Marx explained long ago that capitalism operates through a series of booms and
slumps. In the boom of the Nineties, his ideas were laughed at. Now, the
situation is turning out differently as the world capitalist economy splutters.
No wonder a recent article in the FT stated, "Marx seems to be getting the
last laugh yet."
As the world economy continues to slow down, giving rise to fears of a
deflationary spiral, the US Federal Reserve has been forced once again to cut
its interest rates. Greenspan has slashed rates, down from 6.5 per cent at the
end of 2000, to just one per cent today, the lowest for more than four decades.
This is the thirteenth cut in three years,
"Nothing could better show the depressed state of the post-bubble US
economy", states the Financial Times. "The appetite for still more
aggressive policy action reflects the widespread fear of deflation. This is not
an unreasonable worry. The world and the US economies are well into their third
year of a ‘growth recession’ – a time when the economy grows well below trend
and inflation is already very low, wise people should worry that the US will
follow Japan into deflation." (FT, 28/29 June)
With the British economy also in the doldrums, there is increased speculation
that the Bank of England will follow suit and cut interest rates in July and
August. Gordon Brown’s strategy, based on growth of 2-2.5 per cent, is coming
apart at the seams. After all, annual growth over the last two years averaged
1.8 per cent, and the prospects are bleak. Recent figures show that Britain’s
economy is in its worst state since the early 1990s recession. Growth figures
have almost ground to a halt in the first three months of this year – a mere 0.1
per cent. The news was "an unambiguous warning that the economic outlook is
Consumer spending growth slipped to a quarterly growth rate of 0.2 per cent –
the weakest for more than five years – as households prune back spending.
"It is not a question of being close to the precipice. We are already over
it and are desperately trying to claw our way back", stated a leading
retailer. The slowdown in the housing market has added to the gloom. The
building society Bradford and Bingley saw a 20 per cent drop in its housing
transactions, which is certain to dent its first-half profits. Record household
debt now stands at 125 per cent of household incomes.
Business investment, which is the only real basis of a sustained recovery in
the economy, is at rock bottom. It is 6.1 per cent lower than in the same
quarter a year ago. Without the spending on new plant, machines and fixed
capital, there is no basis on which the economy can grow. However, with excess
capacity, there is little incentive for the capitalists to spend money on
increasing it, even if the cost of borrowing is lowered still further. Lower
interest rates might not lead to investment but could they prop up consumer
Consumer spending, which has taken up the slack and sustained growth over the
last few years, cannot last indefinitely. Six per cent of last year’s consumer
spending came from equity raised from re-mortgaging homes. "Growth was
achieved by encouraging unsustainable rises in consumer expenditure",
reports the Financial Times. In fact, it is rapidly slowing down already. And
government expenditure, which increased by 2.5 per cent over the previous
quarter, failed to offset the effects of the consumer retrenchment.
Boom and bust
Gordon Brown, our master financial wizard, has repeatedly claimed that he has
done away with the cycle of ‘boom and bust’. But as with all those who suffer
from illusions in the capitalist system, they can never see further than the
booms of capitalism. They have never understood that the boom and slump cycle is
an integral part of the capitalist system, just as inhaling and exhaling is part
and parcel of our lives. The long period of boom during the 1990s is turning to
bust. The only reason why the boom has lasted so long is that it has been
artificially extended by the enormous amounts of credit being pumped into the
system. But like all excess bingeing, there will be an almighty hangover.
However, whatever the short-term changes to the British economy, the economic
climate looks bleak. Not only is America slowing down but so is Europe. The
German economy, the most powerful in Europe, is stagnant and there are
predictions of five million unemployed by the winter. The Japanese economy, the
second in the world, has been in the grip of a deflationary spiral for the last
decade. It is this example that terrifies the serious American economists.
The world economy is hanging by a thread. If the US economy fails, then the
world economy will collapse with it. Tinkering with interest rates will not
solve the problem of over-production, or excess capacity, that has become
endemic. "Working for deflation are the rising excess capacity, the high
levels of consumption in GDP, the ongoing financial deficits of the household
sector, the high debt burdens of the private sector and the weak demand
abroad", states the FT.
Despite this scenario, the Blair government is still full of praise for the
market economy. It hopes it can run capitalism better than the Tories. But it
will come unstuck, as the economy is dragged down by the world contraction.
Tinkering with capitalism will solve nothing. Crises and the problems workers
face are endemic to the system. That was the reason for the labour movement
adopting the aim of socialism.
In the words of RH Tawney – and fondly quoted by Neil Kinnock in the distant
past – "It is improbable that a third Labour government would be guilty of the
same follies as ruined its two predecessors… It must be prepared to live
dangerously – it must on no account remain in power merely on sufferance…
Either it means a decisive break with the whole policy of capitalist
governments, or it means nothing at all."