[Militant International Review, No. 38, Autumn 1988, p. 24-25]
Dear Comrades,
The editorial of MIR Number 36, Winter 1988, on the world economy said: “While one could not theoretically rule out the possibility of a temporary agreement which would only serve to postpone the slump a year or two, while making it more severe when it finally arrives, at the present time, all the signs point in the opposite direction.” Doesn’t this perspective need to be reassessed in the light of the latest evidence? To say that all the signs pointed in the opposite direction of a postponement of the crisis is surely not true.
Predictions of developments in capitalist economics must represent a balance of probabilities. In particular, the prediction of short term trends must be conditional because of the nature of capitalist society. Prior to the crash, unlike 1929, production was rising in all the main capitalist countries, quite strongly in Japan and Britain. In the aftermath of the crash, also unlike 1929, interest rates fell and the money supply was allowed to increase. These factors pointed to a strong possibility of a delay in a slump or recession, although of course deepening the fundamental contradictions.
Since the stock market crash a year ago economic growth has not fallen, it has even increased in some countries. Recent rises in interest rates worldwide mean this will not continue and the stage is set for a downturn, though not in 1988.
Yours fraternally,
George Passmore,
East London.
The MIR Editorial Board replies:
Firstly we must welcome George Passmore’s letter because a discussion of the points he raises should help us to understand better all the factors involved in analysing current developments in the world capitalist economy. Marxism is the science of perspectives – the analysis of the underlying processes and general trends in society as a 24 guide to action. But as Trotsky once said, perspectives are not blueprints of the future. They cannot forecast or predict every event and that is particularly true in relation to each twist and tum in the economy and above all in the exact timing of important changes.
The stock crash of October 1987 did mark a definitive new stage in the development of post-war capitalism. The strategists of capital were terrified of the possibility of a worldwide slump and its social consequences. So immediately after the crash, the seven dominant imperialist powers (the so-called G7 countries) came together to work out a new policy. They believed that they could prevent a new world recession by pumping ‘liquidity’ i.e. credit into the world economy. The temporary agreement they reached is something we took to be a possibility as the passage from the MIR editorial that George Passmore quotes confirms, just as it was only the Marxists who forecast the stock crash well before its arrival last October.
US dominant
Even then, when discussing the prospects for a slump in an MIR article written before the stock market crash, we stressed that “at all times we must make a caveat. We must take into account the enormous resources that have been created by the labour of the working class, by science and technique, in the course of the last 50 years…” MIR No 35, Summer 1987 (emphasis in the original). “Are the capitalists prepared to waste the resources accumulated in the course of the last 50 years?” we asked. “Can they defer the onset of a fresh recession, given the accumulation of the US budget and trade deficits? It is possible, temporarily, but it would depend on a whole series of circumstances” including developments on the political plane. Thus the question in America is, as the Financial Times put it in September, “whether the new administration – be it Republican or Democrat – will take determined action to rebalance its economy by cutting the budget deficit, or rather whether it will do so before the markets impose their own solution.”
Let us remind ourselves of the underlying processes in the world economy which led up to the stock crash. The post-war period began with the overwhelming economic, military and political dominance of US imperialism. The USA was able to force down national tariff barriers for its exports and established the dollar as the main means of exchange and store of wealth after gold (of which it held over two- thirds of the world stock in 1945), But the whole post-war period has been characterised by the relative decline of the USA in relation to the growing countervailing economic power of Europe (led by West Germany) and Japan. The US share of world production and trade was reduced at the same time as the world economy accelerated upward on the basis of an expansion of world trade and international division of labour. Now the world economy has never been so integrated – as the worldwide chain reaction that followed the initial fall in share prices in Wall Street demonstrated. In the 1929 crash the fall was at first restricted to the US stock market.
Capitalism expanded through an unprecedented growth of world trade, combined with the secondary factor of Keynesian methods of state spending. However the first simultaneous world recession in 1974-5 brought a sharp change in the policies of the capitalist strategists. Keynesian policies of state subsidy and expenditure had failed to avoid a slump. The new answer was monetarism – in reality a return to the old orthodox economics of ‘sound budgets’ of the 1920s and 1930s.
But it was monetarism only in words. In practice the Reagan government adopted what we have termed as ‘negative Keynesianism’ i.e. massive state spending not on civilian projects but on arms. It was a policy to avoid slump that echoed Hitler’s policies of the 1930s. Hitler also adopted an arms programme to reduce unemployment. Hitler faced the choice of slump or war and opted for the latter by building up arms and then using them. Although Reagan has easily outspent Hitler he does not have the option of a world war. But the massive arms spending created a huge deficit on the budget which could only be financed by borrowing. To make it attractive to invest in the US government, interest rates for lenders were kept high. This drove up the value of the dollar and raised the costs of investment for US manufacturing. US exporters were driven out of world markets and a huge trade deficit was built up. The USA moved from being the world’s largest creditor i.e. lender to being the world’s largest debtor i.e. borrower.
Banks
This process could not continue and the main capitalist countries have made strenuous attempts to try and reduce the US deficits while avoiding a slump. They have tried to control the fall in the value of the dollar to give it a ‘soft’ landing. Between 1986 and the beginning of 1988, the central banks of the G7 countries spent $150bn in trying to control the dollar’s value. But inexorably interest rates began to rise in 1987 to the point where it threatened to drive the world economy into slump. That fear triggered off the stock crash. We argued that the relatively sluggish growth of the last eight years would either turn straight away into a slump or it would accelerate into an uncontrollable boom and then swing back sharply into slump. It is true that there has not been an immediate slump but all the underlying conditions for it remain. Since the stock exchange crash there has been an acceleration of growth in the world economy – although only in the advanced industrial nations. In the so-called Third World growth has declined as their huge foreign debt rises and wealth continues to be sucked out of these countries by the imperialist powers over $200bn since 1982.
It is not possible accurately to predict how the underlying processes in the economy will unfold both in detail and in timing. But it would be wrong to conclude that capitalism has avoided a slump. The same underlying factors which pointed to a recession still continue to operate.
It is not possible accurately to predict how the underlying processes in the economy will unfold both in detail and in timing. But it would be wrong to conclude that because there has not been an immediate downturn in world production and trade after the stock crash that capitalism has avoided a slump. The same underlying factors which pointed to a slump still continue to operate.
The G7 countries responded to the crash by saying that they would avoid the mistakes of the 1930s and of 1979-81 by lowering interest rates and pumping liquidity into the world economy. But the result has only been to temporarily stave off a recession at the expense of beginning a new inflationary spiral. This runaway boom will inevitably go bust. The US trade deficit has improved, if only marginally. However, the current account, which includes invisible earnings like shipping, insurance and tourism, is worse in the first quarter of 1988 than in 1987 as the cost of interest payments on all that borrowing mounts up. The budget deficit has hardly been dented. Now all the serious commentators are worried and the stock markets remain nervous and swing around at the smallest movement in trade figures or interest rates. The US financial system remains perilously weak, as the US government has to bale out bank after bank that is forced into difficulty. The collapse of the savings banks may cost the US government $50bn and as the Financial Times recently remarked: “financial disaster could spread like a forest fire if recession ever took hold.”
So all the main factors that pointed to recession in October 1987 are still present. The delay in the coming slump, which has been postponed by the attempt of the G7 nations to lower interest rates and expand the money supply, threatens to set off a new bout of inflation. So now interest rates are rising again. The capitalist powers try to control the economy, but the forces of the market really control them. Their attempt to delay the recession is only stoking up an even worse downturn later on. And they are being forced to adopt policies of rising interest rates in contradiction to their original aim at the beginning of this year.
Of course there are differences with the 1929-32 slump when there were special and unique factors at work. In any event, an exact replay of the 1929-31 events is highly unlikely. However, as we explained in MIR No 36 it is not true, as George Passmore suggests, that governments and bankers in the 1930s restricted money supply and kept interest rates high. Between 1929-33 US interest rates fell from 6% to 2% while prices fell faster than money supply. Money was plentiful and cheap but it made no difference because the market for profitable production and investment was too poor to revive the economy. Monetarism and balanced budgets existed during the boom of 1924-9. So these policies were not decisive in causing the slump of the early 1930s.
Inflation
What is different is that now the next slump will take place while prices continue to rise. In the 1930s the slump was characterised by sharp falls in prices of goods. Now it is more likely that we will have a slump along with some price rises i.e. slumpflation or stagflation, although the price of raw materials could fall. The world economy is now dominated by huge multinational companies who can exert some control over prices. Any collapse of markets leads to them cutting back production to preserve price levels. Thus the process of capitalist crisis now takes form not so much through an overproduction of goods but of excess capacity where even in boom periods up to 20% of productive potential lies unused. In slumps that excess capacity reaches much higher levels, forcing industry and commerce into closures and redundancies to try and write off this ‘excess’ capital.
The capitalists have tried to stave off the world recession by the input of extra credit. In so doing they are fuelling the fires of inflation, which they are also desperate to avoid after the experiences of the 1970s. So 1988 starts off with falling interest rates and ends with rising rates such are the twists and turns of policy as the capitalists try to weave a narrow path between inflation and slump. But they cannot control the world capitalist economy in that way. The forces of the market will exert themselves. The imbalances between the capitalist powers expressed in the payments surpluses and deficits, and in the net transfers from the ex-colonial countries to the industrial economies can only be corrected at the expense of an enormous contraction of production and trade i.e. slump. Again we must emphasise that it is difficult to ascertain exactly when the world recession will take hold. It could be next year or it could even be postponed for another two to three years. But it is inevitable that this present boom will go bust. It was some nine months after the Wall Street crash of 1929 before there was the first real downturn in world trade and production, and the bottom of the slump was not reached until July 1932. As George Passmore says himself, the recent rises in interest rates show that the accelerated growth of the last year cannot continue and the stage is set for a downturn.
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