The World Economy and the Credit Crisis
The significance of the current turmoil in global financial markets can be seen sharply in the following quote from the article `The rescue of Bear Sterns marks liberalisation’s limit’ by the chief economic commentator of the Financial Times, Martin Wolf, in the March 26 issue of that paper. Wolf, who is no radical, writes
Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Sterns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits…..even the recent past is a foreign country.
One of the most important parts of this statement is the reference to `three decades’. The current crisis has been compared to 1929. This is not really helpful as a guide to its significance. Much more useful in my view is to see what is happening as the unravelling of the set of institutional arrangements which have governed global capitalism since around the mid-1980s, which in turn emerged as a response to the breakdown of the long post-war boom a decade earlier. To understand what is happening now we need to go back to this period and to the emergence of this framework.
2. The Crisis of the 1970s and 1980s
Stable capitalist accumulation depends on two crucial conditions. Firstly, it requires the extraction of sufficient profits in the process of production. Secondly, it requires the realisation of those profits through sales on the market. This gives rise to a key contradiction – these two conditions are in conflict with one another. The successful extraction of profits depends on keeping wages down while the realisation of those profits depends on sufficient demand being available which in turn limits the ability of capital to lower wages. This conflict is a central reason for the periodic crises which characterise capitalist growth. It is worth noting here that two of the main Marxist theories of crisis result from adopting a partial view which focuses on just one side of this conflict; under-consumptionism (for example the work of the Monthly Review school in the USA) concentrates on the lack of demand which prevents realisation of profits while the profit-squeeze theory of writers like Andrew Glyn and Bob Sutcliffe focuses on rising labour costs which prevent the generation of profits in production. An adequate theory of crisis has to encompass both perspectives and to take account of the way in which capital can achieve a temporary resolution of the contradiction, which however inevitably stores up new problems for future accumulation.
The temporary resolution underlying the boom of the 1950s and 1960s depended on three main factors. First, state expenditure as a key source of additional demand. Second, the stable international economic environment provided by the `Bretton Woods’ system of fixed exchange rates which allowed for rapid growth of world trade. Third, the development of new consumer goods technologies and markets, notably in areas like the motor industry and consumer electronics (so-called `white’ goods).
For reasons which are still controversial amongst Marxists this boom broke down in the mid 1970s leading to a decade of economic turbulence and two major international recessions, in 1974-75 and 1979-82. However, from the mid-1980s onwards a new framework for accumulation began to take shape, in an unplanned and chaotic way, but embodying a measure of coherence.
3. The Temporary Resolution of this Crisis
This framework had three main components:
· The first was a massive explosion of debt – both household and (to a lesser extent) corporate debt. Debt has played a key role in mitigating the contradiction between the generation and realisation of profits, allowing for expanded demand even though wages have been kept down and a frontal assault on trade unions and organised labour has kept the working class on the defensive. However, there is an obvious contradiction here in that debt has to be repaid eventually and so the conflict between low wages and increased demand is likely to reassert itself with renewed ferocity at that point. Consequently, debt has only been able to play the role which it has because of the other two components listed below.
· The second component of accumulation has been a renewed stability in the international financial system, following on from the wild exchange rate swings of the 1970s and the first half of the 1980s which resulted from the end of the Bretton Woods arrangements. This stability has allowed for strong growth in international trade but, more importantly, has underpinned dramatic financial deregulation and increased international investment. The key factor leading to this stability has been the informal but durable relationship between the USA and China (and to a lesser extent other Asian countries) whereby the US deficit has been funded by surplus countries, who have purchased US treasury bills, allowing those surplus countries to maintain the value of the dollar and keep their own currencies low in value, which in turn has underpinned their export drive. Linked with this, and important for both the US and UK, has been a rise in the returns earned by these countries on their investments abroad, which has helped them run large balance of payments deficits without their foreign liabilities escaping out of control.
· The third factor has been two decades of exceptionally low commodity prices. This has been a key factor in allowing central banks in the industrialised world, especially in the UK and USA, to let debt increase and to lower interest rates to boost demand, without worrying too much about inflation. A number of orthodox economists (most recently Brian Henry from the National Institute of Economic and Social Research) have argued that low commodity prices have been more significant in keeping inflation down since the 1980s than either central bank economic management or labour market developments.
It is important to recognise that, owing to the unplanned and chaotic nature of capitalism, this framework did not take root globally at a single point in time, but arose in a more spontaneous way. Notably, the second most important capitalist economy, Japan, followed a trajectory of its own, as a result of the specific characteristics of Japanese capitalism in the 1970s and 1980s, and has stagnated throughout most of the last two decades (though the Japanese trade surplus and Japanese purchases of American assets have been important for the second factor listed above). Western Europe remained unstable for longer than the USA, with a sharp recession in the UK in the late 1980s and 1990s (resulting from the especially sharp crisis of capitalism in the early 1980s in this country associated with the Thatcher government’s economic policies and the consequent weakness of the British economy in the years following) and exchange rate turbulence in the early 1990s across the region (resulting from the strains caused by German unification and the effect of this on German interest rates and on the value of the Deutsche mark). However, from the mid 1990s onwards Europe participated in the general framework outlined above and this provided an important basis for two key successes for the European capitalist class during this period – the absorption of Central and Eastern Europe into the capitalist world economy and the institution of a common currency, the euro. Particular regions continued to experience crises during this period, notably Latin America, South East Asia and Russia but these were successfully localised by capital and did not bring overall global expansion to an end, although the instability of 1997-98 briefly opened up such a possibility.
It is also important to realise that each of the three factors outlined above is integrally linked with the other two in a mutually reinforcing system. The growth of debt requires a low inflation environment and international financial deregulation, which in turn requires exchange rate stability. The export boom in China and elsewhere has depended on debt fuelled demand in the US and other countries. Low commodity prices have resulted in large measure from the process of `globalisation’ and imperialist expansion which has required deregulated debt finance and stable exchange rates.
4. The Current Crisis
The depth of the current crisis for capital arises because all three of the factors listed above have been thrown into question. The build-up of debt is extremely serious in itself, partly because of the size of the debt, partly because of the way in which `securitisation’ has spread it around the system so widely and partly because the amount of bad debt is so uncertain owing to that very securitisation. However, despite the over-valuation of the housing market in the US and other countries, problems in that market on their own would not threaten the system globally were it not for the role of debt in the current pattern of capitalist accumulation more generally. What is dangerous for capital is the conjunction of major problems in the credit markets with renewed exchange rate uncertainty, especially the fall in the value of the dollar (and also a steep decline for both the US and UK in returns on foreign investments) and with what appears to be the end of the era of low commodity prices – shown most clearly by increasing prices for oil and other fuels and for food. The difficulties are shown up most clearly in the key policy weapon which capital has depended on over the last three decades, control over interest rates. The US has cut interest rates sharply to deal with the build-up of bad debt, but such cuts run the risk both of speeding up the decline of the dollar and of raising inflation (which in turn will go up in the US if the dollar falls). In the Financial Times article referred to above Martin Wolf mentions a speech by the former chief IMF economist, Kenneth Rogoff (now at Harvard). Rogoff quoted the poet Robert Frost: `Some say the world will end in fire. Some say in ice’. For Rogoff, fire here is financial ruin, ice is inflation.
5. Can Capital Resolve the Crisis?
Discussion of the possible outcomes of the crisis runs the risk of being very speculative. However, it is important for socialists to consider some of the arguments now being used by capital which indicate possible resolutions of the crisis which might be attempted. Any attempt at such a resolution will involve some kind of distribution of the costs of the crisis. Clearly capital will try to shift as many of these costs as possible on to labour and its success or failure in doing so will depend on working class resistance both nationally and internationally. Within that general framework, however, there are also likely to be divisions between different fractions of capital (financial and industrial; importers, exporters and foreign investors etc) and also potentially differences between different kinds of workers (for example between homeowners and others).
Some of the key issues that have been raised are the following:
· Demand from China and elsewhere may substitute for US demand: One possible resolution of the crisis might be a slowdown in the US and similar countries and a shift towards internal growth in China and other surplus economies, based on domestic consumption and investment rather than exports. This would clearly be possible in principle in a globally planned economy. It is much harder to achieve in the unplanned, spontaneous world of contemporary capitalism. The attempt to carry out just this kind of shift in Japan from the mid 1980s onwards was a spectacular failure. Important problems here include internal inequalities and class tensions in the Asian economies and, perhaps most importantly, the ecological constraints which are already expressing themselves in higher food and fuel prices.
· The crisis may be just a crisis of liquidity not of solvency: A number of observers argue that the credit crisis results mainly from liquidity problems and panics in the financial markets and that the amount of `genuinely’ bad debt is still quite limited. In addition corporate profits in the non-financial sector remain high. This latter point is probably the most optimistic element for capital in the current situation. However, this argument neglects the extent to which non-financial profits have been dependent on a degree of debt-based consumption which now looks unsustainable. It also neglects the fact that if inflation does become more of a problem the low interest rates of recent years may not persist much longer.
· Commodity price rises may mainly be caused by speculation: There does seem to be a strong element of speculation in recent oil and raw materials price rises (with speculators fleeing from the dollar). To the extent that such speculation unwinds capital will have more room for manoeuvre. But the seriousness of the ecological crisis and the relatively long-term nature of recent price rises seem to indicate that speculation is only playing a minor role here. Also, any attempt to base future world economic growth on increased domestic growth in China and other Asian countries is likely to cause even larger commodity price increases.
· A fall in the dollar and sterling will raise US and British exports: It has been argued that exchange rate changes will restore balance to the world economy and that already US exports are rising as the dollar falls. Again, there is some truth to this. But reliance on this mechanism is very risky for capital because of (a) the substantial losses it would involve for countries like China which have purchased US dollar assets in recent years (b) the inflationary impact of such falls on the British and American economies (c) the possibility of renewed exchange rate turbulence of the kind seen in the 1970s and 1980s and (d) the fact that even balanced growth resulting from such exchange rate changes is likely to be at a much lower level than what we have seen in recent years.
· New surplus economies may emerge as saviours of the international financial system: This relates to the growth of so-called `sovereign wealth funds’, such as those run by China, Russia and other oil and natural resource exporters. But such funds are not immune to capitalist crisis in general – many of them have already lost significant amounts of money propping up US banks in recent weeks. There are also some important political tensions involved in their investment activities abroad.
· A better structure of regulation can solve the problem: One strand of thought in recent discussions sees an improvement in the regulatory structures of capitalism as key to solving the crisis. Martin Wolf in the article quoted above is an example of this. However, this is controversial; other analysts have strongly opposed responding to the crisis through increased regulation (see for example the article in the Financial Times by John Gapper the day after Wolf’s piece). There are a number of problems. Technological change and internationalisation have made financial regulations increasingly easy for banks and other institutions to bypass. Even if effective, such regulation really only deals with the financial aspects of the crisis, not with the problems of global payments imbalances or rising inflation. In addition, the ideological difficulties of reversing, even if only partially, two decades of neo-liberal attacks on any attempts to limit market imperatives, cannot be underestimated.
All of the above means that any attempt to resolve this crisis, at least in the short-run is fraught with dangers for capital – and consequently, the crisis opens up significant opportunities for socialists.