Theses on the Economic Crisis
(March-April 2009)
By Dave Winter
(Page 2 of 2 pages; click here to go back to page 1.)
12. US imperialism was the main loser from this symbiotic relationship. It became like a drug addict who needs a constant supply of more drugs to keep going. If China had decided to cut off the supply, the addict would have gone into painful withdrawal. But that did not happen, because China counted on American markets for its goods. Ultimately, however, the bubble economy grew into a big balloon, and finally had to explode, throwing the Wall Street drug addict and the rest of the world economy into shock and convulsions.
It is the fallout from the financial world’s gambling binge, not the so-called “mortgage crisis,” that has precipitated the current global crisis of capital. Contrary to popular perception, the speculation in home construction and the proliferation of “sub-prime” mortgages are only components, albeit significant ones, in the cause of the international credit collapse. A far larger part of the problem was “an ever-increasing volume of transactions” by major banks and hedge funds “founded on a relatively small base of actual physical assets.” (“The Quiet Coup,” The Atlantic, May 2009) The sub-prime mortgage crisis would not have had such far-reaching results had it not been caught up in the broader picture of the financial institutions’ ruinous self-indulgence in Collateralized Debt Obligations (CDOs) and credit derivatives. CDOs are a form of security derived from bundles of mortgages and other consumer debt. Credit derivatives are essentially insurance policies taken out by lenders against defaults on the loans they have made, or against the fall in prices of CDOs caused by defaults on the underlying debt. (“What Cooked the World’s Economy,” Village Voice, Jan. 27, 2009)
Under the Clinton administration, officials such as Alan Greenspan, Robert Rubin, and Lawrence Summers (now Obama’s top economics adviser) championed the sweeping deregulation of the financial markets, promoting “a river of deregulatory policies that is, in hindsight, astonishing.” (“The Quiet Coup,” The Atlantic, May 2009) In the wake of these policy changes, which precluded any government oversight of the markets for CDOs and credit derivatives, the trade in these instruments expanded enormously, fueled by fraudulent credit agency ratings and (formerly illegal) “bucket shop” or “boiler room” sales schemes. “Counterparties” – banks, hedge funds, insurance companies and ultra-wealthy individuals – bought credit derivatives insuring the value of CDOs that had been assembled from sub-prime mortgages, undocumented “liar” or “ninja” mortgages, and other risky loans, often “replicating” them on the same CDOs many times. (Bill Moyers Journal, Interview with William K. Black, April 3, 2009)
In the process, the companies and individuals that created and marketed these instruments made fortunes on premiums and commissions. This money, ultimately traceable to the surplus value produced by underpaid workers in China and other developing countries, was expropriated to the tune of billions of dollars as the wealth of the financial industry moguls hit the stratosphere. Thus, while in 1979 the top 0.1% of Americans earned 20 times the income of the bottom 90%, by 2006 the income of this privileged and powerful elite had ballooned to 77 times that of the oppressed masses at the bottom. (“The Rich Under Attack,” The Economist, April 2, 2009)
Ultimately, however, when the housing bubble burst and the sub-prime mortage crisis hit, the companies that had sold the credit derivatives were on the hook for billions of dollars that they could not hope to pay. Hence the need for bailout and recovery schemes, under which the masses are being forced to pay the gambling debts of financial industry entities that are deemed “too big to fail.” As The Economist put it on April 2, 2009, “Traders and fund managers got huge rewards for speculating with other people’s money, but when they failed[,] the parent company, the client and ultimately the taxpayer had to pay the bill. … [E]ven a newspaper as inherently pro-business as this one has to admit that there was something rotten in finance: the basic capitalist bargain, under which genuine risktakers are allowed to garner huge rewards, seems a poor one if taxpayers are landed with a huge bill for it all.” (“The Rich Under Attack,” The Economist, April 2, 2009)
It was the erosion of the standard of living of the American working class that ultimately burst the overinflated economic balloon. The existence of the crisis of overproduction was masked temporarily, and its climax both deferred and exacerbated, by the ready availability of consumer credit. Workers were encouraged, by offers of sub-prime mortgages, home equity loans, and low-interest credit cards, to go into debt to purchase homes, cars, and expensive gadgets that they could not afford. But the decline of the US economy, which became apparent by 2007, deprived them of sufficient income to cover the interest and late fees on their mounting debts, much less repay the principal. Thus, the credit-based bubble economy was doomed to explode, exposing the underlying reality of overproduction and glutted markets.
13. Ultimately, the most fundamental reason for the grave global economic crisis is the decline of US imperialism and the revival of the old inter-imperialist struggle for world domination and for the privileges of plundering of the earth’s resources and profiting from the super-exploitation of the masses. The increasing tension between the main imperialist players is beginning to become manifest in the news headlines. Protectionism is on the rise again, and the honeyed language of diplomacy can barely conceal it. The US wants to restrict Chinese imports, and at the same time has increasingly emphasized its demand that China open its own markets to American goods. In response, China has effectively declared that it is becoming the new boss of the global capitalist gangsters, and has made clear that no one should dare to mess with its interests, or exclude it from any of the gangsters’ big meetings.
As The Economist put it, “China’s prime minister, Wen Jiabao, no longer sticks to the script that China is a humble player in world affairs that wants to focus on its own economic development. He talks of China as a ‘great power’ and worries about America’s profligate spending endangering his $1 trillion nest egg there.” (“How China Sees the World,” The Economist, March 19, 2009) Despite China’s concerns, the Federal Reserve in March 2009 responded to the economic crisis by manufacturing a trillion dollars out of thin air and unleashing the money at the US banks and the government’s “recovery” plans. (“Fed Plans to Inject Another $1 Trillion to Aid the Economy,” New York Times, March 19, 2009) The dollar took an immediate dive, and China was not happy. Just a few days later, on March 23, 2009, the governor of China’s central bank, Zhou Xiaochuan, called for a new international reserve currency to replace the dollar. According to the Financial Times: “China’s central bank on [March 23, 2009] proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund. The goal would be to create a reserve currency ‘that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.’ … Analysts said the proposal was a clear indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China. ‘This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,’ said Qu Hongbin, chief China economist for HSBC.” (“China calls for new reserve currency to replace dollar,” Financial Times, March 23, 2009) This amounts to China sending the US the message that “Your days are numbered, old boy, and your currency should no longer dominate the world.” Obama responded, in effect, by telling China to forget it. So the tension keeps on growing.
14. The tension between the US and Europe is also growing. Germany, which has huge investments in Eastern Europe and is dependent on Russian oil and gas, has been becoming cooler toward the US and warmer toward Russia. A similar attitude is displayed by “independent” France. (“NATO Duel Centers on Georgia and Ukraine,” New York Times, December 1, 2008) Even the Russians themselves are reviving their pre-1917 dreams of becoming an important imperialist force. The so-called war between Russia and Georgia in August 2008 was really a mini-war between Russia and the US (with a Georgian proxy army) over the domination of the Caucasus region, which is rich in oil and gas. The Russians are rebuilding their army as fast as they can. So far, however, the Russians are not a serious imperialist force economically, and there is clearly a discrepancy between their economic weakness and their military power. Thus, it is questionable whether Russia can be characterized as an imperialist country. Unlike China, it is only partway there.
The old rivalries between major European countries are also returning. The most powerful European imperialist countries (Germany, France) have no interest in helping out newcomers to the Euro zone, particularly Eastern European countries which, along with Iceland and several others, are virtually bankrupt. Instead, the major European powers have asked China to give these countries a financial hand. But China, asserting itself as a world power, has decided so far to ignore Europe’s appeals.
Because of all these conflicts, there was a lot of anxiety and tension building during the weeks preceding the early April meeting of the so-called G20 – the biggest countries – in London. Even more interesting is that one western diplomat, at least, expressed to a reporter from The Economist the view that “the meeting between President Barack Obama and his Chinese counterpart, Hu Jintao, in the margins of the G20 summit in London on April 2nd will be far more important than the G20 meeting itself.” (“A time for muscle-flexing,” The Economist, March 19, 2009; see also “How China Sees the World,” The Economist, March 19, 2009) [“Already a big idea has spread far beyond China: that geopolitics is now a bipolar affair, with America and China the only two that matter. Thus in London next month the real business will not be the G20 meeting but the ‘G2’ summit between Presidents Barack Obama and Hu Jintao.”]) Nothing better illustrates the real “new world order” characterized by the rise of Chinese imperialism.
15. All of this rising inter-imperialist tension could eventually result in a new world war, unless global capitalism can prevent it by means of some magic with which we Marxists are unfamiliar. Although it should be emphasized that there are many historical differences, the situation today is fundamentally similar to what happened in the wake of the decline of British imperialism at the beginning of the 20th century. At the time, the US was the rising star among the imperialist powers. The British decline unleashed an inter-imperialist struggle for domination that ultimately found brutal expression in two successive world wars. This period was also marked by a number of deep economic crises that found resolution only after the victory of US imperialism at the end of World War II. The massive destruction of the productive forces caused by the two world wars consolidated the final domination of US imperialism and permitted the development of the economic boom of the 1950s. Today the players and the circumstances are very different, but the cards are the same: the sharp decline of one imperialist power; the rapid rise of another; and at the same time, the greatest economic crisis in 70 years.
Since the start of the crisis, the Chinese ruling class has tolerated the rise of nationalism, so far relatively muted, aimed at the west and the US. This sentiment is useful in part to the “left” wing of the new ruling class to distract the masses from supporting the growing wave of protests and strikes in China against mass unemployment. (20 million Chinese migrant workers have been laid off since the 2008-2009 financial crisis first erupted, and the real rate of unemployment among Chinese workers is probably much higher.) (“When jobs disappear,” The Economist, March 12, 2009) But the capitalist class primarily uses nationalist propaganda to prepare the masses for growing hostility in their government’s relations with the US.
Despite all the talk of avoiding protectionism, this is exactly what the fat cats are doing: “The World Bank has counted 47 trade-restricting steps taken by 17 of the G20 members. Tariffs have risen in several developing countries, including India, Russia and Ecuador. European ones and America have resorted increasingly to subsidies for failing industries, with implicit pressure on firms to create jobs ‘at home’, possibly at the cost of shutting down more efficient facilities abroad.” (“Falling world trade,” The Economist, March 24, 2009) China no longer treats the US as a great power, but as an equal competitor to which it can apply increasingly tough diplomacy: “China’s prime minister, Wen Jiabao, no longer sticks to the script that China is a humble player in world affairs that wants to focus on its own economic development. He talks of China as a ‘great power’ and worries about America’s profligate spending endangering his $1 trillion nest egg there. Incautious remarks by the new American treasury secretary about China manipulating its currency were dismissed as ridiculous; a duly penitent Hillary Clinton was welcomed in Beijing, but as an equal.” (“How China Sees the World,” The Economist, March 19, 2009) There is some talk about pulling China’s $1 trillion carpet out from under the US’s shaky feet. But so far, because of the symbiotic relationship between China and the US, such threats are not being taken seriously.
As the crisis and the depression remain unresolved in the coming years, we will likely start to hear the drums of inter-imperialist war. It is unclear as of yet who will side with China and who will side with the US. The process is likely to take years to mature; for comparison, it took about 10 years from the collapse of Wall Street in 1929 for the Second World War to start. Any Third World War is likely to result in a nuclear catastrophe that will kill billions of people. Sadly, we are facing a race between such a nuclear disaster, and the looming threat of catastrophe from global climate change. The only thing that can stop these two horrendous possibilities is the international socialist revolution.
16. The severity of the crisis, and where it is headed, can be illustrated with just a few choice figures. Since the crisis began, there been an average fall of 32% in trade for the 45 countries for which the World Bank has January trade data. (“Falling world trade,” The Economist, March 24, 2009) Nothing like this has happened since the Great Depression. With the drastic fall in trade, factories that are shut down in one country cause ripple effects in other countries, because companies and countries are now interconnected on a global scale to an unprecedented extent. For example, a car that is made in the US may get its steel from China, its tires from India, and many complete sections from other countries. So if a specific model of car is no longer produced, and it is not replaced by another model, the resulting unemployment lines extend all over the world. So severe is the crisis that as protectionism becomes a growing reality, there are talks about de-globalization as the only solution to stop it. For example, The French auto-maker Renault is closing its factories abroad and moving production back to France. China blocked Coca-Cola's $2.4 billion bid for a Chinese juice manufacturer. ((“A time for muscle-flexing,” The Economist, March 19, 2009) And the list goes on. So it is now goodbye to the globalized “free trade” economy, and hello to the dog-eat-dog mentality of inter-imperialist competition.
17. The capitalist countries cannot stop the bleeding from getting out of control. The various bailouts of banks and financial institutions that have been tried so far have not worked, and are unlikely to work in the future. The Obama administration, resorting to Keynesian measures, is pulling trillions of dollars out of thin air (in the form of Treasury notes) and throwing them at financial institutions as gifts. “Go ahead,” it tells the financial institutions, “for every dollar that you use to purchase toxic assets from the banks, we will contribute two government dollars, and we will cover any loss that you potentially accumulate.” This is like giving a patient who is rapidly bleeding to death enough money to buy all the aspirin in the drugstore. The bailouts may increase the money supply, but they cannot cure the underlying the crisis of overproduction, and they cannot return the world economy to a healthy state.
The real story can be seen in the current situation on Wall Street. As the world loses confidence in the shattered American economy and the dollar, the price of gold shoots up. In the early 1970s, Nixon severed the link between the dollar and gold. So confident was American imperialism in that era that it decided to break the link between labor (the real value that is behind money) and gold, whose traditional scarcity and resulting price stability had guaranteed relatively stable currency exchange rates since capitalism emerged as a world system. With Nixon’s act, the dollar, as the new “gold,” became linked to the production of oil. With American control of oil, the petro-dollar was a symbol for the dominance of the US, and it was viewed as a good-enough replacement for gold. Everyone sought dollars as the ultimate in stable currency. Now this game is over. In light of the clear decline of the US economy, gold is returning to its traditional economic role as the ultimate in “hard currency” that represents a known quantity of productive labor. Conversely, as the crisis deepens, the dollar will transform to what it ought to be: just a deteriorating piece of paper.
18. While China itself is also in crisis, of course, it has the only economy that is still growing, although at a much slower rate than a year ago. But as the markets get tighter and the global mess gets worse, this growth will disappear. At that point, China will not have much money to dump into the US, and the current symbiotic relationship between the two countries will fall apart. If the crisis gets totally out of control, it is possible that the Chinese will have no alternative but to pull their money out of the US. That would mean the loss of enormous dollar amounts, in the form of treasury notes, that are currently being used to finance the wars in Iraq and Afghanistan and to fund bailouts for the banks. The aftermath will make the world economy today look healthy. The US will have to “print” massive amounts of dollars (or rather, create their virtual equivalent electronically) to finance its wars and bolster its economy. The inflation from that will only weaken the dollar, and destroy any last vestige of illusion in America as the land of milk and honey.
That does not mean that this is the last global economic slump ever. Dialectically speaking, the capitalist cycle never really goes straight up or down. In the 1930s, there was a shallow recovery before everything was settled through World War II. We cannot exclude the possibility of another such shallow upturn in the capitalist cycle in the coming years, but any ups will be shallow and brief in comparison to the deep and prolonged downs. Unless a clear winner emerges in the imperialist struggle for world domination, the economic cycles will follow Trotsky’s predictions regarding capitalism’s falling into deep decay on the road to barbarism.
19. The fall in exports from China is already producing deep social unrest within that country. Because of the police-state style of Chinese capitalism, not much detail is available. But we know that as thousands of factories close down, there are massive strikes and protests as well as attempts to build independent unions. Mass protests have also taken place against the deadly environmental damage caused by the rampant boom, which was accomplished with utter disregard for any environmental concerns. The Yellow River has turned yellower, and practically entire regions have been partially depopulated due to high rates of fatal cancer among workers. Now, many of the survivors are organizing against the “Wild West” style of Chinese capitalism. We know from history that dictatorships cannot stop the class struggle, and it will almost certainly intensify in China, making that country a key factor in the current prospects for world revolution. Unless recovery arrives soon, it is also almost inevitable that the masses in Europe, the US and the rest of the world, particularly Latin America, will also start to rise up against the system.
It is not surprising that the French working class is leading the way. France has had two brief general strikes in the last couple of months. The unions are mired in intense factional struggles, in which the right wing is losing ground to the left. Workers have taken over factories and held managers hostage. University students have occupied the classrooms, through strikes and sit-ins, and many are conducting anticapitalist workshops and educational events. 1968 may once again be on the agenda, this time against the background of a massive international crisis, and the French bourgeoisie is scared. The eyes of all advanced workers should be focused on France. The French proletariat and students could strike a spark that ignites the international class struggle. In other countries (Greece for example), the class struggle has also begun to pick up, although with less intensity.
20. The world is in transition to a “new world order” in which the class struggle and the potential for socialist revolution could develop in a number of countries. It is unlikely that the world crisis can be resolved just through diplomacy and Keynesian economic measures of varying degree. The next decade must end with the international socialist revolution on the agenda. If this does not happen, the instability of global capitalism will eventually bring about another world war – this time coupled with the environmental catastrophe of climate change.