Mick Armstrong
There is a growing consensus among economists that the US is headed for or is already in recession. But there is still considerable disagreement about the scale of the recession.
Some claim it will be a mere blip - a necessary correction to market exuberance and inflated housing prices. Growth will then resume on a more sustainable basis. Just as many economists paint catastrophic scenarios. The London Financial Times argues:
"Primordial fear will be slow to set in as everyone still believes in the Goldilocks read Pollyanna future. Millions of Americans will undergo cutbacks in salary, others will lose jobs. People will learn to work with their hands again. Class and racial struggles will erupt with greater intensity.
When the boom is on the up everything seems fine. But when it clips a few hurdles it can all come crashing down."Foreclosures and bankruptcies will reach all-time records. Overproduced, overconsumed luxury items will hit the market, each competing in price-dropping to find the bottom first.
"The mutual plotting society within the financials and world banking will exhaust all efforts at propping up an unsustainable false picture of the economy. When they crack, CRASH! Then the markets will revert to a barbaric equilibrium. Tremendous wealth will be destroyed across all spectrums of society."
I repeat, this is not a quote from Karl Marx but from the London Financial Times - one of the world's most eminent bourgeois mouthpieces. This is not to say that its prediction is correct. It is too early to tell and Marxists have no crystal ball. Even if there is a sharp US recession we can't be sure whether it will pull down the rest of the world. Some analysts argue that the China connection means Australia will suffer little impact. What we do know is that the heads of Europe's central banks are extremely nervous.
Either way, the Financial Times article highlights what a chaotic, brutal and destructive system capitalism is. If this is what apologists for capitalism think of their system, the case could not be clearer for abolishing it root and branch and ushering in a new egalitarian social system - a socialist society in which the scenario they paint would not be possible.
How are we to understand the turmoil in the US economy? A crisis which started in the sub-prime property market and has engulfed the rest of the property market, the banks and other financial institutions and is now threatening to drag down the real economy - the productive core of US capitalism.
We need to start first not with the surface phenomena - the gyrations on the markets - but with the fundamentals of capitalism. Capitalism is a system based on the exploitation of workers' labour by a tiny class of capitalists who control the key means of production: the factories, mines, transport and communications industries.
Workers are paid considerably less than the value of what they produce for sale on the market. It is this surplus value - the difference between what workers are paid and the value of what they produce - that fuels the system; that produces the profits necessary for firms to invest in new buildings and equipment.
But capitalism is not only an incredibly exploitative system; it is also a highly competitive one. Rival firms compete for markets. This competition between capitals compels firms to reinvest a large part of the surplus extracted from workers in new technology.
Marx showed that this process of competitive accumulation provokes crises in the system - both short and long term. In the long term the piling up of more and more capital leads to a tendency for the profit rate to decline. A decline in the profit rate makes capitalists less likely to invest in equipment and can provoke recession.
The competitive nature of capitalism also leads to a regular pattern of boom and bust - the so-called business cycle. In the boom phase capitalists cash in on expanding markets by producing more and more. New mines, factories and offices are built. Companies buy up raw materials, hire workers and take out loans to finance expansion. For a period the boom feeds off itself. Profits skyrocket. Investors have a field day as the stock market surges. But because capitalism is an anarchic, unplanned system the boom creates contradictions that eventually bring it to a grinding halt.
Increased demand for raw materials and skilled workers forces up costs, squeezing profits. Rapidly increasing demand can lead to over-investment in sectors of the economy. Because production is not planned, hundreds of office blocks are built to deal with a temporary shortage of office space, new iron mines are opened all over the world because of rising ore prices.
As every capitalist is trying to outdo their competitors by getting in first, more mines or office blocks are built than are profitable. The market is flooded and firms are forced to sell at a loss.
The boom gives way to contraction. Firms cut back production. The weakest go to the wall. Workers are sacked. This worsens the slump as sacked workers cut their spending. The slump feeds off itself, flowing from one section of the economy to another and leading to more cutbacks and sackings.
Eventually the slump bottoms out as profit rates are restored. In this brutal system the surviving firms cannibalise their rivals, buying up their assets cheaply. The fall in demand lowers raw materials prices. The rate of exploitation is forced up as workers' wages are pushed down and conditions undermined.
This is a general sketch of how the boom-slump cycle works. But every boom and slump has its own unique features.
It is important to emphasise that two things are central to capitalism: the exploitation of workers and the relentless competition between firms. In the final analysis the source of profits is not the gyrations of the markets but the pumping out of surplus value at the point of production. All the banks, the insurance companies and markets do is redivide this surplus.
It is a crisis of profitability in the productive core of the system that is the cause of a slump. Sharp falls in share prices do not necessarily bring on recessions. This doesn't mean that what happens on the debt, share and equity markets and in the labyrinth of other financial institutions is irrelevant. Events there can trigger broader economic turmoil.
As capitalism aged it developed a vast array of financial institutions. Some are parasitical; others provide services to productive capitalists by marshalling finance for investment in technology and labour. The massive growth in financial intermediaries underpinned capitalist expansion. But it also introduced major destabilising elements by fuelling an unsustainable level of debt and fictitious capital.
When the boom is on the up everything seems fine. But when it clips a few hurdles it can all come crashing down.
We can see that with the sub-prime crisis. These were home loans to high-risk borrowers. The borrowers were suckered in with an initial low interest period, but when that ended many could not meet the higher interest payments. The banks thought that in a rising market they could foreclose and sell the houses at a tidy profit, but there were so many foreclosures that the property market began to spiral downwards.
The crisis was not confined to the US housing market. By way of a web of financial arrangements it spread to debt markets worldwide. US banks sold the sub-prime mortgages to foreign banks, superannuation funds and so on. So they were all drawn into the crisis.
Some banks took out mortgage insurance. But the mortgage insurance companies also invested in the sub-prime market, so they may not be able to meet their obligations. By the end of 2007 losses and write-downs at the world's biggest banks and security companies totalled $US97 billion.
This is only the tip of the iceberg. The complex interweaving of debt is so difficult to unravel that no one knows the scale of the losses or even who is in debt to whom. This makes banks fearful of lending, even to other banks. They just don't know who might go belly-up.
The drying up of credit threatens to send even profitable companies to the wall. The first to be hit will be those that depend on high levels of debt.
Already in Australia we have seen the plunge in the share price of shopping mall manager Centro after the banks refused to roll over Centro's $4 billion debt because of fears about its US investments. Centro may be forced into a fire sale of assets. Centro expanded aggressively by using a complicated structure of debt and equity to buy properties and then on-sell the debt, clearing its balance sheet for more property acquisitions using more debt. It was a structure geared for boom times when credit was easy. If credit continues to dry up, more and more companies will be burnt.
European and US central bankers have released large volumes of credit to try to shore up the debt market. This may or may not restabilise the situation. The other potential stabiliser is that investors from oil-rich countries and China are buying up US assets on the cheap. This may put a floor under the US economy.
But even in the best case scenario, the sub-prime crisis is an incredible human tragedy. Millions of low-paid American workers will be forced to walk away from their homes and be left with nothing. Yet many of the company executives who came up with the scams will pocket tens of millions of dollars in bonuses even if their companies fail.
Whether the US slips into a severe recession that drags down the rest of the world or whether it experiences a mild slow-down, the sub-prime crisis has starkly revealed the true face of capitalism as a barbaric, anarchic and destructive system - a system that deserves to be swept away. |
