Public Debt Crisis: Capitalism is Heading towards New Convulsions
After more than two years of grim economic news, last year came to a close with cheers for the supposedly "budding" economic recovery. However, so far 2010 does not seem very promising. Presently the mass media message about the economic crisis is quite ambiguous: on the one hand we are told that the recession is over. Why? Because the economy is growing again, bankers are making money, Wall Street is again flying high, etc. On the other hand the bad news of the last two years of recession keeps on coming. For instance, unemployment is still growing, the housing market is deep in shambles, commercial real estate is hitting the wall only now, consumer loans defaults remain at record highs, and banks are still failing.
In the specialized economic media, the mood is mostly gloomy. In general it seems that bourgeois economic specialists have no confidence in the long term effectiveness of the state capitalist policies that have been put in place to pull the global economy out of the recession. And surely it is difficult to be optimistic when you know that these policies are, essentially, no different than the policies that have so much contributed to the severity of the so-called "great recession". In particular there is a growing anxiety among bourgeois economists about the huge increase of state debt the world over as governments have been trying to ‘stimulate' their national economies.
A new surge of public debt
From so-called ‘communist' China to democratic America, the bourgeoisie has been keen to spend its way out of the recession. Every national state is everywhere intent on saving capitalism not just by increasing the money supply through interest rate manipulation, but by a direct massive injection of money both in the sphere of production and the circulation of commodities. Sure the question arises, where is all this money coming from? According to some good thrifty souls, national states, like individuals, are supposed to spend only what they have. But obviously nobody follows this frugal advice. Like individuals, states, through credit, can "buy today, and pay tomorrow," and in fact have been covering their budget deficits through public debt more or less forever - which of course does not exclude the occasional running of the printing money machine at full speed. However in the last four decades, in the context of an insane policy of abusing the credit system to alleviate the devastating consequences of capitalism's chronic crisis of overproduction, state public debt the world over has grown to monstrous and more and more unsustainable levels. The reality that the mountain of debt that national states are sitting on all over the world has no chance of being repaid, is creating a nightmare scenario for the whole capitalist system.
We've seen on a smaller scale what can happen when you hit the limits of this policy. This has already been demonstrated several times; for instance, when Argentina and Russia defaulted on their foreign debt in 2002 and 1998 respectively, and in 1997-98 during the collapse of the so-called Asian dragons and tigers that once were paraded as an example of the vitality of capitalism. We could also point to the decade long Japanese crisis in the 1990s -the so-called ‘lost decade' in this country economic history.
That capitalism's day of reckoning is fast approaching has been signaled recently by the bankruptcies declared by Iceland and Dubai, which are likely only the opening salvo in a coming storm, but also by the quasi-official insolvency of several "developed" countries that are much closer to the epicenter of capitalism, such as Spain, Ireland and Italy. These countries are still standing only because of European ‘solidarity,' or better said, because the European bourgeoisie is afraid of the economic, political and social consequences that their collapse could create. And this is just the tip of the iceberg.
The International Monetary Fund (IMF) recently published a research report by its economists about the finances of the world's "richest" countries, (the G-20 club) which provides considerable ammunition to support the argument that world capitalism is heading towards new convulsions, spearheaded this time by the financial insolvency of the biggest economic powers. A full analysis of the dozens of tables published in the IMF document is beyond the scope of this article, but we can extract from them two unavoidable conclusions.
- in most countries national debt has grown tremendously in the last two years, as governments the world over have tried to spend their way out of the recession and at the same time confronted diminished tax revenues. In addition, according to the IMF, this imbalance between expenses and revenues, financed by a growing debt, is not likely to end any time soon. The IMF document shows that in 2007 the average government debt to GDP ratio among the advanced economic nations of the G-20 group was 78.2 percent; by 2009 this average had grown to 98.9 percent, and by 2014 it will reach the breathtaking figure of 118 percent. Among the economic heavyweights of the G-20, Japan, Italy, the US and Great Britain are the countries with the biggest total government debt loads as measured by the debt-to-GDP ratio (this figure expressed as a percentage is found by dividing the total debt of a country by a year's worth of its domestic production). Thus Japan, Italy, the US, and Great Britain are expected to reach by 2014 a public debt-to-GDP ratio of 245.6 percent, 128.5 percent, 108.2 percent and 98.3 percent respectively. In other words it would take Japan about two and a half years worth of its gross domestic production and around one year for the rest to paid off their debts and balance their public expenses!
-there is no way that this mountain of debt can be repaid and the most likely scenario is a wave of defaults that will make the "great recession" look like child's play in comparison. The IMF report has not said so, but its own projections of the governments budget adjustments needed - draconian cuts in expenses, particularly in social programs, and sharp tax increases - in order to get the debt under control speak for themselves. For instance the IMF estimates that getting public debt under control "...will require a sharp correction in the structural primary balance of advanced countries. On average, bringing government debt-to-GDP ratios in advanced economies below 60 percent by 2030 would require steadily raising the structural primary balance from a deficit of 3½ percent of GDP in 2010 to a surplus of 4½ percent of GDP in 2020 - an 8 percentage point swing in one decade-and keeping it at that level for the following decade." By country, based on spending cuts or tax increases or both, this "correction" swing would amount to 8.8 percent for the US, 12.8 percent for Great Britain, 13.4p percent for Japan and around 10 percent for Spain, Greece and Ireland.
Incidentally it is a wonder of bourgeois economics that today the IMF is considering a 60 percent debt to GDP ratio as a prudent fiscal policy for the so-called advanced economic nations, when the same organization back in January 2003 chastised the Bush administration for running up a record breaking budget deficit of $400 billion, which now looks like peanuts, and a debt-to-GDP ratio of 40 percent. "An unprecedented level of external debt for a large industrial country" would push up interest rates and slow global growth, as the IMF warned just seven years ago. Today the US is running deficits of over a trillion dollars a year, its national debt has more than doubled in the last decade, and probably will pay more for servicing its debt this year than the total budget deficit of 2003. In the face of these "little" changes, the IMF economists mainly recommend a bogus budget adjustment. The bourgeoisie has really lost any sense of reality!
No way out under capitalism
The bourgeoisie can finagle its numbers all it wants to pretend that it can get society out of capitalism's historical crisis. Four decades of ever worsening economic conditions prove the reality that there is no solution to this crisis on capitalism's terms. The monstrous increase of state debt is just as much a dead end policy as the consumer credit bubble burst during the "great recession." Yet strictly speaking it is even worse. While consumer credit can stimulate production and thus help valorize capital, debt financed state expenses are mostly parasitic, a pure waste of value, which, except for economically sound infrastructure enterprises, don't add anything to the national economy. In fact the huge increase in state debt all over the world, reflecting growing government expenditures and diminished national revenues, mirrors also the repugnant growth of the bourgeois state which is sucking up the blood and energy of civil society. The upkeep of an omnipresent permanent bureaucracy, the running of an efficient repressive apparatus able to maintain bourgeois law and order and the maintenance of a well fed and equipped military - a killing machine able to wage war and defend the bourgeoisie's imperialist interests; all these cost enormous amounts of money. For instance in 2008 the world military expenditures amounted to $1.473 trillion, of which, not surprisingly, 48 percent ($711 billion) were spent by the US alone.
In the coming period we will frequently hear the government call for sacrifice and a national "solidarity," a call to accept higher taxes and less social services to help shoulder the burdens of "our" public debt. The working class has only one way to respond to this bourgeois gimmick: the development of its class struggle on its own terrain, for its own demands, refusing to bear the brunt of the crisis. The only solution to the crisis is the overthrow of capitalism and its state, and the building of a real human community. This is the historical mission of the world working class.
Eduardo Smith. 21/1/10