Saturday, 11 September 2010

A Tale Of Contradictions - Part 8

This Is Not The 1930's

However, as stated above, this is not the 1930's; a Depression now would not be like then. A Depression lasts for around 40 months, and sees output fall by around 25%, with unemployment at around 20%. Some economies like Spain are already effectively experiencing such conditions. It is possible that the consequences of the spending cuts in the PIIGS, and in the UK could result in something similar. Obviously, the more economies suffering such conditions, the more profound are the consequences, the less the potential for any economy to escape by exporting to others, and so on. Yet, seeing even such a dramatic situation as catastrophic reflects a US/Eurocentric view of the world, which is no longer valid. The fundamental economic basis of the global Long Wave expansion remains in place. The dynamic driver of that expansion from its commencement in 1999 has not been the US or western Europe, but has been Asia. It remains so. Asia would undoubtedly suffer in such a scenario. But, such a crisis would merely act to violently correct the imbalances and contradictions that exist, and having done so would lay the basis for the restoration of the Boom on a sounder footing.

The basic outline of such a resolution can be surmised from current trends. Firstly, the economic basis of western economies used to paper over the cracks for the last 20 years or so would be blown apart. The basic drive in that regard being attempted now would be massively accelerated. In other words, where in the US and UK the debt binge of individuals is being partly reversed and savings rates increased, there would be a huge deleveraging, as individuals brought spending on non-essentials to a halt, and saved what disposable income they might have. Keynes called this type of saving, a “Precautionary Demand” for money. Recent TV news reports have spoken about increased levels of empty shops in town centres. As consumers stopped spending, those levels would soar, with a massive increase in bankruptcies in the retail Sector. So, two of the props of that bubble economy would disappear, consumer debt, and the expansion of commercial Capital at the expense of productive Capital. Alongside it would go another prop of that bubble economy, inflated asset prices. The Dow Jones Index went from below 1,000 in 1982, to 14,000 at its height before the 2008 crash. It was blown up on the back of repeated injections of liquidity. Some renowned Stock Market pundits like Bob Prechter, are forecasting that it could drop back down to 1,000. Others like Marc Faber expect any such falls to be met with yet more injections until the entire system collapses. They are the extremes, but the Dow had fallen back to 7,500 in 2000, after having gone over 10,000, and many do expect that it could drop to 5,000. Similarly, house prices were repeatedly inflated because of the same cause. In 1997, as a result of the collapse of the Japanese bubble, property prices dropped around 80%. Elsewhere, I have set out why a similar drop is likely in the UK, and other economies with a similar housing market.

In part, such collapses will address other contradictions, and disproportions in these economies that have arisen on the back of the measures taken to get through the previous downturn. Some recent dialogue has focussed on inter-generational disproportions, particularly in relation to Pensions. Such collapses will mean that a large component of the wealth of the Baby Boomer generation – the value of their property, and in part the value of their private pensions, ISA's etc – will be wiped out. At the same time, the collapse in house prices will effect a transfer of wealth to the current generation, who at least for those in work, will find for the first time in 30 years or more, that houses become affordable, and indeed, that they could be investing into a pension scheme at more reasonable rates of return over the longer term. The other consequence of this is that some of the policies being proposed by Governments of taxing this wealth to cover things such as Social Care for the elderly will be impossible to achieve, because that current wealth will no longer exist to tax.

This process will be further enhanced as a result of a temporary but sharp rise in general inflation. I have previously set out that in conditions of high levels of debt, all governments throughout history, have resolved that situation by debasing the currency, paying back their creditors with devalued currency. In modern terms through inflation. The current situation is not likely to buck that millennia long historical precedent. Already we see, in the UK, the RPI persistently showing inflation at over 5%, as against the Bank of England target of just 2%. The Bank repeatedly predicts it will falls, repeatedly it doesn't. Even the CPI shows inflation at over 3%, whilst a working-class calculated index would probably show the true rate to be closer to 7 or 8%. The Bank on the basis of these figures should have been raising interest rates long ago, but stubbornly refuses to do so. In fact, even while inflation has been rising it has pumped additional liquidity into the system, being unable to lower rates further from their current 0.5% level without risking a liquidity trap. In part, it cannot do so, because of its fear of choking off the economy even more. But, that is largely a smokescreen. Although, the Bank charges 0.5%, the commercial banks are still charging more like 8% on loans! And, printing money, and holding interest rates low is counter-productive unless it is accompanied by either strong demand for that money via a thriving economy, or else stimulation from fiscal expansion. The first, certainly does not exist, and the Government is reversing the latter! The real reason that rates are kept low, and that money is printed, is to monetise the increased costs coming down the road. Given the huge amount of imports that many western economies suck in from China, that make up a large part of the wage bundle for workers – a fact which over the last 30 years has helped reduce the Value of Labour Power – any changes there have significant effects here. Western currencies are falling against the RMB, and will fall further and faster in any double dip, and certainly any Depression. China would be under considerable pressure to float its currency or else face quotas, and other restrictions. Given the degree of competitiveness of China's exports it would probably concede. But, at least in the short term western economies would continue to such in those imports, because they would not quickly be able to substitute for them. This is the so called J-Curve effect.

Already, the fact that China's apparently limitless supply of labour has begun to dry up, has seen those effects of the Long Wave Boom referred to earlier kick in. Chinese workers have become more confident, more organised, more militant, and better able to win significant improvements in their pay and conditions. The combined effect of a rising RMB, and 30-50% wage increases for Chinese workers – and something similar will undoubtedly spread to other Asian workers – will mean, rapidly rising prices for all those wage goods that are imported into western economies. Unless that cost increase is monetised the drain of Value that would imply would mean that the prices of other, domestically produced commodities or assets would have to fall even more significantly. Central Banks were established by Big Capital precisely to avoid such catastrophic falls in the nominal levels of prices for their goods. Higher rates of inflation will effect a number of things. Firstly, nominal wages can rise, whilst real wages are cut. What Keynes called Money Illusion, and what Mises and Schumpeter called “Forced Saving”. Higher nominal price levels means that the real levels of debt, because it is historically priced, fall. The 25% spending cuts being proposed could alternatively be accomplished by two years of 10% inflation.

See:Paying For The Crisis

The fact, is that although in a globalised economy there can be no talk of decoupling, the dynamic driving force of that world economy now resides in China and the rest of Asia. China has by-passed several of the world's largest economies in just a few years to become the second largest economy. It may surpass the US within 10-15 years. If the West enters a severe recession let alone a Depression, it will achieve that even quicker, because as the last crisis demonstrated the Chinese Stalinists retain the advantages of a centralised planned economy to direct economic activity, alongside the competitive advantages that come from market competition.

It now has huge resources that can be directed into whatever areas of investment or consumer spending it chooses, and it also has a network of bilateral trade agreements with other Asian economies, as well as developing economies in Africa and Latin America. Just as its planned economy allowed the USSR to grow strongly in the 1930's, the elements of planning in the Chinese system would have a similar consequence, but with the advantage of a more efficient economy, a worldwide chain of economic partners, and the continuance of a global Long Wave Boom. All that a serious recession in the West would achieve would be to hasten the process already underway of the relative decline of the West and rise of the East, it would only make apparent what is already real.

But, nevertheless it is obvious why the US, and indeed other western powers would prefer it not to play out in that manner. As stated in the link above, the whole reason for that “Social-Democratic Consensus”, the reason for the use of Keynesian policies when possible, the reason that Big Capital established the Welfare State at a national level, and attempted to establish something similar on a global level, is precisely for the reasons set out by Engels, to avoid costly class conflicts. Such crises are only worth enduring for Big Capital, if the attempt to resolve the underlying contradictions has failed, and the contradictions have been raised to the level where such a crisis is inevitable, and where it has to be resolved by open conflict. In general such occasions only arise within the context of the Long Wave decline not of the Boom. The fact, that there has already been significant resistance across Europe, shows that the underlying trends of this stage of the Boom are in place if only weakly. The risk for Capital is that even if it wins a temporary victory over Labour in resolving the current situation, it may do so at a much greater cost to itself.

Capitalism rests on a very narrow support. The Capitalist class is tiny compared to the working class. It rules only because it is able to persuade workers that it provides them with the best of all possible worlds. In short it rests entirely on an ideology that is reproduced alongside Capital day in day out. But, once Capital ceases to be reproduced, so does its ideology. The basic concept embodied in that Social-Democratic consensus fostered by Big Capital – and by its effective agents in the Labour Movement who limit the workers to bargaining within the system – is precisely that, that bargaining within the system can bring you returns without the risk of engaging in something unknown – Co-operative production, Socialist Revolution. But, every time that Capital enters crisis, every time that bargaining within the system does not bring about improvements, the basis of that ideology is undermined. That does not mean that Socialist revolution is inevitable as some Leninists portray. Especially given the experience of such a large scale experiment in Russia, workers are unlikely to make such a big gamble. They are more likely to take an easier route towards some demagogue offering simplistic solutions, if that is the only thing on offer to remedy their immediate situation. It is no wonder that Paul Mason in his recent blog could write,

“But Spain is a young democracy whose institutions are untested in prolonged austerity.

On a demo of one million people, on the streets of Barcelona two weeks ago, I saw conservative nationalists march alongside communist shop stewards in favour of political autonomy for Catalonia. On the demo the whole demographic rainbow - from anarcho youth to well-heeled professionals - told me the same thing: we're paying too much to central government, we're sick of Spain, they're sick of us.

The main slogan was "Adeu Espanya" - which you don't need to know Catalan to understand. And - slightly chillingly for a country that was once fascist - more than one young person informed me: "democracy isn't working".”

It is also no wonder that after 100 years, in which that Social-Democratic consensus has papered over not just the contradictions of class society, but papered over the other divisions within it, the cleavages of gender, sexual orientation, ethnicity and so on, and rather than dealing with them by thoroughly democratic means, which would have involved open struggle against the remnants of past ideologies, dragged down through the ages like shit through a sewer, has attempted to modernise society by bureaucratic and police methods – a good example is the legislation enacted in the 1970's on Equal Pay and Discrimination, which has not only failed to bring about the first, but has in some ways by criminalising the latter rather than dealing with it in people's heads, only driven it under ground, and, like illegal drugs, made it more powerful in the hands of its purveyors – that every time a crisis arises upon which the basis of that Social democratic consensus is undermined, these other contradictions become heightened, and exposed to the oxygen flare up.

The Big Bourgeoisie have no desire for such a conflagration, because it challenges the stability they need for Capital Accumulation. This is not the 1930's, nor even the 1980's. Even a Depression now would be over by at the latest 2013, and the Long Wave Boom is likely to last until around 2025. In the conditions likely to exist after such a crisis, with Capital cleared from the sclerotic sectors and moved to more dynamic areas of production, with a rapid rise in the demand for Labour, the lessons of such a period would quickly be absorbed, especially as workers looked to rising new Labour Movements in Asia and elsewhere for inspiration. Workers might accept they have to pay for the crisis caused by the Bankers for now, but they might have a different view in five years time! The question for Marxists is whether they can provide the working-class with the kind of leadership necessary, now and for the immediate future. A leadership that breaks out of that Social-Democratic consensus of Statism and Welfarism, in which the class has been trapped, not by offering utopian, and romantic calls for a repeat of 1917, but that offers workers practical solutions to their immediate problems, outside that Social-Democratic consensus of bargaining within the system either at the shop-floor or in Parliament, solutions based on their own self-activity, their own self-government, and the establishment of their own solid basis of economic and social power.

Back To Part 7

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