World economic crisis: The demise of credit

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If lying was a mortal sin, the ruling class would have died a long time ago.

Everywhere it’s been shouting from the rooftops, on the TV, the radio, in its newspapers and journals: Look: there it is – a light at the end of the tunnel! The proof: unemployment is falling. Or so it seems. In the US and in France, in the last few months the unemployment rate has had its biggest drop since the outbreak of the crisis of 2007. In Germany, it’s fallen to its lowest since 1992! And the big international institutions have been parading their optimism. According to the IMF, in 2011, world growth will reach 4.4%. The Asian Development Bank is predicting growth rates of 9.6% for China and 8.2% for India. Germany, France and the US will reach 2.5%. 1.6% and 2.8% respectively. The IMF even predicts a growth rate of 1.7% for Japan this year, despite the earthquake and the nuclear disaster!

A decisive argument for the return of better times: the stock exchanges are soaring...

So, do these gleams of light announce an imminent resurrection of the economy? Or is this the classic hallucination of a dying creature?

Poverty, poverty

In the US, then, things have been getting better. Gone is the spectre of the 1929 crash. No chance of seeing interminable queues outside the employment offices like in the nightmarish 1930s. It’s just the end of March, McDonald’s announced an exceptional recruitment of 50,000 jobs in one day. On 19 April, there were three million people waiting to apply at the doors of the restaurants! And the firm hired 62,000.

The reality of the present crisis is revealed in the suffering inflicted on the working class. Unemployment in America is officially falling, but the state’s statistics are a huge trick. For example, they exclude everyone classed as “NLF” (Not in the Labor Force). These includes older people who have been laid off, long term unemployed discouraged from looking for work, students and the young, unemployed people on job-seeking short, in January 2011, 85.2 million people. The state itself has been obliged to recognise that the number of poor people makes up 15% of the American population and is continuing to grow.

The explosion of poverty on the soil of the world’s leading power shows the real state of the international economy. All over the planet, living conditions are becoming more and more inhuman. According to the estimates of the World Bank, around 1.2 billion people live below the poverty line (1.25 dollars a day). But the future is even more sombre. For an increasing proportion of humanity, the return of inflation will mean that it is getting harder and harder to keep a roof over your head or even to eat. World prices of food products have risen 36% above their level a year ago. According to the last issue of Food Price Watch, produced by the World Bank, every 10% rise in world prices pushes a minimum of another 10 million people below the poverty line. 44 million people have thus officially fallen into poverty since 2010. Concretely, the prices of basic necessities are becoming more and more prohibitive: maize up by 74%, grain by 69%, soya 36%, sugar 21%.

The decadence of the system: A new chapter in the historic crisis of capitalism is opening up in front of us

Since the summer of 2007 and the bursting of the ‘sub-prime’ bubble in the USA, the world crisis has worsened inexorably, at an increasing pace, without the bourgeoisie being able to come up with the merest shadow of a solution. Worse, its efforts to deal with the problem are preparing the ground for further convulsions. The economic history of the last few years resembles a sort of infernal spiral, a downward pulling whirlpool. And this is a drama that has been in gestation for the past 40 years.

From the end of the 1960s to the infamous summer of 2007, the world economy has only kept going through a systematic and increasing resort to debt. Why is this? A short theoretical detour is required here.

Capitalism produces more commodities than its markets can absorb. That is almost a tautology:

Capital exploits its workers - in other words their wages are lower than the real value they create through their labour.

Capital can therefore sell its commodities at a profit. But the question is: to whom?

Obviously, workers buy these far their wages allow. There remains therefore a good part which is not sold, corresponding to what is not paid to the workers when they were producing them, the part containing an added value, a surplus value, which alone has this magic power to create profit for Capital.

The capitalists themselves also consume things, and in general we know they are not too badly off...But they alone can’t buy all the commodities containing surplus value. It would make no sense for Capital as a whole to buy its own commodities to make a profit: this would be like taking money from its left pocket and putting it in its right pocket. Any poor person can tell you that you can’t get rich that way.

To accumulate, to develop, Capital therefore needs to find buyers others than workers and capitalists. In other words, it is imperative that it finds outlets outside its system, otherwise it will find itself weighed down with unsold goods and a market that has become engorged. This is the celebrated ‘crisis of overproduction’.

This ‘internal contradiction’, this natural tendency towards overproduction and this ceaseless obligation to find external outlets is also one of the roots of the incredible dynamism of this system. Capitalism has had to trade with all economic spheres without exception: the former ruling classes, the peasants and artisans of the whole world. The history of the late 18th century and the entire 19th century is the history of colonisation, of the conquest of the globe by capitalism. The bourgeoisie was ravenous for new territories on which it forced, through multiple means, the populations to buy its commodities. But in acting this way, it was also transforming these archaic economies; little by little, it was integrating them into its system. The colonies slowly became capitalist countries themselves, producing according to the laws of the system. Not only were their economies less and less susceptible to being outlets for the commodities produced in Europe and the USA: they too were generating their own overproduction. To develop, Capital was therefore again and again forced to seek out new territories.

This could have been a never-ending story but our planet is only a round ball: to its great misfortune, Capital had hardly taken 150 years to complete its conquest. At the beginning of the 20thcentury, all the main territories had been taken, the great historic capitalist nations had divided up the world. From then on it was no longer a question of new discoveries but of taking the possessions of rival nations. Germany, the poorest in colonies, was thus put in the position of the aggressor and unleashed the hostilities of the First World War, driven by the necessity which Hitler formulated openly in the lead up to the Second World War: “Export or Die”.

From then on, capitalism, after 150 years of expansion, became a decadent system. The horror of the two world wars and Great Depression of the 1930s is the dramatic and irrefutable proof. However, even though, during the 1950s, it destroyed the extra-capitalist markets which still existed (like the French peasantry), capitalism did not fall into a mortal crisis of overproduction. Why? We return to the initial idea we were trying to demonstrate: if “Capitalism produces more commodities than its markets can absorb”, it has been able to create an artificial market: “From the end of the 1960s to the infamous summer of 2007, the world economy has only kept going through a systematic and increasing resort to debt”

The last forty years can be summarised as a series of recessions and recoveries financed by credit. With each open crisis, Capital has increasingly resorted to debt. And it’s no longer a question of just supporting ‘household consumption’ through state, whole states have themselves plunged themselves into debt to artificially maintain the competitive edge of their economy faced with other countries (by directly financing investment in infrastructure, by loaning to banks at the lowest possible rate of interest so that they in turn can lend to households and enterprises...). In short, by opening up the sluice-gates of credit, the world is awash with money and all sectors of the economy are in the classic position of the debtor: every day new debts are taken out to pay for yesterday’s debts. This dynamic inevitably leads into a dead-end.

And here the summer of 2007 opened a new chapter in the history of capitalist decline. The capacity of the world bourgeoisie to slow down the development of the crisis by an increasingly massive recourse to debt has reached its limits. Today, convulsions follow each other in quick succession without any respite or real recovery. The powerlessness of the bourgeoisie in front of this new situation is patently obvious. In 2007, with the bursting of the sub-prime bubble, and in 2008 with the collapse of the banking giant Lehman Brothers, all the states of the world were only able to do one thing: pump up the finance sector and let public debt explode. And this was not just a one-off. Since 2007, the world economy, the banks and the stock exchanges have only kept going through a permanent transfusion of public money derived from new debts or simply from printing money. One example: the USA. In 2008, to save the financial sector from generalised bankruptcy, the US Federal bank launched an initial phase of money-printing – QE1, or Quantitative Easing 1 – amounting to more than 1400 billion dollars. Just two years later, in January 2010, it had to renew the whole operation by launching a QE2: 600 billion injected thanks to printing off more dollars. But this is still not enough. Hardly 6 months later, in the summer of 2010, the Fed had to renew the buy out of debts that had reached their deadline, at a rate of 35 billion a month. In all, since the latest stage of the crisis began, that’s over 2300 billion dollars coming out the pocket of America’s central bank. It’s the equivalent of the GNP of a country like Italy or Brazil! But obviously history doesn’t stop there. In the summer of 2011, the Fed will be obliged to launch a QE3, then a QE4[1]...

The world economy has become a bottomless pit, or more precisely, a black hole: it is absorbing increasingly astronomical quantities of money/debt.

The future? Inflation and recession!

It would however be wrong to claim that the immense sums of money injected by all the states of the planet today are having no effect. Indeed, without them, the system would literally implode. But there is a second consequence: the unprecedented increase in the mass of money on a global scale, particularly in dollars, is about to corrode the system, to act on it like a poison. Capitalism has become a dying patient dependent on its morphine fix. Without it, it would die, but each new injection gnaws away at it a little more. So while the injections of the years 1967-2007 allowed the economy to hold, today the doses needed are on the contrary speeding the patient towards its demise.

Concretely, by printing money, the different central banks are consciously producing what the economists call ‘funny money’. When the monetary mass grows faster than real activity, it loses its value. As a result prices rise and we have inflation.[2]

Obviously, in this sphere, the world champion is the US. They know that their currency has been the pillar of economic stability since the end of the Second World War. Still today no one can bypass the dollar. This is why since 2007 it has been the US that has produced the greatest quantity of money to back up their economy. If the dollar has not been put out of commission, it’s because China, Japan etc have been, despite themselves, obliged to buy dollars. But this precarious equilibrium is also reaching its end. There are less and less buyers for US Treasury Bonds because everyone knows they are not really worth anything. Since 2010, it has been the Fed itself buying up its own T-Bonds to maintain their value! Above all, inflation is beginning to develop in a significant way in the US (between 2 and 105 according to what source you use, with workers increasingly feeling the pinch in their food shopping). The President of the Fed in Dallas, Richard Fisher, who this year sits on the monetary policy committee, has raised the risk of a hyperinflation comparable to what happened in the Weimar Republic in 1923.

This is a fundamental tendency. Inflation is growing in all countries. And the capitalists are increasingly distrustful of all currencies. The shocks to come, the probable collapse of banks and entire states, are placing a very big question mark over the whole international financial system. The consequence of this is tangible: the price of gold is hitting the roof. After a 29% rise in 2010, the hunt for gold is now beating record after record, for the first time jumping the fence of 1500 dollars – five times what it was ten years ago. The same phenomenon with silver, now at its highest level for 31 years. The University of Texas, which trains economists, has recently put its whole treasury of a billion dollars into gold. We can see from this the confidence that the American big bourgeoisie has in its own currency! And this is not just an epiphenomenon. The central banks themselves have bought more of the yellow metal in 2010 than they have sold, a first since 1988. All this means nothing less than the end of the Breton Woods agreement (not officially but de facto) which after the Second World War set up an international monetary system based on the stability of the dollar.

The bourgeoisie is obviously aware of the danger. Incapable of stopping the flow of credit, to stop the money printing presses from turning, it is trying to limit the damage and to reduce debt by introducing draconian austerity plans which are aimed first and foremost at the working class. Almost everywhere, wages are being frozen or cut in the private and the public sector, health and social benefits are being slashed. In short, poverty is on the rise. In the USA, Obama has announced that he wants to reduce the US debt by 4000 billion dollars in 12 years. The sacrifices which are going to be imposed on the population are unimaginable. But this solution really is no solution. In Greece, Portugal, Ireland, austerity plan comes after the next and yet the deficits continue to grow. The only effect of this policy is to plunge the economy a little deeper into recession. There is only one outcome of this dynamic: after the failure of American households in 2007, of the banks in 2008, it’s now the turn of states themselves to sink into bankruptcy. There can be illusion on this score: the defaults on payment by countries like Greece are inevitable. Even American states like California are not immune and questions have been asked about the credit-worthiness of the US economy as a whole. The consequences for the acceleration of the world crisis are incalculable: explosion of the euro zone, deregulation of currencies, hyper-inflation....

It’s not possible to make exact predictions, to see when and where the next crack in the world economy will appear. Will the catastrophe that hit Japan (which brought down production in the world’s third-ranking economic power by 15% in March) be the detonator? What will be the impact of the destabilisation of the Middle East? Will we see the collapse of the dollar or the bankruptcy of Greece or Spain? No one can tell in advance. One thing is certain though: we are going to see a succession of extremely brutal recessions. After the slow development of the world economic crisis between 1967 and 2007, we are now entering a new chapter in the decadence of capitalism, marked by incessant convulsions in the system and an explosion of poverty.  

Pawel 30/4/11


[1]However, it will certainly do it unofficially the next time to avoid having to admit the patent failure of all its previous measures!

[2]Observant readers will say: “But his monetary mass increased at a huge rate in the period 1990 to 2000 without there being an inflationary surge”. It’s true and the reason is simple: the saturation of the real market pushed capital to flee towards the virtual economy (the stock exchange). In other words, the monetary mass augmented considerably above all in the financial sphere, so it was not the price of commodities but of shares which shot up. But this speculation, however mad and disconnected it was from reality, is still in the final analysis based on enterprises that do produce value. When the latter are threatened en masse by bankruptcy (in particular the banks that finance them), this whole casino game gets exposed to the light of day. This is what happened in 2008: the crash, and the bigger crashes yet to come. This is why investors are now running after gold and food products in a desperate search for a value ‘refuge’. We will come back to this.