Crisis: The Worst Since the 1930s

As we go into 2009, world capitalism is experiencing its worst economic crisis since the 1930s. In some ways it may even be worse than that because, this time, every country in the world is affected. In the 1930s, many very poor countries not closely integrated into world markets did not feel the sharp collapse of the capitalist system that was dominant in Europe, North America and Japan. But since the Second World War, and particularly in the last 25 years, ‘globalisation’ has brought India, China, Latin America, nearly all Asia and much of Africa fully into the capitalist nexus. So no country can escape the terrible slump that world capitalism entered in the latter part of 2008 and will continue to grind down through this year.

Another feature of this slump that may make as bad if not worse than the 1930s is that it has happened so quickly. Only a few months ago, capitalist commentators were telling us that, sure there was an economic slowdown, but it would probably be shortlived and mild, as it was in 2001. Indeed, central banks like the Bank of England and the European Central Bank were still convinced that it was not a slump in the economy that they had to worry about, but inflation. If there was a crisis, it was mainly restricted to the banking system and to the US with its housing mess. So they were unwilling to consider cutting interest rates.

But in October, how things changed. The economies of the US, the UK, continental Europe and Japan fell straight off a cliff. And they have been quickly followed by the Asian tigers, China and India; and also by the great agricultural and energy exporters of Brazil and Argentina, Russia and Ukraine.

Now every week brings yet more awful data in the state of these economies. Most commentators now expect the US economy to contract absolutely by 1-2% in 2009, by nearly 2% in the UK and over 1% in Europe and Japan. China and India, which had been growing at around 9-10% a year up to 2007, are now expected to manage only half that rate this year – not enough to stop a significant rise in unemployment in those teeming countries. Indeed, the UN estimates that the number of unemployed of working age in the world will reach a new record of 200m in 2009.

It is no accident that the major advanced capitalist economies that are suffering the most are just those that have ‘expanded’ mainly on the basis of finance capital (banking, insurance, hedge funds, stock broking etc) and non-productive sectors or services (like real estate, legal services, media, marketing etc).

They are also the countries where politicians, whether Conservative or Labour, claimed that manufacturing was not the centre of growth any more and the fat cats of Wall Street or the City of London were what mattered. Moreover, it was vital that these very important sectors of the modern capitalist economy were not interfered with petty regulations, supervision or unnecessary taxes, so that ‘free market’ forces could flow in these monopoly banks and financial institutions. The best policy was ‘do not touch and let greed operate’.

Well, greed certainly has operated. The grotesque billions made by the management tycoons of the big banks and investment houses make the pay of professional footballers or baseball players look like chicken feed. Chuck Prince of Merrill Lynch admitted to the US Congress that in just eight years he had made $800m in personal pay, let alone the extras from stocks he owned. He held a birthday party for his daughter that cost $10m and had golden fountains built in the birthday venue.

And with greed came corruption, fraud and embezzlement. Just before Xmas, it was revealed that a Mr Madoff, who ran a $17bn investment fund for decades that involved hundreds of very important, famous and so-called ‘clever’ people, had faked all his accounts. He had paid his investors not from making money on his investments, but by raising yet more money from new investors in a classic example of what is called a Ponzi scheme or pyramid selling scheme. It all came tumbling down when the credit crunch came and he could not find enough new investors or credit to pay off his existing investors who wanted their money back. Madoff was ‘highly respected’ in Wall Street and was a ‘great philanthropist’, the epitome of a successful finance capitalist. The regulators were happy with him and his word was never questioned. But he was a crook.

Well, the chickens have come home to roost in these economies where 10-20% of annual output depends on banks, investment houses, insurance brokers, lawyers, estate agents and advertising agencies. The US and the UK, proudly held up by their political leaders and economic experts as models for the rest of the world to follow, have been shown to have feet of clay, which have now crumbled to dust.

All this makes a sorry joke of the statements of George Bush that America is the richest place in the world and the ‘fundamentals’ of the US economy are ‘sound’. That is exactly what those in power said in 1930. It is also a cruel irony that UK PM Gordon Brown should say that Britain is the ‘best placed’ of all the major capitalist economies to weather the economic storm.

On the contrary, it is in these ‘Anglo-Saxon’ economies that the biggest drops in output are being recorded. In the US, the UK, Ireland and others, house prices have plummeted more and are still falling; unemployment is rising fastest (550,000 jobs lost in one month in the US in November!); manufacturing is falling the most along with, of course, banking and financial services. In the US, the big three auto makers are basically bust, threatening to put nearly 3m workers out onto the street – just as happened in Detroit in the 1930s. Only this time, the jobs may never come back. The same thing is about to hit the British auto industry (even though it has not been owned by British capitalists since the 1980s).

The US auto industry has now stockpiled four months of vehicles in its car parks and is losing $2bn a month. The UK auto firms will stop production and put 30,000 workers on the dole within a matter of weeks after Xmas unless somebody bails them out. And that is what the US and UK governments are doing with taxpayers’ money. (But not by taking them into public ownership, of course.)

So, although these economies have been dominated by finance capital in the last 25 years in particular, the collapse of that sector is now destroying the productive sectors of these economies as well. Jobs will be lost in the financial sector, but also in the relatively small manufacturing sector too and in the big employing retail and service sectors (high street shops like Woolworths, cafes, restaurants, and a host of small ancillary services like building, do-it-yourself, transport etc).

The head of Barclays Bank in the UK now forecasts that the British economy will dive between 2-4% this year, unemployment will go from 1m to nearly 3m and house prices will drop another 15% from the 15% they are already fell in 2008. In the fourth quarter of 2008, UK manufacturing is now falling at the same rate as in the 1980-2 slump.

As the banks went bust and had to be bailed out, they stopped lending. This has led to a catastrophic situation for many small businesses that rely on bank credit. In the US, Republic Windows and Doors had their credit line cut off by Bank America, which had just been bailed out by the US taxpayer and taken over by the rapacious JP Morgan Chase Bank. At Republic, 240 employees faced being put on the street, so they occupied the factory in Chicago, home town of the president-elect Barack Obama, when the firm’s management refused to pay any severance pay. Earning just $30,000 a year, barely enough to pay for a banker’s annual holiday outlays or feed the kids, the workers had had a enough. As one put it: “we have nothing to lose”. Bank America was forced to come up with a quick loan to pay off the workers – a small victory in a sea of despair that is sweeping across heartland America.

Workers in the financial sector will lose their jobs too – not the big wheels but the hundreds of thousands who staff the bank counters, make the settlements, fix the computer problems, look after security etc. But spare a moment for the financial fat cats too. Goldman Sachs is the most famous of the big US investment houses (most of which have now been devoured by the slump). It has avoided the worst of the crisis. But even GS has recorded losses for the first time in its history. It has about 300 managing directors out of a workforce of 30,000. I heard of the terrible story of one of these MDs who arrived from America to London recently: “how was the flight?” he was asked. “Terrible” was the reply, “we had to fly economy or coach class, with the unwashed – it was awful” to save money. Such are terrible ignomies that the fat cats are experiencing in these days of economising!

This capitalist crisis will make American and British capital suffer the most, along with their working classes. This has made some politicians cocky in countries where finance capital is not so dominant and where taking bankers loans or getting huge mortgages to buy real estate is not the culture. German and French politicians have looked smugly at the failure of finance capitalism in Britain and America. They have railed at Anglo-Saxon capitalism compared to the ‘mixed economy’ that they support. But the smirks will be wiped off the faces of Merkel, Sarkozy, etc in the months to come. German and French capitalism are heading down the spout just as much as British and American capital.

German industrial output fell at nearly a 4% rate in October and probably finished the year dropping faster than in the 1991 recession. German manufacturing is joining the Anglo-Saxon financial economies in the slump. It is the same for Japan, that other major economic power that depends on manufacturing rather than finance for its health. In the last quarter of 2008, Japanese manufacturing actiivity dropped more than it has done in 34 years.

And the world’s great manufacturing powerhouse, China, is also being hit. Exports fell for the first time ever in November. Sure, China’s economy is still comparatively heavily planned (even if mismanaged by a dictatorship) and will be able to avoid a major economic slump, in the sense of an absolute fall in production. But even so, its increased exposure to global capitalism makes it much more liable to economic downturn than in previous capitalist slumps.

That other great rising economic power, India, is also taking collateral damage from the slump in the advanced capitalist economies. Its growth has been founded on foreign capital investment in the Indian stock market and privatisation and ‘deregulation’ of the Indian industries. That exposes it to a sharper downturn than for China.

How long and how deep will the global economic slump be? All the evidence suggests that it will be deeper than any capitalist slump since the 1930s. The main reason is because some of the key trends in the motion of capitalism are coming together as they have seldom done before.

The most important law of motion of capitalism is the one that Marx identified: the tendency of the rate of profit to fall. That law is now operating in its downward phase that generally lasts 16-18 years. The rate of profit in the major G7 economies peaked in 1997: it fell sharply to 2001 and then recovered up to 2007. Now it is falling quickly. We probably won’t see a final bottom until 2015, even if there is some recovery in between.

At the same time, capitalist construction is also in a sheer fall. House prices and commercial rents peaked in 2007 and have plummeted since in most advanced economies. The US is now experiencing the lowest construction starts for 50 years. And the stock market is also in its downward phase, or what the financial ‘experts’ call a bear market. Bear markets can last up to 18 years and usually start a few years after the Marxist profit cycle enters its downward phase. The current bear market started in 2000 and so has some way to go yet (although it will be interspersed with rallies that last a few years like 2003-07).

The stock market matters to many workers in the advanced economies because so much of their retirement pension funds are now invested in stocks by the pension fund experts. Some observers of the market reckon that, although share prices were down 40% in 2008, they have further to fall and, even if there is a rally from 2010 to 2013, they will go down further before the crisis is over. Already many workers’ retirement savings are down 30% in value, with more to come.

But there is another important capitalist sector that in its downward phase: the prices of commodities. This follows an even longer cycle than the Marxist profit trend – of about 32-36 years upwards and 32-36 years downwards. It has been in its downward phase since 1982 and so will not bottom until 2014-18.

All these trends of capitalist development are now in their downward phase – something not experienced since the 1930s. It means that the capitalist slump may take the form of a deflationary depression. There may be a brief recovery from 2010 to 2013, as there was between 1933-36, before the capitalist economy slips back into a depression as it did in 1937. Then only world war took enabled recovery as overcapacity was destroyed and economies were put on a semi-planned war footing.

Some capitalist commentators like to think that the Great Depression of the 1930s was finally overcome by Keynesian policies of cheap credit and public spending programmes under the Roosevelt administration in the US. But the reality was that Roosevelt did not even adopt Keynesian policies when he came into office in 1932 – the brief economic recovery that took place between 1933-36 happened without Keynesian measures. When they were applied from about 1935 onwards, they did not stop the renewed slump of 1937-8.

So the current Keynesian policies of zero interest rates, tax cuts and spending programmes being applied by Obama in the US and European governments will have little or no effect. We can expect another slump some time around 2014 after this one comes to an end.

This article first appeared on Socialist Appeal.

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This post was written by Michael Roberts