Submitted by International Review on
from the credit crisis to the monetary crisis and the recession, or:
Credit is not an eternal solution
One year after the stock market collapse of October 1987, when $2 trillion of speculative capital went up in smoke (equivalent to about $400 for each human being on the planet), world capitalism would appear to be in good health: indeed, according to today's forecasts, 1988 should be the best year since the beginning of the 1980's. But then, the years 1973 and 1978- 79 which preceded the great slumps of 1974-75 and 1980-82, were also excellent years in their time. The flight into credit is not an eternal solution. Today's ‘euphoria' heralds a new financial upheaval, with a new worldwide recession in perspective. Even as the American elections came to an end, the official language and propaganda were already changing, as ‘euphoria' gives way to appeals for caution.
"The end of the Reagan mandate is characterized by an expansion which has lasted now for six years, the longest peace-time expansion in American history ... In absolute terms, the US deficit may seem large. But since the country produces a quarter of the world's GNP, the US deficit is, as a percentage, lower than the OECD average ... The American ‘deficit crisis' is a public relations trick employed by the traditional Republican establishment to purge the party of certain popular politicians ... What is needed is a monetary system which prevents the central banks from endangering economic prosperity." (P.C. Roberts, a professor at the US Centre for Strategic Studies, and a theoretician of the so-called ‘supply-side economics' or ‘Reaganomics')
According to some economists, in other words, US capital's gigantic deficits and massive indebtedness are not major problems. The anxiety aroused by their rapid development is supposedly without any real foundation, and is at most expresses the result of the ‘tricks' employed in the internecine struggles of American politicians. What in fact lies behind this ostrich-like idea is the question whether the flight into credit may not be, after all, an eternal remedy, a means of allowing the capitalist economy to develop without interruption, provided the monetary authorities adopt the right policies: "the longest peace-time expansion in American history" is supposed to confirm this possibility.
In reality, these famous six years of ‘expansion' of the American economy, which have temporarily prevented the complete collapse of the world economy are not the fruit of any new economic discoveries. They are nothing other than a continuation of the old Keynesian policies of state deficits and the flight towards debt. And, contrary to the affirmations of our eminent professor, the size of this debt - the result of a veritable explosion of credit during recent years - far from being a matter of no importance, is already posing enormous problems for US. capital and the world economy, and opens up in the short term the perspective of a new world recession.
The devastating effects of excess credit
"In 1987, America imported almost twice as much as it exported. It spent $150 billion dollars more in other countries than it earned, and the Federal government spent $150 billion more in the home market than it received in taxes. The United States counts some 75 million household; last year, each of them therefore spent on average $2000 dollars more than they earned. And borrowed the balance abroad."
Statistical science makes it possible, when a bourgeois possesses five cars and his unemployed neighbor has none, to say that on average they both have 2.5 cars. The average credit of each American household is only an average, but it gives an image of the extent to which American capitalism has had recourse to credit in recent years.
The consequences of this situation are already a particularly clear demonstration of the state of disrepair of the capitalist machine, both in the United States and in the rest of the world.
In the United States ...
Apart from the record indebtedness of US capital, the year 1988 has also seen three other historic records beaten:
-- the record of bank failures: in October 1988, the number of bankruptcies for the year had already smashed the 1987 record;
-- the record for amounts paid in compensation to depositors in US thrifts (savings funds);
- the record in the amount of interest paid on its own debt by the US Treasury: "Any moment now, the US government's bookkeepers will record a noteworthy passage in the federal accounts: the interests the Treasury. pays on the $2 trillion national debt is itself about to exceed the huge Federal budget deficit ... The US government pays roughly $150 billion a year in interests, or 14% of all the government's spending. Of that $150 billion, 10% to 15% goes to investors abroad." (New York Times, 11th October 1988).
However, the most serious immediate effect of this race into debt is the resulting rise in interest rates. The US Treasury has more and more difficulty in finding new lenders to finance its debt. To do so, it is forced to offer higher and higher interest rates. The government was forced to let these rates fall in October 1987 in order to slow down the stock market collapse, but since then it has once again been forced to raise them (the rate for three months Treasury Bonds has thus risen from 5.12% in October 1987, to 7.20 in August 1988).
The immediate results are already devastating on two levels. Firstly, at the level of the debt itself: given the size of the debt, it is estimated that a rise in interest rates of' one percentage point increases by $4 billion the amount US capital has to payout every year. Secondly, and above all, the rise in interest rates puts an increasing drag on the economy: in other words, heralds a recession in the more or less short term.
... and in the world
But US capital is not the only one to be in debt, far from it, even if it has become the planet's major debtor. When interest rates rise in the US, they also rise in the rest of the world. For the countries of the periphery, and especially for those of Africa and Latin America, long since unable to meet the obligations of their debts, this means an immediate increase in their interest repayments, and so in their already fantastic debt. Their chronic bankruptcy is already pushing inflation towards new records. In Brazil, for example, inflation is forecast at nearly 1000% for 1988. Investment has already undergone a generalized collapse.
The United States' creditors (in particular Japan and West Germany), who are in theory the first to benefit from American deficits since they provide an outlet for their exports, find themselves in possession of mountains of American ‘IOUs', held in dollars and of every description: Treasury Bonds, shares, promissory notes, etc. This makes a lot of money on paper, but what happens to this mass of paper should American capital be unable to pay, or should it - and we will come back to this later - devalue the dollar?
The idea of some economists, that the flight into credit, especially in the United States, is not a real threat to world capital, is an illusion already disproved by its devastating effects today, even without taking account of the perspective it opens up for the future.
Credit is not an eternal solution
Capitalism has always used credit to ensure its reproduction. It is a fundamental element of its functioning, in particular at the level of the circulation of capital. The generalization of credit accelerated the process of accumulation, and as such, it is a vital instrument for the smooth functioning of capital. But it only plays this role to the extent that capital functions in conditions of real expansion; in other words, if at the end of the delay that credit creates between the moment of sale and the moment of payment there exists a real payment, or repayment.
"The most that credit can do in this domain - which concerns circulation alone - is to safeguard the continuity of the productive process, on condition that there exists all the other conditions of this continuity, in other words that the capital against which it must be exchanged really exists." (Marx, Grundrisse).
Now the problem for capitalism today, both in the US and elsewhere, is that "the capital against which [credit] must be exchanged", "the other conditions of this continuity of the productive process" do not exist.
Contrary to what happens in conditions of real expansion, capital today is not using credit to accelerate a healthy productive process, but to put off the deadlines of a productive process bogged down in over-production and the lack of solvent outlets.
Since the end of the 60's, the end of the reconstruction process following World War II, capitalism has only survived by pushing all kinds of economic manipulations to unimaginable extremes, but without being able to resolve its fundamental problem. On the contrary, it has only succeeded in making it worse.
The flight into debt
In the United States. Following the "crash" of October 87, the USA had no choice but to increase its debt. Some economists estimate that other countries' central banks had to furnish the US some $120 billion.
In the less developed countries. Some economists had spoken of declaring a moratorium, and simply abolishing the debt of the poorest countries. As we predicted. In International Review 54, this idea has been reduced to promises and a few crumbs.
It is true that wiping out the repayment obligations of the indebted countries would eliminate the problem. But this would come down to making capitalism a mode of production which no longer produces for profit ... and which would no longer be capitalism. No, the ‘solution' has been to open new lines of credit, and to renegotiate interest repayments. The US has even accorded Mexico an emergency loan of $3.5 billion, the biggest loan accorded a debtor country since 1982.
In the Eastern Bloc. After a period of trying to reduce its debt, the USSR has returned to beg for credits from the Western powers, with the help of Perestroika. Banking consortia in Italy, West Germany, France and Britain should allow Moscow to obtain around $7 billion of loans. The same is true of China, which increasingly finds itself in the same situation as the countries of Latin America (galloping inflation, new credits requested to mitigate the inability to repay those contracted previously).
The capitalist economy is not heading for a credit crisis. It is already in it up to its neck. Now it must appear on the financial, monetary level. "The monetary system is essentially Catholic, the credit system essentially protestant... The Scotch hates gold. In paper form, the monetary existence of commodities is purely social in nature. It is faith that saves: faith in monetary value considered as the immanent spirit of commodities, faith in the mode of production and its predestined order, faith in the individual agents of production considered as mere personifications of capital, which grows by itself... The credit system cannot free itself from its foundations in the monetary system, any more than protestantism can free itself from its foundations in Catholicism." (Marx, Capital, Vol III).
In this sense, Roberts perceives something of the truth when he denies that the USA has a problem of excess debt, and only sees the problem of the monetary limits imposed by the central banks. But what he does not see, is that what follows on from this is not that the central banks should create more money, but that they have already created too much, and that the next expression of the capitalist crisis of over-production (of which the credit crisis is only a superficial expression) will come in the domain of money, in a loss of "faith" in money (and, firstly, in the currency of virtually all world trade, the dollar).
American capital cannot, and will not be able to pay back its debts, any more than any other capital. But it is the most powerful gangster. And it has the means to force its creditors to reduce - once again - its debt. Unlike the world's other states, the USA alone can pay its debts in its own currency (the others have to pay in hard currency, and in particular in dollars). This is why, as in 1973 and 1979, their only way out is to devalue the dollar.
But such a prospect today directly heralds in new monetary disaster, which in turn opens the way to a new recession, vastly deeper than those of 74-75 and 80-82.
The devaluation of the dollar will in the first place be "ruinous" for the United States' major creditor capitals, especially for Japan and West Germany ... who can do nothing about it, and who will certainly be quite incapable of playing the part of the "locomotive" to replace the flagging USA. But it will also constitute a trade barrier which will close off access to the American market - which has played the part of "locomotive" for the last six years - for the whole world economy.
As we wrote in International Review 54, only the American elections delayed this process. Whatever its speed, it is now under way.
The atmosphere over the last six years has been highly alarming. Far from being reabsorbed, or disappearing, the world economic crisis has continuously deepened: unemployment has continued to grow in most countries, misery has reached unheard of proportions in the poorest parts of the planet, the industrial deserts have spread within the very heart of capitalism's vital centers, the exploited classes reduced to pauperization in the most industrialized countries; at the financial level, we have seen the explosion of debt and the biggest stock market tremors for half a century, the whole wallowing in an unprecedented speculative frenzy. And yet, the capitalist machine has not completely collapsed. Despite the record numbers of bankruptcies, despite the increasingly frequent and serious cracks in the system, the profit machine continues to function, concentrating new and gigantic fortunes - the product of the carnage among different capitals - and boasts with cynical arrogance of the benefits of "liberalism". As economic journalists often remark, "the rich are getting richer and the poor poorer", but the machine "works" and the results for 1988, in the statistics at least, should be the best of the decade.
Not many people still really believe in the possibility of a new period of economic ‘prosperity', as in the ‘50s-‘60s. But the perspective of a new capitalist collapse like those of 1974-75 or 1980-82 seems to be receding thanks to governments' multiple manipulations of the economic machine. Neither real recovery, nor real collapse: an eternal "no future".
Nothing could be further from the truth. The capitalist system has never been this sick. Its body has never been so poisoned by massive doses of drugs and medicines to which it has had recourse to ensure a mediocre and appalling survival over the last six years. The next convulsion, which will once again combine recession and inflation, will be all the more violent, deep, and worldwide.
The destructive and self-destructive forces of capital will once again be unleashed with unprecedented violence, but this in its turn will provoke the necessary seisms that will compel the world proletariat to raise its struggles to higher levels, and to profit from the experience it has accumulated during these last years.
 Le Monde, 25/10/88
 For an analysis of the reality of this "expansion" and its effects on the world economy, see "The perspective of recession has not receded, quite the reverse", in International Review 54, 3rd quarter 1988.
 Stephen Marris, Le Monde, 25/10/88