1990s >> 1993 >> no-1070-october-1993

World recession closes in quickly

The current world slump shows no real signs of abating. In Britain and the US, the “official” recession may have ended, but this deceives very few. Growth is at best sluggish and generally well below the 2.5 percent annual rate thought to be necessary for sustained reductions in the level of unemployment. Outside of these countries, the recession is gathering pace more quickly.

Unemployment is rising fast in most of the countries of mainland Europe, while growth and industrial output tend to be, at best, stagnant. The old Eastern Bloc countries have been particularly badly hit as they attempt to integrate more fully into the world economy. In Russia, industrial output has fallen 18 percent in the last year, while in eastern Germany 75 percent of all agricultural jobs have been lost since unification while overall employment has fallen by over a third, from 9.9 million workers in 1989 to 6.3 million today (Wall Street Journal, 18 August).

As for Britain, the US and some of the other major industrialized countries, the present slump can perhaps best be described as a “contained depression”. Production and growth have fallen and bankruptcies have soared, but the massive amount of debt built up during the relative boom of the mid to late 1980s has not yet been anything like fully liquidated.

Delayed effects

What happened during the boom was that low interest rates and easy credit — particularly after the stock market crash of 1987 — temporarily staved off the inevitable slump only to ensure that the effects of the slum would be worse when it finally arrived. The unprecedented levels of indebtedness built up at this time had to be reversed, leading to a period of pronounced downturn. The boom may have been prolonged, but only at the cost of worsening slump.

Because not enough weak capitals have yet
gone to the wall, the overall rates of profit in most sectors of the economy are still very low and there is no real sign of renewed investment in these sectors. Far from it. The quality of new credit being granted is minimal and the poor quantity of new credit is being matched by its quality. For instance, in the US 57 percent of recent new credit went ultimately to finance government expenditures and much of the rest went into mortgages. “Hard” business credit for investment purposes has been virtually non-existent, and this situation is mirrored in Britain.

What has clearly been happening in that instead of investing in production, capitalists who have hoarded their wealth in the early stages of the slump are now looking for profitable outlets elsewhere. This has primarily taken the form of stock market speculation and investment in bonds. The FTSE in London. Dow Jones in New’ York and the Paris and Madrid stock markets have been among those recently hitting all-time highs. But these buoyant equity markets do not reflect an underlying strength in the world economy. They are primarily a product of speculation, and like all speculative bubbles they are liable to burst, sending the markets into meltdown and confidence plunging. This is a view shared by a number of capitalism’s business analysts who see a “double-dip” slump as a very real prospect.

Structural weakness

In addition to the stock market bubble, the recent currency turmoil has illustrated the present weakness at the heart of the capitalist economy. Investors have been shying away from productive investment and have increasingly played the currency markets in the hope of short term gains, picking off fragile European currencies one-by-one in a speculative scramble. The agreement to widen the ERM bands in early August will not prevent this — on the contrary, currencies that have been vulnerable to speculation are likely to be driven even lower.

That the recent currency chaos is largely a product of the present slump with its low rates of industrial profit has been recognized by investment analysts like Bob Beckman. Beckman has argued that:

   “Attempting to link currencies to one central currency is like trying to moor twelve boats to a floating raft. As long as the sea is perfectly calm the situation appears satisfactory. But, as soon as the waters start to get a bit rough, the boats start crashing against each other, the raft breaks up and the captains are left with chaos.”

(Investors Bulletin, 19 August).

Chaos and capitalism go together because of the anarchy of the market mechanism. At the moment the capitalist economy is in a period of profound disequilibrium and most of the indicators show that it will get worse before it gets better. There is still too much capital seeking not enough profit, leading to unsustainable and potentially catastrophic flights into speculation in the stock and currency markets.

The stock markets are in particular danger with another crash a definite possibility, which would see masses of unprofitable capital go to the wall and huge liquidation of existing debts, the primary conditions in fact for a sustainable recovery.

If this does not happen the capitalist system may be in for a bout of extended stagnation before the next boom can come along.

Either way, the immediate prospects for wage and salary earners pinning their hopes on a swift recovery don’t look good. It would be far better for them to work for the complete abolition of booms and slumps, together with their cause — capitalism.

Dave Perrin