World economy: recession fears dampen bosses' festivities
Workers Power Britain
The USA's central bank, the Federal Reserve, this week said it was now more focused on combating recession than on reining in an inflationary boom. It was the clearest signal yet that the longest-running period of economic growth since 1945 is coming to an end.
April 2000 saw the start of a US stock market slide that has wiped 50% off the value of the US technology stock market Nasdaq.
Now, in the fourth quarter of 2000 we are seeing the slowdown in the real economy: there have been profit warnings in nearly every sector of US big business. And in those sectors most exposed to consumer demand, there are sharp falls in year on year sales growth.
As well as problems with share prices and profits, the capitalists now face a crisis of liquidity: in laymans terms, a credit crunch.
Piles of unsold stock are growing from computers to automobiles, profits are falling and the stock markets are on a downward slide. This in turn affects companies ability to borrow in order to invest. Banks have been warned that they are over-exposed to the high-rolling borrowers in the booming telecoms industry. According to the Economist: Banks have taken a close look at their loan portfolios and turned white with fear (16 December 2000). Likewise it is becoming harder for corporations to raise money by issuing bonds.
Small privately-owned firms looking to grow by issuing shares (the so called Initial Public Offering or IPO) see the route effectively barred by falling share prices.
Just three years ago, according to Federal Reserve chief Alan Greenspan, the financial markets were gripped with palpable fear: the Asian stock market crash and currency crisis raised the spectre of a world recession. Washington stepped in to avert this using three different ways of providing cheap lending to busineesses:
- the cost of borrowing (the interest rate) was lowered,
- countries and investment firms that threatened to default were propped up (most spectacularly the Russian economy and the Long-Term Capital Management hedge fund in Summer of 1998)
- capital fleeing from the crisis-ridden Asian economies arrived on Wall Street, fuelling share prices, encouraging millions of middle class people to put their money into shares effectively handing millions of dollars straight over to the capitalist class.
Greenspans counter-crisis plan worked because the US economy at that time could absorb the extra cheap money without a massive rise in inflation. Undoubtedly new technology investments played a role in boosting productivity and dampening inflation producing the facts upon which the new economy theory is based.
Never before, goes the argument, have we seen productivity rise and inflation fall at the END of a long recovery. In particular, despite a potentially inflationary injection of cheap money.
This prompted commentators as diverse as the US Department of Commerce and Wired magazine to hail a new economic order. Wired sums it up: A new economic order is emerging, driven by information and
What is now clear is that the post-1997 bounceback was the result of a combination of factors that are now being exhausted. Cheap money, low oil prices, defeats of the US workers in the class struggle, the flight to quality.
Even the much-vaunted productivity effect of technology investments have been impossible to repeat outside the borders of the USA and with recession looming they will not be repeated within this cycle.
The key question for the capitalists now is whether Greenspan will repeat the attempt to stave off recession. While the Fed is likely to reduce interest rates, in an attempt to engineer a soft landing, the overhanging debt of companies, the high exposure of individuals and investment firms to a still-overvalued stock market, and the persistent sharp falls in operating profits across US corporations are all factors that signal a harder landing.
A further factor is the price of oil. It is pushing up inflation and raising costs across the board for the capitalists eating into profits from both ends.
The USA was the engine that drove the world econonomy out of crisis in 1997-98, leading to the most concentrated share price boom since 1927-29. Today the rest of the world is experiencing a slowing of growth (Europe) or a petering out of recovery after 10 years of recession (Japan).
In summary, the fundamental laws Marxists point to the inability of technology innovation to raise profit rates for ever, the inevitability that, as the mass off profits grows the underlying rate of profit is eaten into, the overaccumulation of capital in relation to the opportunities to invest it at optimum rates, the exhaustion of consumer spending growth, and therefore the opportunity to realise all the profit locked up in commodities produced: all these factors are kicking-in before our eyes.
This was an unusual recovery: unusual because of the length and because of the atypical features after 1997 described above.
We do not rule out that some of these features were the result of unique technological innovations, but we do predict that the economic factors (falling rate of profit, exhaustion of productivity gains, credit crunch) will override technology factors as the recession begins taking down good companies as well as bad.
The coming recession will also throw the debate on globalisation into new focus. During the eleven year period of growth the debate on globalisation has been framed as in the UK Governments white paper by the assumption that globalisation brings growth.
As recession kicks-in, national governments will find they have far fewer levers to pull to soften the blow except of course the government of the USA, which maintains supreme freedom of action.
The assumption that capitalism=growth, rising incomes, technology innovation and full employment will be seen as an illusion created by special circumstances and self-interested US economic policy.
The precise depth and length of the recession does not depend on the profit generating possibilities of productive capital it depends on what happens in the financial sector.
The coming months will reveal exactly how over-exposed the finance capitalists are to bad debt and whether the US government is in a position to bail them out if a major country, bank or company goes bust.
US capitalism: markets in denial (pdf) [Trotskyist International 25, 1999]
Modern capitalism and crisis theory [Trotskyist International 25, 1999]