Financial crash or slowdown?

Bill Jefferies of Permanent Revolution replies to Hillel Ticktin on the strength of the world economy

The US sub-prime mortgage crisis and credit crunch, and the resultant US slowdown and potential recession, has acutely posed the nature of the current period. Over the last 12 months, the IMF has raised its estimate of financial losses from approximately $50 billion in the summer of 2007, to $945 billion in April 2008. US growth is expected to hover around 0% for at least the first half of 2008 and the knock-on effects on the world economy have still to unravel.

As a result certain Marxists, including Peter Taaffe, Lynn Walsh, Robert Brenner - and now Hillel Ticktin in the Weekly Worker - have asserted that this is the deepest crisis that capitalism has faced in decades, one that poses the potential possibility of a repeat of the 1930s great depression. Ticktin says: “The question at the moment is not really whether there is a downturn. It is clear that is the case. The question is whether there is a depression - and I think there is.” And he adds, apocalyptically, that the “system itself could disintegrate”.1

In contrast over the last 18 months Permanent Revolution has explained how several factors coming together over the last decade have decisively transformed the prospects of world capitalism, strengthened it economically and produced a long wave of upward growth.

What were these factors? Firstly the restoration of capitalism in the former centrally planned economies of China, the CIS, eastern Europe and central Asia doubled the size of the working class that could be exploited by capitalism. And secondly there has been an ongoing neoliberal offensive against the world’s working class and the opening up of the formerly sheltered semi-colonies like Brazil and India to the unlimited exploitation by finance capital.

We do not to deny the existence of the present US sub-prime and financial crisis, but it is necessary to situate it within the context of the wider, very strong recent growth in the world economy. “During the past five years, world GDP has grown by an average of 4.5% a year, its fastest for more than three decades, though not as fast as during the golden age of the 1960s, when annual growth exceeded 5%. But the world’s population is now growing at half of its pace in the 1960s, and so world income per head has increased by more over the past five years than during any other period on record.”2

The period of stagnation which characterised the crisis-wracked years of the 1970s-80s was overcome and in its place the period of globalisation saw a marked upward trend, with the explosive development of new capitalist powers, most notably China and Russia; the transformation of production through the information and communication technology revolution; the doubling or trebling of trade as a proportion of gross domestic product; a radical reduction in circulation times; and a consequent recovery in world profit rates.

As Goldman Sachs put it, “While profits as a share of GDP in the US in 2006 were about 67% higher than their post-1970 average, this profit share was not much higher than in the 1950s and early 1960s. What we saw over the course of the 1970s was a massive decrease in profitability, both in the national accounts and in reported earnings. The trend upwards in the profit share in the US starting in the mid-1980s, bumpy as it was due to two recessions, has basically taken us back to where we were five decades earlier.”3 The present US crisis comes against the background of this recovery and is significantly shaped by it.

The sub-prime crisis originated in the Thatcher-Reagan financial revolution of the 1980s onwards. This significantly loosened financial regulations, as finance capitalists sought new avenues to exploit the working class. The old structured relationship between mortgage-holders and banks was transformed: instead financiers sought to ‘securitise’ debt through selling it on financial markets.

As multinational corporations’ balance sheets improved through the 1990s, they used their surplus profits to pay off debt and funded investment through retained profits rather than borrowing from the banks, thus further intensifying the incentive for financiers to invent ever more elaborate scams aimed at skinning the working class out of their wages.

Far from these loans increasing working class demand, as is asserted by Chris Harman, Robert Brenner, Peter Taaffe et al, they in fact reduced it by taking an ever increasing proportion of wages as interest payments. The proportion of disposable income paid in debt repayment in the US rose from 14% in 1980 to 19% in 2007. In the UK the figure is even higher at 21% for 2007. Consequently, US workers spend around $981 billion of their wages every year in debt repayments.

At the same time neoliberal capitalism massively increased disparities in wealth in the imperialist heartlands - for example, the proportion of US national income going to the top 1% rose from 9% in 1979 to 18% in 2007. Annual income for the bottom 20% rose by a mere $200 during the same period.

Capitalist gluttony filled the gap in effective demand. The reduction in working class consumption did not reduce effective demand - consumption increased in the USA to around 70% of output, for, as the workers lived on less, the capitalists lived on more. Much, much more. This was combined with a reduction in wages as a proportion of national income and massively increased profits. Again Goldman Sachs gives the figures: “Between 1980 and 2005, labour’s share of national income decreased from 64% to 60% in the US, from 73% to 63% in Europe, and from 70% to 59% in Japan. As labourÖ’s share of national income declined, the share of income going to capital increased, which manifested itself in the form of increased corporate profitability.”4

Such a dramatic reduction in the real value of working class incomes was only possible because globalisation revolutionised manufacturing productivity. The deflation of manufacturing production from the later 1990s to the mid-2000s meant that, even though the value of wages fell, the amount of commodities they could buy increased and living standards rose. In Marxist terms the cost of the reproduction of labour-power fell. This raised the rate of surplus value and hence the rate of profit.

The effect of revolutions in productivity was not limited to wages. They reduced the cost of investment as well, lowering the organic composition of capital worldwide. Thus investment spending as a share of GDP in the UK can appear very low, but in real terms spending on capital equipment is reaching record highs and massively increasing profits. The low proportion of fixed capital investment is not evidence of capitalist stagnation or a surplus of capital, but of the revolutionising dynamic of globalisation. Fixed capital investment was highest not in the post-war boom, but in the 1970s, as productivity stagnated and capitalists sought to offset rising wages by replacing labour with machines.

The present US recession does not demonstrate the stagnation of capitalism, or the end of the long wave, but the disproportion between the globalisation of the past and the globalisation of the future.

The USA has used its position as a financial and military hegemon to live beyond its means for the past two decades. No longer. The very sharp falls of the dollar, necessary to reflate the US economy, have not been matched by any of its major competitors. This has been combined with very large bailouts from the US state to the tune of an extra $200 billion this year, massively increasing the budget deficit. While this might ameliorate the extent of the crisis in the US in the long run, it will seriously undermine the financial power of the USA, as rivals like the EU, China and even Japan flex their growing financial might.

The concept of an upward long wave asserts that in a period of upswing strong or rising profits will offset crisis by enabling capitalists to invest in new profitable sectors and by permitting the capitalist state to undertake significant reflationary measures not open to it during a period of downturn. The present US recession is a worked example of this. Through the course of the 1980s onwards, US manufacturing, particularly of domestically consumed consumer products, contracted dramatically. Manufacturing employment fell by 20% between 1998 and 2005, even as total output increased.

So, while US workers sought to maintain their living standards through increasing loans, they bought overwhelmingly imported goods and the US balance of payment deficit ballooned. It peaked at 6.8% in the fourth quarter of 2005 before falling to 4.9% in the fourth quarter of 2007. The US dollar was only prevented from falling by massive influxes of cheap foreign loans from China and the so-called ‘emerging world’ into financial instruments - also dependent on the ever diminishing pool of US workers’ wages.

From 2005 onwards the Federal Reserve, in a vain attempt to limit the scale of the housing bubble, raised interest rates - further bolstering the dollar and providing an incentive for foreigners to buy US assets. As the credit crunch exploded in August 2007, the financial instruments, which, it was suggested, spread risk through severing the link between the lender and the borrower, simply made the real value of the speculative assets unclear. Massive write-downs to the tune of $240 billion dollars by April 2008, meant the Federal Reserve cut interest rates at an unprecedented rate, halving them in six months, in order to increase the ability of US workers to maintain their debt repayments and so attempt to put a floor under the losses of the financiers.

But as a result the dollar has fallen very sharply against all the major currencies. This too is no bad thing from the Fed’s point of view, as the price of imports has increased and exports fallen. As a result imports have slowed from around from around 15% annual growth in the middle of 2006 to 6% annually in 2007. Goods exports in 2007 increased to $1,149.2 billion from $1,023.1 billion. The improvement in the US balance of payments has added around 1.25% to US GDP for each of the last three quarters and this trend is likely to accelerate as the crisis deepens.

In addition, this fall in the value of the dollar has meant that repatriated profits have increased in value, whereas the value of US debts to the world has fallen. So, while US financial corporations saw profit growth fall towards the end of 2007, the proportion of foreign profits in US balance sheets increased very rapidly: “Domestic profits of financial corporations decreased $74.4 billion in the fourth quarter, compared with a decrease of $32.5 billion in the third ... The rest-of-the-world component of profits increased $55.8 billion in the fourth quarter, compared with an increase of $26.4 billion in the third.”5

The final scale of the financial losses will only become apparent when the collapse in the US housing market ends. This is nowhere near happening yet. What is more, the credit crunch is now hitting other sectors dependent on large-scale consumer purchases, most notably automobiles (which are also suffering due to the rise in petrol prices), by around 60% over the last year, as the dollar falls.

So the US recession certainly has some way to go, but what about its impact on the rest of the world? The traditional leftist schema has asserted that globalisation, and particularly the rise of China, was predicated upon US consumption of its exports. Chris Harman, writing in Socialist Review in a rather unfortunately titled article - ‘The financial panic that never was’ - published the week before Northern Rock collapsed, explained: “The world economy was only able to recover from the recession of 2001-02 because of US consumers and the US government borrowing massively to spend well beyond their incomes, by a total of around $400 billion a year.”6

Harman had elaborated this point in an earlier International Socialism article: “So the US economy holds the Chinese economy up by buying its excess production as imports, and the Chinese economy holds the US economy up by providing its firms and consumers with the cash to maintain their present level of consumption.”7

If this were true, then China should already be on the point of collapse, for over the last year its exports to the US have dramatically slowed: “Growth in imports from China has slowed to 2.1% during the last 12 months after growth between 10% and 30% during the last several years. Exports to China for January showed a 15.1% decline, but that followed huge gains during the past several years, also between 10% and 30%.”8

Yet China’s GDP growth accelerated in 2007 to 11.5%. So what is going on? There have been two previous episodes when China’s increase in exports collapsed in the last decade (in 1997 and 2001), yet Chinese growth hardly slowed, for the government increased capital expenditure to compensate for lower exports, and this trend has been repeated this year: “China’s merchandise imports rose 44.3% through February, far outpacing the sequential trend growth in exports. This is a significant change in the previously persistent trend of lagging import growth in the past three years and is consistent with the solid domestic demand trend in China …. The import data by end use also show that domestic demand-related goods are behind the latest surge, while imports for export-related production have slowed.”9

Clearly a slowdown in the USA, which is still responsible for 14% of world imports, will hit exporters to it. But China’s growth is fundamentally due to high domestic rates of profit: “At the end of 2007, profit margins among EM non-financial companies were about 4.6 percentage points above their developed market counterparts. To put this in some perspective, EM companies are now generating about 64% more profits on each dollar of sales compared to companies headquartered in developed markets.”10

And the Chinese government desperately needs to maintain growth rates to cope with the average 10-20 million annual increase in the urban population. So, while US growth has slowed dramatically, it has been significantly offset by the strength of the world economy in general and the growth of the emerging nations, China in particular. It is reasonable to expect both the European Union and Japan to slow this year, as exports to the US are reduced, but German industrial production continues to grow at over 5%, based on capital exports to the emerging world, and the same thing applies to Japan, where exports to China have risen to almost parity with those to the US.

So is this likely to be a repeat of the great depression, as Ticktin and some others on the left suggest? Well if US financial losses increase by a further factor of 20 over the next year, then certainly. But otherwise it seems unlikely. Before the great depression and before the stock markets crash US industrial output fell by 20%. Between 1929 and 1933 US national income fell by 48%. In the present crisis, US industrial production and national income is still increasing, albeit slowly. In the great depression, every major industrial power slumped. In the present crisis, every major industrial power is still growing - and some of them are growing very fast.

This crisis is not insignificant; it signals the beginning of the end of US world hegemony, which was a precondition for the first phase of globalisation from 1990-2008. In its stead a multipolar world is developing, with competing multinational blocs - the EU, China, Russia and Japan. This will destroy the basis of the globalised world economy, based on free trade and the unlimited freedom of finance capital. But the beginning of the next phase of globalisation is not the end of it - which still lies some way ahead.


1. Weekly Worker April 3.
2. The Economist March 13.
3. Goldman Sachs, ‘The end of the global profit boom?” Global Economics Weekly  January 16.
4. Ibid.
5. Bureau of Economic Analysis, ‘Corporate profits: fourth quarter 2007’: www.bea.gov/newsreleases/national/gdp/2008/gdp407f.htm.
6. Socialist Review  September 2007.
7. ‘China’s economy and Europe’s crisis’ International Socialism February 2006.
8. T Moeller, ‘US trade deficit widened’, March 11 2008: www.haver.com/comment/Moeller.htm.
9. JP Morgan, ‘China’s import strength buffers global economy’, April 4.
10. Goldman Sachs, ‘The end of the global profit boom?’ Global Economics Weekly January 16.