A shock to an ailing system: do we face global recession?

The world economy is facing a downturn in the aftermath of the 11 September attacks. A US recession is certain - but will it trigger a global slump? These questions now haunt the capitalist policymakers. Fran Kellermann weighs the answers.

The attack on the World Trade Centre shut down US aviation for 3 days and Wall Street for a week. As a result, some businesses will shut forever. The head of Boeing said this week that up to half America's airlines could go bankrupt, so finely poised were their finances. The fact that he made this claim to justify 30,000 job cuts at Boeing itself speaks volumes.

The US economy was already edging towards recession before the planes hit the building. But the short term economic impact of the attack, combined with the long term instability it has injected into the capitalist system, will prolong and deepen the US recession.

Already the policymakers are hard at work trying to turn the situation around. The sight of hardline monetarist right-wingers pleading for increased spending is nearly as bizarre as seeing buccaneering US airline bosses call for the nationalisation of the airport security system. But the addition of big tax cuts and government spending to the already frantic interest rate cuts simply raises the stakes. If it doesn't work then the USA is doomed not just to recession but possibly deflation.

How this will impact onto the wider global economy is a more complex question, because it depends how much the individual governments of the main industrial countries are prepared to deviate from the US line. It also depends on the length and disruptiveness of military action, and on the effects of working class resistance.

To understand the complex layers of cause and effect between a US recession and a global depression - and make no mistake the world's rulers tangibly fear the latter now - we have to take a snapshot of the US and world economies as they were at 0845 eastern time, 11 September 2001.

Why was America already in trouble?

US pundits had been celebrating not only the longest period of economic recovery but two highpoints in economics they claimed were related. Between 1995 and 2000 the US economy demonstrated significant productivity growth, which economists were able to trace to the application of information and communications technology (ICT) to productive industries. Unlike Britain, the USA still has a large manufacturing base, both low and hi tech, and the productivity miracle there was seen as crucial to prolonging the economic recovery after its "natural" endpoint in 1997.

The year 1997 had been one of extreme turbulence on the financial markets, with a stock market crash, the near collapse of a major investment fund and requiring the US Federal Reserve to inject money into the economy. The fear was that inflation would follow - but it didn't, and that was put down to the productivity miracle.

The second gravity defying phenomenon was the stock market. A combination of easy money from the Fed, the flight of capital from Asia to the USA and a new round of capital investment in ICT fuelled the greatest stock market bubble in history - and the theory that stock market values would no longer be governed at all by profitability - a theory most notably advocated by Wired magazine.

The last two years have been the story of the collapse of these illusion. First the stock market bubble burst, in March 2000, as the near criminal lies told by dot.com companies about future growth started to be exposed. But it was not until late autumn of 2000 that the impact of the share slide started to be seen in the real economy. Both IT manufacturers and advertising-driven media companies saw a sharp downturn. Then on 9 January 2001 the Fed chairman Alan Greenspan made his fateful pronouncement that the main battle was with recession, not inflation. He cut interest rates at an emergency session and repeated the interest rate cut nine times. The cost of borrowing money fell from 6% to 3.5% in the nine months before the WTC attack.

Those nine months were to be a time of pain for US industries. Nearly one million people were laid off. But the most important figure to watch was profits: after nearly a decade of "double digit" operating profits, suddenly there were none. The technology, media and telecoms industries led the way - but significant old-economy industries were suffering by early 2001 - especially the auto industry.

As profit warnings piled one after the other, the US stock market continued sliding. It lost 18% of its value between 1 January and 11 September. That destroyed wealth across the board, because around 2/3 of US citizens had been drawn into share ownership by the seeming miracle of easy gains during the boom. At the same time, with firms reluctant to sack many highly skilled workers they had spend thousands of dollars attracting during the boom, productivity rates declined (and some of the earlier ones were revised down by statisticians).

Everyone was waiting to see how all this would impact on consumer spending in the USA - the main driver of economic growth. Just before the attack, it became clear that the USA was seeing falling consumer spending, falling prices, a falling stock market, falling profits and falling growth. It now looks like growth between April-June 2001 was just 0.3% - and that the third and fourth quarters will see the US economy shrink: the technical definition of recession.

With some recessions, politicians come forward who basically say: "let it rip". Thatcher and the first term Ronald Reagan did this - refusing to counteract "market forces" for essentially political reasons, to create the best conditions to take on and beat the working class, and then move swathes of industrial production to the third world.

Now, despite the fact that most capitalist economists subscribe to some form of neo-liberalism, there are few takers for a let it rip approach. Instead both sides of the American ruling class are united in the view that government action must halt and turn round the trend to recession. The right wing want massive tax cuts, the Democrats and some Republicans want a government spending spree and a return to big budget deficits. Both are now firmly focused on the task of "management of aggregate demand" - the key obsession of Keynesian economics, and a concept supposedly outmoded by the triumph of neo-liberal capitalism.

In fact, reality is turning the debate even further in favour of the real Keynesians instead of the half-hearted, pragmatic ones. The conservative parties across the globe are wedded to using interest rates - so-called monetary policy - to manage the economy. But they are now finding that interest rate cuts alone are not enough to stimulate demand. So they look to tax cuts: but tax cuts when war beckons simply means a bigger budget deficit. In the end the refusal of the US ruling class to countenance a straightforward state-interventionist role for ideological reasons will hamper their counter-crisis programme and deepen the crisis.

The point is, will government efforts to stimulate demand work? The masters of the world already have an answer when they look at Japan. Japan has entered its fourth recession in 10 years. Interest rates there are effectively nil, having been cut to near zero by successive governments determined to use monetary policy to overcome the stagnation of the Japanese economy. But it hasn't worked.

So successive Japanese governments have resorted to pure demand management techniques: government spending programmes and infrastructure investment combined with the central bank simply printing money. Huge modern bridges with no traffic on them stand in mute testimony to the limits of capitalist demand management.

The third big economic power in the system of global capitalism is of course the European Union. While Japan struggled to halt deflation, and the USA underwent its panic conversion to fighting off recession, the Eurocrats did not seem to notice anything was wrong. The whole basis of economic and monetary union (ERM) and the Euro was founded on the neo-liberal policy of keeping inflation and public spending low in all Eurozone countries. If we believe "being determines consciousness" then the social being of a man like European Central Bank president Wim Duisenberg says it all. He behaves like a number crunching sloth, refusing steadfastly to countenance anti-crisis measures, because his pension depends on hitting the right targets on inflation and public spending. In short: the EU under its current political leadership is making a point of refusing to be bounced into urgent measures to stimulate demand -and this too will weaken the USA's anti-crisis efforts.

In short, Europe - despite having the best position from which to resist recession and even take up the strain from the USA as leader of world growth - lacks the political will to do so: a pro-growth strategy would probably bust up the Euro and dis-locate the different economic cycles within the EU profoundly.

To sum up the subjective factor: the EU is still fighting the ghost of inflation, Japan has exhausted all its weapons against the spectre of deflation, and the USA's capitalists are stuck with a set of outmoded ideologies somewhere in the middle.

The USA is pledged to use the crisis to restart the World Trade Organisation negotiations that were effectively stymied by the Seattle demo. Indeed from Gordon Brown to George W Bush all the leaders were quick to say: the best way to fight back is to restart trade talks. The Australian newspaper even carried an exhortation "Fight back with free trade". But the ruling classes of the Third World may see this as a moment to extract a high price in terms of social concession.

All of this sets the scene for future conflicts between the imperialist blocks - despite their shows of unanimity at G7 meetings today.

"Things that up to now seemed not possible are all of a sudden not only possible, but quick action is possible with lots of countries," says US Treasury secretary Paul O'Neill. "A concerted economic stimulus package is out of the question," says his German counterpart Hans Eichel. "The attacks affected the U.S. in a different way to the rest of the world.

"If there is a shift in the international economic situation, then we may have to consider fresh measures," says Masajuro Shiokawa, the Japanese finance minister - "But we can't decide what to do so soon."

On top of all this, the capitalists are starting to fret about a renewed third world debt crisis. "We worry that global conditions have deteriorated to the point that a third world debt crisis like the one in the 1980s could result," said investment bank Bear Stearns this month. It fears that Argentina will finally default on its debts under the political pressure of the working class resistance to austerity - precipitating a wave of defaults.

That is only the most sayable worry. Behind the scenes and closer to home there is another worry: which financial institutions will be over-exposed to failing companies as they topple. The insurance industry is already apprehensive about the eventual cost of paying for the S11 attacks. It will pass on the costs to cash-strapped industries. And if an airline goes bust who are its bankers. The Swiss banks UBS and Credit Suisse stepped in to save Swissair partly because a complete collapse would have left them in trouble. But what if half of America's airlines go bust. What if a hidden iceberg of bad debts suddenly looms ahead?

All these fears explain why, across the board, the capitalist policy makers are flexing their muscles to fight off global recession. With Japan on the edge of a deflationary spiral and the USA certain to go into recession, their backs are against the wall. They are using up ammunition in the anti-crisis battle but it is not working. Beyond the efforts of the individual imperialist leaders there is a naieve belief that the "international financial institutions" can save the day. Writing in the South African Mail & Guardian, economist Charles Feinstein said:

"The most important reason for confidence that there will not be a serious depression is the profound change in economic understanding and in the role that is played in the modern world by national governments, central banks and international agencies."

Like Gordon Brown he believes that the calculating powers of Microsoft Excel, combined with nicely timed policy tweaks, can conquer boom and bust. Yet reality suggests otherwise. It was the IMF which arguably amplified the Asian crisis of 1997-98: its crass and corrupt actions set the stage for the mini-revolt of the third world ruling classes at Seattle in November 1999. The WTO process is moribund. The World Bank is only good at drawing up and imposing austerity budgets - not what you want in a recession.

This recession was shaping up to be bad even before the 11 September attack. The attack will merely concentrate the effects.

Unlike the two previous recessions, this one is not simply the end of a cyclical recovery. Previous recessions have been triggered by events in the financial markets and by monetary policy decisions. Growth peaks and turns down, cyclically; inflation rises because productivity drops; governments slam on the brakes with higher interest rates; a credit crunch occurs which deflates the stock market and the housing market and a short recession follows: that is the classic model accepted even by some Keynsian-influnced Marxist economists.

This one is different. It did not start in the financial markets, it started with a real downturn in profits, reflecting overcapacity across the board from automobiles to credit-card companies. Profits will not come back until a shake-out occurs: the natural destruction of capital that the system demands. While it has depressed the share markets, with some "bubble" companies losing 95% of their value in 18 months, the worst is yet to come.

Many factors apart from imperialist economic policy will influence the outcome of the crisis. Indeed the real crisis begins with the admission that no theory and no policy - either monetarist or Keynesian - can stop the runaway train to ruin. Then it becomes a pure question of whether one country will foist the costs onto another; or one class against another.

The outcome of that is not decided in economics books or finance ministries, or in the Afghan mountains - but on the battlefields of class struggle itself: the workplaces of the world.

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[April 2001]

USA: economy teeters on the edge of recession
[January 2001]

World economy: recession fears dampen bosses' festivities
[December 2000]