As trade unionists and socialists we need to understand a little economics – so we can have an idea of the terrain on which we are going to be fighting on – are we facing a period of slump, or of upswing?
Based on articles and analysis from the CWI - read more here
Of course, in today’s crisis-hit capitalism, any upswings will only be feeble – so you may not even have noticed that the world economy grew slightly - by about 3% - in 2022. It wasn’t long ago that the capitalist economists’ official predictions were for stronger growth in 2023 – but now the World Bank is sounding alarm bells, warning about a “decade of lost growth” with growth bumping along at only 2% or so until 2030.
War in Ukraine may have added to the problems, but the World Bank admits that the main problem is declining productivity. Productivity - a measure of how much employees produce for every hour worked - is declining worldwide, but not because people are working less. It’s down to a lack of investment by the capitalists in new technique, alongside worsening health, and worker dissatisfaction - also by-products of capitalist failure.
The historical justification for capitalism was that it was able to develop the productive forces. Yes, it was done at the expense of the working-class and the planet, but the capitalists historically reinvested profits to develop industry, science, and technique. Today, most don’t even do that. Because their system is a system designed to maximise profit, rather than maximise production, if they can’t make a profit, they don’t invest.
But some capitalist economists - like Nouriel Roubini - mirroring a Marxist analysis but from a capitalist standpoint - are warning that things could be worse still for the world economy - a lot worse. He has described the current banking crisis as the “beginning of the blood bath”.
Our analysis is also that the collapse of Signature and Silicon Valley Banks (SVB) in the US and Credit Suisse in Switzerland signals a new phase of accelerated crisis. A global economic recession in 2023/24 is now a strong possibility - although nothing is ever certain. What’s certain is that we need to be ready for the dramatic economic, social, and political consequences which would flow from this.
To explain why this crisis is on the cards – let’s go back to some basics
First of all, Marxist economics explains that capitalism is an unplanned system, with the threat of slump and recession always present. In fact, the real question is not why capitalism goes into crisis but how sometimes it manages to avoid doing so!
Capitalism is based on the systematic exploitation of the working-class. You are only ever paid in wages a fraction of the total value that has been produced by your labour. The rest, our “unpaid labour” is turned into profit by the capitalist class. However, to realise that profit they need to be able to sell what we have produced for them.
In outline, the main problem the capitalists have is finding a profitable market to sell their goods. They need to make sure they aren’t just sitting in a warehouse but are sold and turned into profit.
But one of the fundamental contradictions of capitalism is that the working-class, with our limited wages in our pockets, are a good chunk of the potential market available to the capitalists to sell their wares to. But, because they have ripped us off by not paying us the full value of what we have produced, we don’t have enough money to buy them all back. There’s also a limit as to how many luxury goods that the capitalists want to buy from each other too.
So there is always a tendency within capitalism towards ‘overproduction’ – not because people don’t need those goods – the global poor and destitute desperately need them – but because more goods are produced than can be sold at a profit.
So, with unsold goods sitting in their warehouses, the bosses cut back production and try to wait it out until some of their competitors go bust & they can start producing for a profit again. In broad brush terms, that’s the boom-slump cycle of capitalism.
This contradiction can be overcome for a while if the capitalists reinvest their surplus back into production. Indeed, if they are to continue to stay ahead of their rivals, they have to invest in new technique – into buying new machinery that can produce things more quickly, and therefore cheaply, than their competitors. That’s essentially what happened in the post-war boom.
But, as the profits that the capitalists could generate from investing in production shrank (and Marx predicted that their rate of profit would tend to fall), increasingly they turned to speculation to make a quick buck instead – creating the kind of bubbles that burst at the time of the 2007/8 crash.
The trigger of the current financial turmoil is not the same as in 2007/8. That was primarily caused by dodgy loans and speculative bubbles reflected in the subprime mortgage catastrophe. The recent crisis has been triggered by different factors, in an entirely different world situation, above all the hiking of interest rates by the Federal Reserve, European Central Bank (ECB), and other central banks in an effort to control inflation.
But the underlying issues are the same – capitalism has become an increasingly parasitic system, seeking to generate wealth through financial wheeler-dealing rather than investing for growth. Alternatively, wealth is simply being hoarded, rather than being invested in new production.
The global financial system
To understand what is happening at present, particularly the rise of inflation, it’s also important to have an idea of the role of credit and borrowing in the world financial system.
Credit developed as an essential part of capitalism. While the bosses’ potential profits are still sat in the warehouse as unsold goods, and/or because they need to get ahead of their rivals by buying new machinery, they need to be able to borrow money from the banks to tide themselves over until their profits are generated. And the banks obviously make sure they grab a part of the surplus generated by our unpaid labour through charging interest on those loans.
But, particularly when profit rates are declining from manufacturing, a bigger and bigger chunk of the capitalist class have realised that they can make more money out of finance capital – out of interest payments and rents, as well as speculation in shares and other financial instruments etc. And, as profit is king – that’s what they do.
But, in order to generate more profit, banks realised that they could take a gamble on lending out more money than they have actually got coming in. As long as all their depositors don’t claim all their money back at once, the trick works – but – and that’s essentially what happened with the recent bank collapses – if they do, then the bank can’t pay them all back and quickly goes bust.
In the recent banking collapses, news spread that the ‘bonds’ that these banks had invested in were falling in value as interest rates went up. Depositors suddenly started demanding their money back. Although this was now all done via computer screens, rather than customers banging on the doors of the bank, they were nevertheless classic examples of how a run on a bank develops. Credit Suisse saw 10 billion euros per day withdrawn in the run-up to its collapse.
The ruling classes were prepared to spend massive resources to bail out these banks, desperate to prevent a meltdown. In reality, they have, at best, bought time, and further bank collapses are a near certainty in the coming period – especially with interest rates still high – as I’ll try to explain.
While the US is one nation state, the EU, should it be confronted with a bigger banking crisis, could be conflicted by one of capitalism’s other main limitations – the interests of different nation states. The cost of further bailouts could easily spark conflict between the different governments of the Eurozone, all of which have differing economies and banking systems.
The collapse of Credit Suisse, in particular, is a significant development – which is probably why they’ve kept it out of the headlines as much as possible. This was not a minor bank. Credit Suisse was a major pillar of the global financial system. Its takeover by UBS points to another tendency that may develop further as more banks collapse – an even greater monopolisation of the banking system in some countries. The massive conglomerate that has now been created is equal to 220% of the GDP of Switzerland. Of course, it also means the scale of further bailouts would be astronomical!
And it’s worth saying a bit more about these ‘bonds’. A bond is essentially a guarantee from a government that it will pay back a loan at a guaranteed rate of interest. But, as interest rates rose, the old bonds that these banks held were suddenly not as attractive and their prices fell. Why buy a bond that promises a 2% return if you can buy the latest bond that now promises a 5% return? And there will be many more banks holding these lower return bonds too and fearing the consequences.
Bonds are ways that governments can raise money to cover their debts – so they can keep spending. Essentially, bonds are governments printing money without any production to back them up.
The massive “quantitative easing” – injection of money into the world economy after the 2007/8 crash – was part of the same kind of process. This injection of ‘cheap money’ was repeated again to get countries through the Covid pandemic. It’s another part of the house of cards that is going to come tumbling down at some point.
Global debt and inflation
The lengths to which this confidence trick has gone are shown by the fact that at the end of 2021, combined global private and public debt was something like 350% of world GDP – so the combined debt is 3.5 times more in value than the global economy actually produces. That is unsustainable.
With rising interest rates making the costs of paying back those debts even higher, then it’s inevitable that a series of nation states will be forced to default on their loans. The UN predicts about 70 countries in Asia, Africa and Latin America will do so over the next few years.
We’ve already seen in Sri Lanka how, on the one hand, the crisis that accompanies a country going bankrupt sparks mass uprisings but also, now that a deal has been done with the IMF, any ‘bailout’ comes with a heavy price of harsh interest payments, privatisation and asset-stripping, and cuts to pay and jobs to make the working-class pay that price.
Demands for non-payment of the debts, nationalisation of the banks and capital controls to stop the bosses removing their wealth – as were raised for Greece at the time of their debt crisis – will become increasingly important.
But the major imperialist countries face similar debt issues too – including the US and China. Following 2007/8, world capitalism was able to benefit from the growth and developments of the Chinese economy, underwritten by relations with the US. This “escape route” is not present today.
Britain – as ever one of the sickest of the capitalist patients – now has a public sector debt of over 100% of GDP, the worst since the early 60s – and that was debt caused by spending on WW2. The Treasury will have to raise money through selling bonds at an unprecedented level to cover that debt – about £240 billion a year for the next five years. That’s why Mark Carney, when Governor of the Bank of England, said the UK was “reliant on the kindness of strangers” – money-grabbing investors willing to buy these bonds on the promise of a high return. But, just like the banks that failed, if investors decide the UK is too risky an investment, the chickens will come home to roost.
But printing money without production to back it up also means that money loses its value – this is what causes inflation, not our wage increases as the bosses would like to pretend. The pumping in of trillions of dollars over the last decade or so, without production increases to match, are the root cause of current global inflation.
The standard response of capitalist economists to rising inflation is – as we have seen – to put up interest rates – the idea being that it discourages borrowing and reduces the amount of money sloshing around the economy. But essentially that also means even less investment, paving the way to a recession. So, a furious struggle is now taking place between different wings of the ruling class over what they should do. Those who are most worried about rising prices are saying interest rates must go up, while those worried about a sharp recession are saying they should be brought down. In reality, they are damned if they do and damned if they don’t. Interest rates aren’t a magic wand that they can wave to control chaotic capitalism. Whatever decision they make, crisis is unavoidable.
However, nobody should ever say that a ‘final crisis’ of capitalism is on its way – and all we have to do is to sit back and wait for its collapse. No, unless overthrown and replaced with a rational planned socialist economic system, the world’s capitalist classes will continue to stagger on – flailing around like a bunch of drunks as they throw punches at the working-class, at the environment, and at each other through trade wars and actual regional wars.
We are in a new period of increasing geopolitical and economic fragmentation, trade and currency wars, inflation, stagnation, climate crisis, and corporate and sovereign debt crises.
None of the measures taken have helped lift the confidence of the bourgeoisie, as they hoped. The massive hoarding, rather than investment, that started to take place before the run on the banks, continues. The current crisis in the banking sector will further tend to strengthen this trend.
Major problems with supply chains will also continue, fuelling the inflationary pressures. This will intensify as the trend towards regional blocks increases, unlike the 1990s era of globalisation.
Prepare for dramatic events
The capitalist strategists may be able to take some empirical measures to ‘kick the can’ down the road, for a time. Yet they are running out of road. A recession or deep depression, at some stage, is unavoidable, given the contradictions present in the system.
There could be a significant crash, or, on the other hand, it may be more of a train crash in slow motion. After all, the crisis in 2007/8, like many other financial and economic crises, developed not as a single act. It was preceded by a series of lesser crises in the months beforehand. What is certain, however, is that the global financial system, like capitalism, as a whole, is in a systemic crisis.
As always, the capitalists will try to make sure it is working people globally who suffer and are made to pay for the effects of the sheer brutality of capitalism.
We need to be prepared for dramatic changes that can arise from these processes. It will result in massive polarisation and heightened conflict. Bitter class battles are already breaking out, reflected in the heightened class struggle in Britain, France, Germany and elsewhere.
The recession in 2008 eventually gave rise to the mass movements around Bernie Sanders in the US, Jeremy Corbyn in the UK, and saw mass revolts and upheavals in Asia, Africa and Latin America. But it also led to the election of Trump in the US, Bolsonaro in Brazil, and other reactionary regimes.
The far-right populists will attempt to capitalise on the current banking crisis and attack the “bailouts” of the bankers. Already sections of the Republican Party in the US have attacked the bailout of the “rich techies” who had their funds deposited in SVB. The fear of further banking collapses can be very powerful, especially in countries where the trauma of what this meant historically is part of mass consciousness.
The right-wing populists can play on this, as we have begun to see in Switzerland. The onset of recession will pose the threat of the far right using the financial crisis, immigration, and other issues to try and strengthen their support. A deep recession can also “stun” sections of the working class, should unemployment rocket, along with other attacks on living standards. However, it can also lead to crucial political radicalization and polarization.
A struggle to help fight the ravages of inflation through the establishment of a living wage, adjusted to match inflation and price increases, is essential. But who decides what inflation is? In the UK, is it official CPI at 10%, RPI at 14% or the actual level of increases on basics like milk which is more like 30%? We should raise demands for committees of workers, consumers and trade unionists to determine in each country what the real rate of inflation is, instead of the fiddled inflation figures of capitalist economists and politicians.
The building of mass workers’ parties with a socialist alternative programme to capitalism, to offer a way out of the contradictions and dilemmas of the profit system, is posed even more urgently as this crisis is unfolding.
What is clear more than ever is the need to take the huge wealth, resources, assets, and power that rests in the hands of the capitalist class into public ownership through nationalisation, under democratic workers’ control – with majority trade union representation at all levels, drawn from workers, including from the unions in the industry and the wider working class and labour movement, with the government also represented.
Socialist nationalisation would be just a first step towards the unification of all the banks and major industries into one democratically controlled system, so we can reorganise society on socialist lines, to provide what is needed: jobs, services, health, and housing, for all.
That way we, and our families and friends, and the workers and poor across the globe, would be able to live a decent enjoyable life with the freedom to develop, learn and explore the many untapped talents and potential that exist among us - by ending the chaos of unplanned capitalism.
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