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Editorial from the Socialist issue 831
Capitalism - 'the new mediocre'
"We're the fastest guns in the West - and still losing the living standards battle", was how Stephanie Flanders summed up Britain's economy (Sunday Times 26 October).
It is true that Britain was the fastest growing of the G7 countries in the third quarter of 2014. However, the UK economy grew by a paltry 0.7%, the government deficit increased, and wages continued to fall (see below). As Flanders, concludes: "Alas, this is as good as it likely to get for the foreseeable future. Welcome to what the head of the International Monetary Fund, Christine Legarde, has called 'the new mediocre'."
Stagnation - a long period of low growth - is now the best scenario on offer for world capitalism. The OECD (Organisation for Economic Cooperation and Development) has even calculated that low growth - an average of two-thirds of the current very low rate - will continue for the next 45 years!
We would agree, except that the working class will not put up with a capitalist system which means impoverishment for the majority for that long - a democratic socialist planned economy will be firmly on the agenda before then.
In recent weeks, however, there has been a renewed wave of panic in the financial markets at the unfolding of a new stage of the economic crisis that began in 2007. Fears are mounting that stagnation might be too rosy a prognosis for the world economy. World oil prices have plunged to $85 a barrel as forecasts for world growth have been slashed.
The US, while it is a declining power, still remains the most powerful economy in the world. Yet the return to growth (very low growth) of the US economy has not been sufficient to lift the rest of the world out of crisis. This is despite the vast sums of money that have been pumped into the US financial system since the economic crisis began.
Over the last five years the US Federal Reserve has put nearly $4.5 trillion into the US economy, via quantitative easing (QE), in a desperate attempt to counter the effects of the recession and prevent the meltdown of the financial system. At the same time interest rates are at historically low levels, making borrowing very cheap.
Similar measures have been carried out in Britain, where interest rates are at their lowest level for three centuries! Yet, in a condemnation of modern capitalism, these huge sums being pumped into the economy have not resulted in a growth in investment.
'The zombie system: how capitalism has gone off the rails' was how an article in the German current affairs magazine Der Spiegel described the situation. Accurately it concluded: "Central banks are also running out of ammunition. They have pushed interest rates close to zero and have spent hundreds of billions to buy government bonds. Yet the vast amounts of money they are pumping into the financial sector isn't making its way into the economy. Be it in Japan, Europe or the United States, companies are hardly investing in new machinery or factories anymore. Instead, prices are exploding on the global stock, real estate and bond markets, a dangerous boom driven by cheap money, not by sustainable growth."
Now the US federal reserve has said it will stop pouring alcohol into the punch bowl. This week the Fed chief, Janet Yellen, is due to make the 'final' QE payment of $15 billion. Panic on the stock markets as the drugs are withdrawn, combined with the deepening of the economic crisis in other parts of the world, however, may yet reverse Yellen's decision on QE.
Whether now or later, the withdrawal of QE and the eventual raising of interest rates will threaten a bursting of the bubbles and a repeat of the financial crisis of 2008. This time, affecting an organism weakened by years of crisis.
Even those parts of the world that initially seemed to have escaped the crisis are now being hit. Australia's 23 year boom has come to an end and in Brazil growth rates have plunged from 7.5% a year in 2010 to close to zero now.
Both economies' growth has been largely based on selling raw materials to China. China catching cold is now giving them flu. China was never immune from the world economic crisis. It is estimated that the collapse of US demand in 2008 led to 30 million thrown out of work in China. However, the unprecedented, gigantic, stimulus packages pumped into the economy by the regime were able to partially cushion the Chinese economy.
Now, however, China's growth rate is lower than at any time since 2009. Chinese officials have warned that growth of 7% - compared to 12% in the past - is now 'normal' for China.
The regime is worried by the rapid increase in China's debts as a result of the stimulus packages of recent years. The amount owed by the government, companies and households is now 240% of GDP, double the level it was at the start of the crisis. This is still modest compared to some other countries (it is 322% in the US for example).
However, even a period of weaker growth in China could raise the prospect of mass, potentially revolutionary upheavals, a foretaste of which has already been seen in Hong Kong.
In a world of ailing economies it is Europe, however, which is sickest. Germany, the only part of the eurozone that was growing, has now entered crisis. The Economist magazine's front cover this week showed Europe as a dead parrot. The magazine's commentary was barely more optimistic, declaring: "Prices are falling in eight European countries. The zone's overall inflation rate has slipped to 0.3% and may go into outright decline next year. A region that makes up almost a fifth of the world's output is marching towards stagnation and deflation.
"Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the eurozone poses far greater risks. Unlike Japan, the eurozone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take fright, populist politicians will gain ground, and - sooner rather than later - the euro will collapse."
Deflation is a drag on growth because it makes debt more expensive and leads consumers to postpone purchases in the expectation that prices will be lower at a later date. Given the huge debts throughout the world economy this is a nightmare scenario for capitalism.
One in five European banks failed the ECB's 'stress tests' on how they would cope with a new stage of economic crisis. Yet the scenarios envisaged were relatively optimistic. Outright deflation, for example, was not even considered. And the correct valuation of German mortgages (German banks all passed) was taken on trust. In reality the number of 'zombie banks' was probably underestimated.
In panic at the situation in the eurozone a section of the capitalist class is calling for Keynesian measures to try and stimulate demand, combined with a slowing of austerity measures. Meanwhile, however, the dominant wing of the capitalist class continues to demand ever more austerity.
Martin Wolf, for example, writing in the Financial Times, calls for measures to stimulate the eurozone economy and declares that the ECB's attacks on the French deficit breaking the eurozone's rules as "absurd". Wolf states that the 'threat to stability' of continued stagnation are 'obvious', meaning the inevitable uprisings of the working class, not least in France.
There is a growing section of the capitalist class who are concerned by this prospect. At a recent meeting on "inclusive capitalism" in London 250 extremely wealthy individuals, from Google Chairman Eric Schmidt to Unilever CEO Paul Polman, gathered in order to fret about the threat to social stability caused by the crisis in their system. The hostess of the meeting, bank heir Lynn Forester de Rothschild, said she was concerned about social cohesion, noting that citizens had "lost confidence in their governments."
Their fretting, however, will do nothing to alter the character of modern capitalism, which is crisis-ridden and increasingly incapable of meeting the needs of the majority, and has inequality at its heart. The result will be exactly what they fear - a growing revolt of the working class and poor against the misery capitalism offers them - and opportunities for a democratic, socialist alternative to gain mass support.
In The Socialist 29 October 2014:
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