World economy: Is the worst of the crisis already over?
Sunday, 15 June 2008.
No, it’s only the beginning
Per-Åke Westerlund, Rättvisepartiet Socialisterna (CWI Sweden)
”The finance crisis, where did it go? The danger for a financial collapse is over, but many problems still remain”. This comment by Johan Schück, a leading Swedish economics commentator, echoed the mood of capitalist pundits globally at the beginning of June. His analysis was that the Bear Stearns collapse in March was the peak of the crisis. Is this a correct analysis? Has the capitalist system once again escaped a sharp downturn? The short answer is no.
The chair of the US Federal Reserve. Ben Bernanke, recently commented that the danger of a deep downturn was receding. Also in the London Financial Times this was reflected, with some economists concluding ”that the US could avoid a full-blown recession this year”. The Swedish commentator praised the central banks, led by the US Fed, for their drastic interest rate cuts. Others saw the cash tax rebates arriving with US families in May as an important measure to keep up consumption and thereby avoid recession. Some figures seemed to confirm this view. Recently, US growth for the first quarter was upgraded from 0.6 percent to 0.9 percent.
”Worse than you think”
However, since a decade or so ago, stock markets are the main crystal ball of these capitalist commentators. Less turmoil in share prices is seen as a sign the economy is stabilising. With a new downturn on the New York stock exchange this week spreading globally, their analysis will change again. ”Here is the second round of the finance crisis”, a Swedish fund report concluded on 11 June.
The analysis of the CWI is based on facts and processes, not any desire for a crisis. Marxists have never hoped for downturns, only concluded that crises are an integral part of the capitalist system. However, since the system has several times found an escape route out of different crises, by loading the costs onto workers and the poor, and by replacing one bubble with another, we have to follow developments and if necessary change our analysis.
In this case, we can conclude that all factors pointing towards a deepening crisis are still developing. The housing crisis in the US is worsening. So is the banking crisis and with it the credit crunch. Upon this, inflation – especially food and oil prices – is rising sharply.
The US magazine, Newsweek, concluded their review 7 June with the headline, ”Why it’s worse than you think”. The writer pointed at statistics for May, ”the fifth straight month of job losses – an event that signals recession sure as the glittery ball dropping on Times Square augurs a new year”. So far this year, 309,000 jobs have been lost in the US.
Housing and households
The Fed’s dramatic cuts in interest rates have not affected housing market interest rates. While the Fed’s rate is down to 2 percent, housing rates have increased to 7 percent. Now, 6.35 percent of US homeowners are behind with their mortgage payments, the highest number since 1979, and 9 million of them have bigger debts than the value of their house. According to Moody’s Economy.com, $2.5 trillion has been lost so far from household wealth. That is 25,000 dollars per homeowner.
And the trend continues. Home prices in the US fell by 14 percent in the first quarter, with an accelerated fall in March. Year on year, the pace is now 25 percent down. The biggest drops were in Las Vegas, 26 percent, and Miami, 25 percent. Up to half a million jobs in construction have been lost in less than two years.
Consumers are hit not only by the housing crisis. In addition there are harder credit conditions, drastically higher costs for food and petrol, plus the increasing risk of unemployment. This situation was reflected in the Conference Board Consumer Confidence index in May, which was the lowest since the recession in 1992. People’s outlook for the future, however, was the most pessimistic since 1973. Another poll showed that 86 percent believes the US is now in recession. The effects of lower consumption are still at an early stage and will have a huge effect since consumption accounts for 70 percent of US GDP. In May, car sales were down 10.7% compared to May 2007.
Banks
Both commercial and investment banks are hit by more than a housing crisis. They are now beginning to suffer losses from the commercial property sector, credit cards, car loans, etc. Their biggest fear, however, is their involvement in hedge funds and the speculation bonanza. In 2007, the finance industry was still the driving force of the US economy, accounting for 40 percent of all profits. This despite the fact it only employed 5 percent of private sector workers. Today, the formerly praised system of spreading risks has ended in catastrophe. Analysing the Bear Stearns crisis, The Economist pointed to the dangers in ”the markets for financial derivatives traded off-exchange. These are volatile instruments that, had Bear Stearns collapsed, could have brought down the financial system with it.” (19 April)
Banks and funds are insured by each other in an entanglement impossible to oversee. Bear Stearns was connected to deals worth 10,000 billion US dollars. The latest case of banks in trouble, Lehman Brothers – a ”Wall Street darling” according to the Financial Times – reported a loss of $2.8 billion for the second quarter this year, its first loss since listing on the stock market in 1994. It immediately raised questions about the bank’s sustainability on its own, as well as speculation about coming reports from other banks.
Prognosis
The International Monetary Fund, in its World Economic Outlook 9 April, is forecasting ”an extended period of economic weakness in the US, with growth of minus 0,7 percent this year”. Only three months earlier, the IMF had expected 0.9% growth for 2008. ”The fund already estimates that losses and write downs on all debts and securities – not just subprime mortgages – could total $945bn”. (FT, 22 April)
Profits in companies listed on Standard & Poor’s 500 index are now tipped to fall 7.8 percent this year compared to a prognosis of increased profits at the beginning of January. Bankruptcies have already increased by 50 percent. In the same article, the FT discusses whether the coming downturn in the US economy will be V, U, W or L shaped. They refer to US economist Nouriel Roubini, who has been leading established economists towards the conclusion of a deeper crisis. Now, his ”idea of a U-shaped recession still involves 12 to 18 months of economic contraction,” the newspaper noted.
Many risk factors can deepen the crisis further – the falling dollar, inflation risks, the huge deficits of the US economy limiting new stimula and of course the development of the global economy. Many elements of the US crisis exist in other countries. The IMF in its April report forecasts 3.7 percent global growth next year, down from 4.1 percent it predicted in January. Population growth means that 3 percent economic growth leads to lower GDP per capita and a global recession.
One paradox in the global economy today is that inflation is rising despite slower demand. The huge food price hikes put pressure on governments to either increase subsidies or to implement austerity measures to try to curb inflation. At the moment, most governments are vacillating in the face of growing mass protests, while capitalist economists advocate all types of austerity measures – higher interest rates, slower money supply growth, public sector cuts. Whatever measures, however, they will not be able to avoid a downturn. Newsweek’s report of rapidly rising inflation, a wave of strikes and a coming crisis in the state finances of Vietnam concludes, ”Vietnam may turn out to be the canary in Asia’s coal mine. Like the rest of the region its economy is export-driven, energy-dependent and labour-intensive”.
Anti-capitalism
A widening wealth gap of historic proportions – never before has the share of the rich been bigger – was for years excused because it created jobs and growth. For the working class, particularly in the US, the real division between rich and poor was covered up by loans, debts and temporary low inflation caused by the increased China trade. Now, the backlash against this period will coincide with the downturn, making it more politically explosive. Already, economic issues are at the forefront in the US elections, with people questioning why Wall Street banks are saved while working class families lose their homes. Worldwide, the global markets for both finance and food/commodities are deeply questioned. ”The Anglo-American capital market-based model of capitalism looks tarnished and an awkward question hangs over the free market process”. (Financial Times, 8 April).
Governments want to be seen as acting against the crisis, but their measures will be totally ineffective. The anti-establishment mood will therefore increase. Strikes and mass protests are spreading and anger will also be directed against speculators whose affairs are behind much of the recent increases in the price of oil, rice, soy beans and so on. The priority of governments in the US and elsewhere is to save the financial system. One method to attempt to divert mass anger could be protectionism and nationalism. While protectionist measures will deepen the crisis by reducing trade, they could in the short-term direct mass anger abroad. Inter-imperialist rivalry is set to rise.
For socialists, workers and youth, the key issue is to show how the crisis is rooted in the capitalist system. The mass protests now taking place need to be anti-capitalist and serve as a springboard towards the building of new fighting and democratic socialist parties. Capitalism will not die of itself, it has to be overthrown by a conscious movement, led by the working class on a global scale. The new possibilities opening up for such movements is what the capitalist strategists fear most of all.
Per-Åke Westerlund, Rättvisepartiet Socialisterna (CWI Sweden)
”The finance crisis, where did it go? The danger for a financial collapse is over, but many problems still remain”. This comment by Johan Schück, a leading Swedish economics commentator, echoed the mood of capitalist pundits globally at the beginning of June. His analysis was that the Bear Stearns collapse in March was the peak of the crisis. Is this a correct analysis? Has the capitalist system once again escaped a sharp downturn? The short answer is no.
The chair of the US Federal Reserve. Ben Bernanke, recently commented that the danger of a deep downturn was receding. Also in the London Financial Times this was reflected, with some economists concluding ”that the US could avoid a full-blown recession this year”. The Swedish commentator praised the central banks, led by the US Fed, for their drastic interest rate cuts. Others saw the cash tax rebates arriving with US families in May as an important measure to keep up consumption and thereby avoid recession. Some figures seemed to confirm this view. Recently, US growth for the first quarter was upgraded from 0.6 percent to 0.9 percent.
”Worse than you think”
However, since a decade or so ago, stock markets are the main crystal ball of these capitalist commentators. Less turmoil in share prices is seen as a sign the economy is stabilising. With a new downturn on the New York stock exchange this week spreading globally, their analysis will change again. ”Here is the second round of the finance crisis”, a Swedish fund report concluded on 11 June.
The analysis of the CWI is based on facts and processes, not any desire for a crisis. Marxists have never hoped for downturns, only concluded that crises are an integral part of the capitalist system. However, since the system has several times found an escape route out of different crises, by loading the costs onto workers and the poor, and by replacing one bubble with another, we have to follow developments and if necessary change our analysis.
In this case, we can conclude that all factors pointing towards a deepening crisis are still developing. The housing crisis in the US is worsening. So is the banking crisis and with it the credit crunch. Upon this, inflation – especially food and oil prices – is rising sharply.
The US magazine, Newsweek, concluded their review 7 June with the headline, ”Why it’s worse than you think”. The writer pointed at statistics for May, ”the fifth straight month of job losses – an event that signals recession sure as the glittery ball dropping on Times Square augurs a new year”. So far this year, 309,000 jobs have been lost in the US.
Housing and households
The Fed’s dramatic cuts in interest rates have not affected housing market interest rates. While the Fed’s rate is down to 2 percent, housing rates have increased to 7 percent. Now, 6.35 percent of US homeowners are behind with their mortgage payments, the highest number since 1979, and 9 million of them have bigger debts than the value of their house. According to Moody’s Economy.com, $2.5 trillion has been lost so far from household wealth. That is 25,000 dollars per homeowner.
And the trend continues. Home prices in the US fell by 14 percent in the first quarter, with an accelerated fall in March. Year on year, the pace is now 25 percent down. The biggest drops were in Las Vegas, 26 percent, and Miami, 25 percent. Up to half a million jobs in construction have been lost in less than two years.
Consumers are hit not only by the housing crisis. In addition there are harder credit conditions, drastically higher costs for food and petrol, plus the increasing risk of unemployment. This situation was reflected in the Conference Board Consumer Confidence index in May, which was the lowest since the recession in 1992. People’s outlook for the future, however, was the most pessimistic since 1973. Another poll showed that 86 percent believes the US is now in recession. The effects of lower consumption are still at an early stage and will have a huge effect since consumption accounts for 70 percent of US GDP. In May, car sales were down 10.7% compared to May 2007.
Banks
Both commercial and investment banks are hit by more than a housing crisis. They are now beginning to suffer losses from the commercial property sector, credit cards, car loans, etc. Their biggest fear, however, is their involvement in hedge funds and the speculation bonanza. In 2007, the finance industry was still the driving force of the US economy, accounting for 40 percent of all profits. This despite the fact it only employed 5 percent of private sector workers. Today, the formerly praised system of spreading risks has ended in catastrophe. Analysing the Bear Stearns crisis, The Economist pointed to the dangers in ”the markets for financial derivatives traded off-exchange. These are volatile instruments that, had Bear Stearns collapsed, could have brought down the financial system with it.” (19 April)
Banks and funds are insured by each other in an entanglement impossible to oversee. Bear Stearns was connected to deals worth 10,000 billion US dollars. The latest case of banks in trouble, Lehman Brothers – a ”Wall Street darling” according to the Financial Times – reported a loss of $2.8 billion for the second quarter this year, its first loss since listing on the stock market in 1994. It immediately raised questions about the bank’s sustainability on its own, as well as speculation about coming reports from other banks.
Prognosis
The International Monetary Fund, in its World Economic Outlook 9 April, is forecasting ”an extended period of economic weakness in the US, with growth of minus 0,7 percent this year”. Only three months earlier, the IMF had expected 0.9% growth for 2008. ”The fund already estimates that losses and write downs on all debts and securities – not just subprime mortgages – could total $945bn”. (FT, 22 April)
Profits in companies listed on Standard & Poor’s 500 index are now tipped to fall 7.8 percent this year compared to a prognosis of increased profits at the beginning of January. Bankruptcies have already increased by 50 percent. In the same article, the FT discusses whether the coming downturn in the US economy will be V, U, W or L shaped. They refer to US economist Nouriel Roubini, who has been leading established economists towards the conclusion of a deeper crisis. Now, his ”idea of a U-shaped recession still involves 12 to 18 months of economic contraction,” the newspaper noted.
Many risk factors can deepen the crisis further – the falling dollar, inflation risks, the huge deficits of the US economy limiting new stimula and of course the development of the global economy. Many elements of the US crisis exist in other countries. The IMF in its April report forecasts 3.7 percent global growth next year, down from 4.1 percent it predicted in January. Population growth means that 3 percent economic growth leads to lower GDP per capita and a global recession.
One paradox in the global economy today is that inflation is rising despite slower demand. The huge food price hikes put pressure on governments to either increase subsidies or to implement austerity measures to try to curb inflation. At the moment, most governments are vacillating in the face of growing mass protests, while capitalist economists advocate all types of austerity measures – higher interest rates, slower money supply growth, public sector cuts. Whatever measures, however, they will not be able to avoid a downturn. Newsweek’s report of rapidly rising inflation, a wave of strikes and a coming crisis in the state finances of Vietnam concludes, ”Vietnam may turn out to be the canary in Asia’s coal mine. Like the rest of the region its economy is export-driven, energy-dependent and labour-intensive”.
Anti-capitalism
A widening wealth gap of historic proportions – never before has the share of the rich been bigger – was for years excused because it created jobs and growth. For the working class, particularly in the US, the real division between rich and poor was covered up by loans, debts and temporary low inflation caused by the increased China trade. Now, the backlash against this period will coincide with the downturn, making it more politically explosive. Already, economic issues are at the forefront in the US elections, with people questioning why Wall Street banks are saved while working class families lose their homes. Worldwide, the global markets for both finance and food/commodities are deeply questioned. ”The Anglo-American capital market-based model of capitalism looks tarnished and an awkward question hangs over the free market process”. (Financial Times, 8 April).
Governments want to be seen as acting against the crisis, but their measures will be totally ineffective. The anti-establishment mood will therefore increase. Strikes and mass protests are spreading and anger will also be directed against speculators whose affairs are behind much of the recent increases in the price of oil, rice, soy beans and so on. The priority of governments in the US and elsewhere is to save the financial system. One method to attempt to divert mass anger could be protectionism and nationalism. While protectionist measures will deepen the crisis by reducing trade, they could in the short-term direct mass anger abroad. Inter-imperialist rivalry is set to rise.
For socialists, workers and youth, the key issue is to show how the crisis is rooted in the capitalist system. The mass protests now taking place need to be anti-capitalist and serve as a springboard towards the building of new fighting and democratic socialist parties. Capitalism will not die of itself, it has to be overthrown by a conscious movement, led by the working class on a global scale. The new possibilities opening up for such movements is what the capitalist strategists fear most of all.
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