optimists speak of a V-shaped recession. By that they mean that the world economy would bounce back as quickly and dramatically as it crashed down. We can already rule out a V-shaped recovery as a serious prospect from the slow pace of recovery that we have seen so far. All the serious economists see doom and gloom ahead for years to come.

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession

The private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving, not spending, has become the order of the day for households and firms. Meanwhile the banks are recapitalising. That means they are unwinding all the excess leverage of the previous decade, and they are reluctant to lend to customers who desperately need the money. Finally vicious cuts in government spending will further depress the outlook. Forecasters suggest that 2.0% annual advances in real GDP in coming years may be reasonable, or even optimistic.

What chance of a boom?

The world economy has now been in recovery for about eighteen months – in the narrow sense that output has actually stopped falling. It doesn’t feel like a recovery! The prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed later.

At the same time it must be recognised that the world economy, after a feeble and lopsided boom, has suffered the most savage recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most advanced capitalist countries the situation facing their economy is similar. This is the picture:

Consumption is reviving from the depths of 2008-9. Its growth is severely constrained by the fact that households are deleveraging, paying off debts rather than running up more credit. This process of trying to getting back in the black is likely to continue for some years Consumers have been burned by the speculative dance and then by the recession.

Cuts in government spending, which are likely to maintain mass unemployment for years to come, will slow consumption growth as well. Consumption is the least volatile element of national income. A real revival of consumption is likely to come on the back of a boom elsewhere in the economy, most likely in the investment sector.

Investment is flat on its back and likely to remain so. Though profits have revived, capacity utilisation in the USA is only running at 75%. As the ‘Communist Manifesto’ puts it, “And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.”

The destruction of capital has a way to go before a big investment boom in will kick in.

 Countries can export their way out of trouble. No doubt exports will provide a fillip for some capitalist nations. But one country’s export is another’s import. For the system as a whole exporting is a zero sum game, not a solution.

Finally government spending is being targeted by the major capitalist powers. Cutting public spending will harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.

This is not the perspective for a healthy boom.

Though there are common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy, it seems, successfully recovered from the Great Recession. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice of the system is bound to have produced a profound questioning in the minds of millions of working people all over the world..


Commentators have noted that large parts of the world appear to have made a complete recovery from the Great Recession and are growing strongly. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing fast.

But our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for 61% of world of world output, almost two thirds. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects.

The development of the so-called BRICs (Brazil, Russia, India and China has been trumpeted as a phenomenon of great importance. Are the BRICs really a unified economic development?  Is their rise preordained and irresistible? We agree with the view that the concept of the BRICs is a ‘broker’s fantasy’. Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

The financial press has taken note of the fact that some of the less developed countries are booming while the advanced capitalist world continues to suffer from the hangover of the Great Recession. As a result speculative flows of idle money capital have poured into third world stock exchanges. There is a real suspicion that, having just suffered the devastating consequences of the pricking of the house price bubble, world capitalism is on the point of blowing another bubble in share prices in places like Indonesia. Here is a typical comment from the ‘Financial Times’. Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10)

“The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (This means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

In the insecure atmosphere of the fragile recovery both deflationary and inflationary pressures loom.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted with years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Critics of the present right wing UK government in Britain rightly raise the fact that the post-War Labour government set up the welfare state while national debt was 250% of GDP and national income per head was between one third and a quarter of what it is today. Now Britain is so much richer, and so much less burdened by debt, the government tries to persuade the people that the situation is so desperate that they have to scrap the welfare state! This is really just the rhetoric of class war. The Tories see the crisis as an opportunity to tip the balance of class forces back in favour of the ruling class by hacking away at the welfare state.

All over the world the capitalists have the same aim. These capitalist government policies are likely to hamstring and constrain economic growth further. They are all trying to outdo one another in their attempts to load austerity upon their citizens. They want the workers to bear the burden of the crisis twice – once in unemployment and lost wages and then again in cuts in public sector pay, jobs and services.

The fundamental problem is that capitalism continues to be in crisis. All the authoritative commentators see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system now. Capitalism will continue to be weighed down by big state debts incurred by bailing out capitalism way into the future.


We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation raising tariffs on imports which was passed in the USA in the 1930s was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Vol III p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is in currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through 2010. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

The USA has embarked on a desperate course of what is called quantitative easing. This basically means printing money. It is a measure of the unpreparedness and cluelessness of the authorities in the face of the crisis that they pumped $1.25trn into the US economy in 2009 and still do not know where the money went and what effect it had on the economy, if any. Similar experiments were carried out by the Bank of England. We think the only effect it had on the domestic economy was to be grabbed up by the banks as ‘free money’ and lent out at a handsome rate of interest. In late 2010 the US Fed decided to launch a second round of quantitative easing. They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’.

Trade rivals believe that this will make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. Some of the money created by quantitative easing could also find its way into the hands of the speculators, fuelling the boom in food and energy prices expected for 2011. In the insecure atmosphere of the fragile recovery both deflationary and inflationary pressures loom.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. It must not be forgotten that national antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continual source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

The fate of the Euro

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has some means of influencing the level of economic activity within its economy and therefore of safeguarding its national currency.  These economic levers are usually listed as fiscal and monetary policy. There is no common Euro-zone wide fiscal (taxing and spending) policy. Euro-zone member countries are instead constricted by rules on the maximum deficit and government debt they may run. They have also surrendered monetary policy to the European Central Bank, which runs the Euro.

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology, a belief that capitalism, left to itself, can deliver the goods. The fact that the Euro has no real defences as yet makes the single currency very vulnerable.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. It is quite possible that a country may be forced into default. The possibility of national default would put enormous pressure on the political leadership of the Euro-zone.

Greece, in particular, may have to be taken through a default. The problem involved in an orderly restructuring of Greek public debt is that this really means that the French and German banks that lent the money in the first place will have to take a hit. That will be resisted by the Franco-German leaders of the Euro-zone.

Default could partly be forced as a result of class battles. The Greek working class is rightly furious at having to shoulder the debt burdens heaped upon them by their tax-dodging ruling class. They will increasingly demand a repudiation of these debts. No wonder they are in the vanguard of struggle against the effects of the recession.

We know that the pain inflicted on the Greek economy by severe cuts in government spending and public sector workers’ pay and conditions mean that the country will continue to get poorer in 2010 and 2011. When an enfeebled economy like that of Greece is linked with the fate of the heartlands of European capitalism by means of a common currency, then the crisis is by no means over.

Policy in the European Union is run by politicians concerned above all with their national interests. The European Union remains a bunch of squabbling nation states, without a united policy towards the Euro crisis, or anything else.

The authorities will have to take the situation more seriously, as the collapse of the Euro would be a worldwide calamity that could plunge the world into a double dip recession and do severe damage to the world economy. Another serious world crisis in a few years ahead, which is quite possible, could sink the Euro altogether or drastically reduce the area covered by the single currency.

The Euro crisis remains the most visible flashpoint for the world economy. This crisis is the one thing that could even cause it to relapse from its present hesitant recovery over the next couple of years.

Back to the rate of profit

We began by linking the form of appearance of the Great Recession as a credit crunch to its underlying cause in the falling rate of profit. Briefly, the rate of profit bottomed out at the end of 2008 and has risen significantly since. The profit rate is a leading indicator of economic activity. It has its main effect on investment, which is the most volatile part of national income. In the usual way what the rate of profit shows this year give a sign of what will happen to investment next year.

In a recession, there is a further delay. A recession characteristically reveals massive overaccumulation. This overproduction of capital shows up as unused capacity. In the course of the recession masses of this ‘surplus’ capital is destroyed. Until this destruction of capital has run its course the economy will not bounce back to a healthy boom, and there will be no prospect of a return to full employment.

This is the situation at present. The rate of profit has recovered, but investment has not picked up. The severity of the Great Recession has also burdened the major economies with vast public debts. In their determination to attack these debts, capitalist governments are further slowing down the recovery. Finally the Euro-zone is an area particularly at risk of speculative attack. That requires still more caution on the part of the authorities, and retards growth prospects even more. The prospects before world capitalism are more uncertain now than at any time since the 1970s, and possibly as insecure as at the time of the Great Depression in the 1930s.

William Thompson