World economic crisis: After the East, the West

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The 'equilibrium' upon which the planetary imperialisms have rested since the end of the Second World War, since Yalta, is being overturned because of the economic collapse of the USSR and the resulting implosion of its bloc. Next to the economic disaster that has befallen its rival, the western bloc seems to be the mighty victor: the exuberant abundance of the shop-windows in the big industrial countries is the best weapon of western propaganda in contrast to the dramatic shortages in the east. However, the illusion of economic victory in the west looks like being short-lived: the economic crisis of generalized overproduction, which has been going on for over 20 years, is a world-wide crisis. Following the under-developed countries' slide into bottomless misery at the end of the 70s, the economic collapse of the eastern bloc at the end of the 80s, far from demonstrating the vitality of the industrial countries of the west, is on the contrary a harbinger of the world-wide catastrophe that is to come. The next decisive step towards this will be the economic collapse of the most developed industrial countries. What we're seeing is less a victory of the west than the defeat of the east. The whole evolution of the western economies over a number of years points to a tomorrow that is anything but bright.

What happened on Friday 13 October 1989? In one session, Wall Street plunged by 7%, and this despite the massive intervention of the so-called 'institutional' investors, for whom the American state immediately opened up new lines of credit so they could buy shares and stop the slide.

After a weekend of intensive meetings in the great central banks of the main western economies, the effects knocked on; on Monday 15 October, Frankfurt went down 13%, Paris 6.9%, London 4.6%, although Tokyo stood firm. However, the joint measures adopted by the economic powers began to take effect: that same day Wall Street improved by 3.4%. In the week that followed, the indices stabilized.

But all this was a clear warning. 200 billion dollars went up in smoke. A new purge was im­posed on stock market speculation. Despite the heavy bill, the central banks rejoiced over their 'technical mastery'. They had limited the dam­age. However, there was no euphoria. On the contrary. This new upset for stock exchange speculation only fuelled disquiet. 1987 was no accident. OK, the markets were stabilized, but for how long?

Capitalists aren't particularly suspicious peo­ple, but they will end up being just that. The month of October is decidedly prone to stock exchange collapses. 1929, and more recently in 1987. However, apart from these repetitive as­pects, the conditions in which these collapses have taken place are very different. Obviously the situation of the world economy is very dif­ferent in the 80s from what it was in 1929: we have already dealt with this amply in the International Review and we won't go over it again here1.

But while the same causes - the raising or interest rates by the big banks - have pro­duced the same effects - the drying up of credit reviving fears of recession and provoking panic on the stock exchange - between October 1987 and October 1989 the international situation has changed a great deal. There has been a marked acceleration in the decline of the American economy and the instability of the world situation has been considerably accentu­ated.

Faced with the recession, a headlong flight into the debt

During the 1970s, the huge credits doled out to the under-developed countries of the periphery made it possible, to a great extent, to absorb the overproduction of the industrialized coun­tries. However, this policy reached its limits with the crisis of the dollar. The 900 billion dollars borrowed by the poor countries of Latin America, Africa and Asia will never be repaid. These fragile economies were ravaged by debt and inflation. They lost all solvencies and were definitively closed as outlets for the commodities produced on a massive scale in the industrial world. The world market contracted brutally and, following in the wake of the American economy, the economy of the whole planet plunged into recession at the beginning of the 80s.

Recession is the worst of all evils for capi­talism. It means a fall in production, factory closures, the development of unemployment and a dizzying rise in unpaid debts. It expresses in a brutal way the impasse that capitalism has reached. Such a situation endangers the stabil­ity of the dollar, the world market's leading currency and symbol of American power and domination. Such a situation is untenable for American capitalism, because it not only threat­ens its economic power, but also its position as an imperialist giant.

The USA isn't just the world's main economic power, it's also the dominant imperialist power within the dominant bloc. Maintaining economic activity and growth is a priority for America to safeguard its own economic and imperialist in­terests. After two years of economic purges im­posed by the austerity policies of the first term of the Reagan presidency, the American state then had to get its economy on the move once again. This was done on the basis of what American imperialism required in order to face up to its Russian rival. The invasion of Afghanistan by the Red Army at the end of 1979 brought a vicious heating-up of inter-imperialist tensions, and led the USA to undertake a vast program of modernizing its armaments. The American 'revival' was a revival of arms pro­duction, a recovery based on the development of the war economy. The USA's military budgets swelled up beyond measure, and at the same time the budget deficit became more and more colossal, despite a drastic reduction in social spending.


However arms production has the particular feature of being a pure destruction of capital which acts as a fetter on economic development as a whole. Armaments are neither consumer goods permitting the reproduction of the labor force, nor a means of production permitting an accumulation of capital. The economic catastrophe of the eastern countries clearly expresses this reality: the absolute priority given to the war economy for decades has led to the asphyxiation of the whole economy.

To a lesser extent, but just as clearly, this reality has also been imposed on the USA. Since the 1950s America's competivity on the world economic arena has been eroded more and more. It's certainly not one of the lesser paradoxes that we are now seeing the countries which were defeated in the Second World War, Japan and Germany, beating all records for competivity. This is due to the fact that these countries, after the war that they lost, rebuilt their destroyed economies on a more modern basis, using what were then the most advanced technologies, whereas the USA's productive apparatus at the end of the war hadn't been destroyed, but had been worn out by the demands of arms production and was to a large extent out of date and obsolete. This relative loss of competivity at the end of the war was further exacerbated in the years that followed, since the defeated countries were forbidden by treaty to engage in rearmament, and were thus able to invest in production without sacrificing this to the needs of the war economy; the USA, on the other hand, had to maintain an imposing military sector, corresponding to its role and needs as leader of an imperialist bloc. This severely limited its competivity on the economic level.

The Reagan presidency's policies of 'recovery' via the war economy thus had the principal result of further weakening the competivity of the American economy. The budget deficits run up to finance the military effort were thus supplemented by trade deficits which also broke all records throughout the 80s. In order to finance these colossal deficits, the USA had to go into debt, and this soon pulverized the records reached by the previously most indebted countries. Today, the debts owed by countries like Brazil or Mexico (a hundred billion dollars for each in 1980), which made financiers tremble at the beginning of the 80s, almost look ridiculous compared to the American debt at the end of the 80s: more than 500 billion dollars of external debt and an internal debt estimated at between 6000 and 8000 billion dollars. The annual American budget was pruned by 170 billion dollars for the payment of the debt. This situation can only get worse and the debts can only get bigger.

An extremely significant pointer to the weakness of the American economy is the fact that, during the 1980s, foreign investment in the USA went well beyond American investments in other parts of the world. Whole chunks of the American economy are today the property of Japanese and European enterprises.

American capitalism, in its search for fresh money, has used all the resources accruing to it because of its status as the world's first economic power and leader of the most powerful imperialist bloc. His Majesty the Dollar has imposed his supremacy in the following ways:

- the American federal bank, in the name of liberalism, has guided the world economy in a very statist manner, through its policy of interest rates;

- a policy of supporting the dollar has been imposed on the main industrialized countries, who have become the USA's money-lenders.

This policy has made it possible to put a temporary brake on the slide towards recession, and to keep the most industrialized countries afloat. It has been accompanied by an intense ideological campaign about the glories of the capitalist economy. In 1987, euphoria still reigned: official 'growth' was beating all the records and inflation was at its low point. The stock market slide was soon halted and speculation took wing again.

The crisis of credit: the limits of a policy

The official, pseudo-growth of the second Reagan Presidency was in fact a hidden recession of the world economy2. What really happened was a growth in the destruction of capital and an artificial growth of the unproductive sectors. Economic activity was maintained in an artificial manner: production wasn't really paid for, commodities were exchanged against debts. In these conditions production was not directly production of value. Capitalism can only keep up such a semblance of economic activity through cheating the laws of the market on a vast scale, but this only destabilizes the world economy more and more and builds up a gigantic pile of waste.

This situation has been masked by the increasing manipulation of economic indices and the deafening noise campaigns about the efficiency of the USA's 'liberal' economic policies: the famous Reaganomics.

But since 1987, the situation has changed a lot. The euphoria has subsided, doubt has crept in. The official statistics, confronted with the reality of the crisis, have been obliged to bear some relation to reality, otherwise they would be of no use whatsoever. Official 'growth' has begun to go into decline while inflation has made a definite comeback. The example of Britain is particularly significant in this respect. Britain had a policy of Reaganomics before the USA did, but it is no longer able to hold back the rise of inflation, whereas lending rates have gone up and plunged the economy into recession.

Of course the American economy, the worlds no 1, is of a different caliber from Britain's, and the dollar isn't the pound Sterling. Moreover, the USA can profit from its position as head of the bloc and impose a discipline which suits its interests. However, the blind laws of the market are at work here; they have already hurled the under-developed countries of the periphery into an economic chaos from which there is no escape; today they're bringing down the British economy; and they are also eroding the economic power of America, which is at the centre of the economic contradictions of world capitalism.

For years now, through the recourse to credit, a mountain of dollars has been in circulation. As it stands, the debt of the peripheral countries has reached 1300 billion dollars. The external debt of the USA has gone up to 500 billion dollars, but this hides the internal debts, where the accumulated borrowings of the state, of enterprises and individuals, are estimated at between 6000 and 8000 billion dollars. The development of credit which can never be repaid, in fact of fictitious capital, is completely out of synch with the development of the real economy, of actual production3. Financial and stock exchange speculation hasn't solved anything. Stimulated by the policy of 'leveraged buy-outs'4, enterprises have seen their share values go up five or 10 times, but the development of production in no way justifies this rise.

In these conditions, the laws of the capitalist market are pushing for a more real relationship between the value of the dollar and the actual production of wealth. Inflationary pressures are getting stronger and stronger. Faced with these pressures, the policy of the American Federal Bank has had to yield and lower the rates, to reopen the flood-gates of credit, in order to avoid a rapid decline in growth, which would have catastrophic consequences for the world's economic equilibrium.

Before the mini-collapse of the stock exchange in October 1989, the managers of one hundred of the biggest American enterprises had sounded the alarm, disturbed as they were by the slow-down in activity concretized in a brutal fall in the profits of US enterprises (the flowers of American capitalism, like General Motors, Ford and IBM, saw their profits fall by between 30 and 40% in the third quarter of 1989. They thus asked the Federal Bank to lower interest rates and maintain growth).

Given the disquiet of the world's financiers in their daily reading of the various economic indices, the particular event which, in a purely phenomenological way, gave rise to the stock market panic of October 1989, might appear rather trivial. However, it is a significant expression of the present difficulties of the world economy. In the 'buy-out' war fought by the capitalists of the whole world, the incapacity of a group of speculators to get the credit they needed at the stock exchange to finance a buy­out they'd launched for United Airlines, one of the main US air companies, unleashed a torrent of panic. Why? Because this meant the end of easy credit, the end of the gigantic buy-outs made possible by this credit, and thus the end of the artificial growth of stock market shares. Once again the USA recoiled in front of the economic implications of a policy of austerity, of rigor vis-a-vis the dollar. At the beginning of November 1989, the Federal Bank had to lower its rates and re-open the coffers of credit. While this policy might hold back the fall in production, it is incapable of stimulating growth. More and more, the new credits put into circulation will be used to pay for previous debts, or to fuel speculation, and less and less to feed production.

The more credit grows, the less effective it is in the real economy, and the rate of growth will decline in an irresistible manner. On the other hand, the policy of easy credit does have a direct effect today, and that is to encourage inflation. In fact, the Federal Bank has chosen inflation rather than face the immediate danger of a catastrophic fall in production.

For years, American economists and political leaders have been talking about a 'soft landing' for the American economy, and in fact the USA's economic policies have managed to avoid excessive damage: the American airplane has managed to make a gentle descent. But where will it land? Won't all the difficult maneuvers it's tried up to now lead to a break-down? Won't the fuel of credit fail it in the end?

From the moment the American economy stops flying, it will mean a new and brutal dive into recession by the world economy. The American market will be closed to Japanese and European imports, there will be a growing incapacity to pay back debts, a new surge of inflation, a major financial crisis centered around the dollar. These perspectives for the world economy have been there in potentio since the beginning of the 80s, and all the USA's economic policies have been aimed at putting off the evil day by manipulating the law of value.

This policy of 'putting off till tomorrow' has only been possible because of the particular status of the USA as not only the world's main economic power, but also as chief of the most powerful imperialist bloc, imposing its diktats on the most developed economies of the planet: the countries of Europe, notably West Germany and Japan. The functioning of the group of the seven most industrialized countries of the western bloc, the 'Group of Seven', has symbolized this imposition of US economic diktats on the countries of its bloc. This discipline, especially as it affected Germany and Japan, has been the sine qua non of economic stability throughout the 80s. Despite the catastrophe of the 'third world', the overall descent of the world economy, the industrialized countries' slide into the morass of a hidden recession has taken place in a 'soft' manner ­from the economists' point of view, of course.

However, the conditions which allowed the USA to carry out these economic policies have now changed:

  • the dilapidated state of the American economy contrasts sharply with the relative health of its main economic rivals, Japan and Germany. Whereas the USA has run up huge trade deficits, Japan and Germany have broken all the export records. In contrast to the post­war reconstruction period, today European and Japanese capital is buying up whole chunks of the American economy. The locomotive is running out of steam, and at the same time as inflation is coming back in force, there is a recession on the American horizon. There is a threat of a dollar crisis and the USA's position of economic leadership is beginning to look shaky;

- the economic collapse of the Russian bloc, just as it has reasserted the unavoidable reality of the law of value within the capitalist system, is now overturning the global balance between the blocs which has 'organized ' the world since Yalta. The discipline which the USA has managed to impose on its main economic competitors, Europe and Japan, was held together only by the imperialist threat from the Russian bear. A bolt has been pulled back in the east, and this will overturn the relationships between the main economic powers of the western bloc.

The collapse of the Eastern Bloc and destabilization of the economy

The new decade is opening up under the auspices:

- of a dramatic dive into the economic crisis, which is based on generalized overproduction in relation to existing markets - markets which are going to get even more restricted;

- of a growing destabilization of the equilibrium which has dominated the world since the second world war.

The collapse of the Russian bloc will lead to the destabilization of the western bloc, and this will have particularly important implications on the economic level (among others). Faced with the threat of economic bankruptcy, America will be compelled to close its markets to European and Japanese imports, and the centrifugal tendencies within the bloc will get stronger and stronger. Since the Russian threat will no longer be credible, America's protective umbrella will also lose its justification. Such a situation will give rise to claims for independence by Japan and Germany, concretized in a growing trend towards 'every man for himself', each power trying to protect its own privileged markets in the face of the open recession which will impose itself with irresistible force.

The two planks which guaranteed the supremacy of the dollar, America's economic and imperialist strength, are being eroded. The solvency of the dollar was guaranteed more by the dominant imperialist role of the USA than by its economic strength. The value of the dollar is in fact largely fictitious, based on the 'confidence' inspired by the USA, and this 'confidence' will more and more be shaken by world events. Within the perspective of the development of the crisis, what's at stake is the dollar's hegemonic role on the international scene, and thus its future solvency. The international financial system, centered round the dollar, is like a house of cards. It threatens to collapse at the least breath of wind, and it's a veritable storm that's brewing.

As long as what's left of US 'growth' provides Europe and Japan with outlets for their production, all the industrialized countries have an interest in maintaining the present status quo, but this situation is provisional. The perspective of the American market's slide into recession means a new contraction of the world market and thus a fall in European and Japanese exports; consequently, recession for them as well. However, the economic situation in these countries isn't as bad as that of the US. They can still have some recourse to credit to preserve a relative stability in their privileged markets - Europe for Germany, and South East Asia for Japan. But this credit can only be based on the growing power of currencies that will challenge the all-powerful dollar: the deutschmark and the yen. And such a policy is no more a way out of the crisis than was Reagan's. It would only express the truly ruined state of the world economy and the bankruptcy of the USA. It would only briefly restrain the development of the crisis and keep illusions going a bit longer, but at a much more limited level than before.

Capitalism can't envisage a crisis without a capitalist solution. It can't accept that its contradictions are insurmountable. It's always looking for new illusions, new mirages to dream about. The convulsions in the east, which hold the prospect of opening up the economies of eastern Europe to the west, are creating the hope that there will be new markets for western commodities, a new shot of oxygen that will allow 'growth' to continue. This hope will be short-lived.

Ten years ago, China raised the same hopes, but the western capitalists were soon disenchanted. Even though China with its billion inhabitants has enormous economic needs, in the logic of capital this doesn't turn these needs into solvent markets. China is a population giant and an economic dwarf.

Economies of the Eastern Countries, 1985


GNP in Bil of $




GNP per habitant

External debt

Bil of $

Service of debt



















E Germany



















If today the countries of the east European 'glacis' can hope to free themselves from Russian domination, it's because of the economic collapse of the Russian bloc. Consequently, their devastated economies are similar to those of all the under-developed countries, ie insolvent. When the Berlin Wall was opened, hundreds of thousands of East Germans had ecstasies in front of the packed shop windows in the west, but their own pockets were empty: if they were able to make a few meager purchases, it was essentially thanks to the 100 marks 'generously' handed out by the West German state. In any case, the countries of Eastern Europe (excluding the USSR) had a total GNP of 490 billion dollars in 1987, a bit more than half the GNP of France, which was 880 billion. Such a market, even if it was healthy, couldn't suffice as an outlet for world overproduction, and so make it possible to avoid the plunge into open recession a recession in which the east European countries have been stuck for a number of years.

The solution of credit, the western manna called for by the leaders of the east, in particular Walesa who's become the representative of the interests of the Polish economy, is no solution at all. Given that these economies are in ruin, ravaged by decades of aberrant Stalinist management, the credits needed for an economic 'reconstruction' of ·the eastern countries are beyond the means of the western economies. They'd be investing in a pure loss: we already have the example of Poland, with its 40 billion dollars debt and the persistent bankruptcy of its economy. In fact billions of billions of dollars would be required for the job. In a period when the whole world is drowning in debt; when, faced with the contraction of the market, as competition is becoming more and more acute, a new 'Marshall Plan' is no longer possible. The loans from the west, rather than permitting the industrial development of these countries, have the aim of stabilizing the situation on a day-to-day basis. In such conditions, these western credits are largely symbolic.

At the beginning of the 80s, the under­developed countries of the periphery of capitalism the 'third world' slid into irredeemable economic disaster. . At the end of the 80s, it's the turn of the eastern bloc - the 'second world' - to go into economic collapse. The 'first world', the big western industrialized countries, in comparison to the general bankruptcy, still looks like an island of health and wealth. This situation can only reinforce the illusions about 'liberal' and 'democratic' capitalism, and constitutes the basis for the intensive ideological campaigns of the western bloc. However, all the conditions are there for the economic failure of the whole capitalist world, especially its most developed poles, to be exposed to the light of day. Since the mid-80s, through economic 'cheating' and deceptive statistics, the bourgeoisie of the industrialized countries has kept up the illusion of growth. This official lie, which the ruling class itself needs to believe, is reaching its end. Despite all the manipulations they've been subjected to, the economic indices are already translating the deepening economic bankruptcy of capitalism. The illusions about growth, about economic development, are going to tumble sharply, along with the official indices themselves, which will be obliged to reflect the reality of an accentuated descent into recession and the accelerated development of inflation.

The whole basis for the domination of capital is being eaten away by the world economic crisis, whose development may be relatively slow, but is nevertheless ineluctable.


1 See ‘Credit Isn’t An Eternal Solution’, IR 56

2 See presentation and extracts from the Report on the International Situation for the 8th ICC Congress, IR 59.

3 See ‘The Barbaric Agony of Decadent Capitalism’, IR 57.

4 ‘Leverage Buy-out’: official stock exchange auction to buy a company, usually based on a massive recourse to credit or the acrobatic manipulation of accounts.