Michael Roberts on ‘The myth of the return to normal’; Lutte Ouvriere on current state of world economy

Posted: August 19, 2014 by Admin in At the coalface, capitalist crisis, Capitalist ideology, Economics, Marxism, World economy

Below are two important articles on the current state of the world economy.  In the first article, Michael Roberts suggests that recent data shows the weakness of the ‘recovery’ from the partial meltdown of the financial sector (itself a result of the tendency of the rate of profit to fall in the productive sector).  Usually crisis indicates not only the sickness of the system but also acts as a cure, opening the way to a new round of accumulation; Michael notes that this does not seem to be much in evidence this time around.

The second article is by the French revolutionary workers organisation Lutte Ouvriere.  LO also note the weakness and fragility of the current ‘recovery’. 

The two articles should be read together.

 

The Myth of the Return to Normal

 

The latest economic data for the main capitalist economies is not encouraging for the optimists that the world economy is set to resume normal service.

Last week, we had the first estimate for US GDP for the period April to June (see my post, http://thenextrecession.wordpress.com/2014/08/01/the-risk-of-another-1937/ ). The US economy has been the better-performing top economy over the last few years. But even here, real GDP growth was just 2% yoy, well below the long-term average since 1946 of 3.3% a year.

US nominal GDPThe recovery has been weak.  In the five years after the Great Depression troughed in 1933, US nominal GDP (that’s before inflation is deducted) rose 52%. In the five years since the end of the Great Recession in mid-2009, US nominal GDP has risen only 18%.  The gap between US nominal GDP and where it would have been without the Great Recession remains wide – and even getting wider.

Indeed, US economic growth appears to be in secular decline. In the 1980s and 1990s, the US economy generated nearly 40 quarters where GDP was 4% or higher on an annualised quarter or quarter basis (not yoy). But there have been just seven of these “hypergrowth” quarters since 2000, if you include the last quarter. But that will be revised down when the huge rise in stockpiles of goods that were included in the 4% quarterly figure are reduced. So US real GDP growth was less than 2% yoy last quarter.  And yesterday, figures for American spending in shops came out and they were not pretty either. Retail sales were flat in July and the yoy rate slowed from 4.3% in June to 3.7% in July.

Things are far worse elsewhere. The data from the

Eurozone are appalling. Industrial production has been shrinking for some time, down 1.1% in May over April and another 0.3% down in June over May. Today, the figures for real GDP growth for April to June came out – and there was little or no growth. The French economy was flat for the whole of the first half of 2014, while business investment fell 0.8% in the latest quarter. The French government has accordingly reduced its previously optimistic forecast for real GDP growth of 1.1% for this year to 0.5%. France may be lucky to see even that.

Even more worrying, the key economy in the area, Germany, contracted in the second quarter, falling 0.2% from April to June. If you put this together with a contraction in Italy already reported and growth of just 0.5-0.6% in the Netherlands, Spain and Portugal and yet another contraction in Greece, the whole Eurozone area failed to grow at all in the last quarter and rose just 0.7% over the last 12 months.

Japan too is a very poor shape, refuting the hopes and talk that Abenomics could turn the Japanese economy around (see my post, http://thenextrecession.wordpress.com/2014/07/30/abenomics-raises-profitability-and-misery/). The huge hike in sales tax imposed by the Abe government in April, brought in to try and reduce the Japanese government’s large budget deficits and debt, has led to a collapse in consumer spending much greater than expected. In Q2’14, Japan’s GDP fell at an annualised rate of 6.8%, the biggest fall since the 2011 earthquake and tsunami. Japanese households cut their spending by 18.7% on an annualised basis! And businesses cut investment by 9.7% annualised. Indeed, investment in new machinery is down 3% from this time last year. Housing investment fell by 35%! And this GDP figure included a 4% rise in the stockpile of goods. If this is excluded, then the contraction was even worse.

Japan GDPNow supposedly, the UK economy is the shining star in these clouds of doom elsewhere. I have had already cast some doubt about the nature and sustainability of the apparent pick-up in economic growth in the British economy (see my posts, http://thenextrecession.wordpress.com/2014/07/18/uk-cost-of-living-crisis-continues/ and
http://thenextrecession.wordpress.com/2014/07/10/uk-economy-can-it-last/).

At his press conference at the Bank of England yesterday on the release of the BoE’s quarterly inflation report, our overpaid governor Mark Carney raised his growth forecast for 2014 from 3.4% to 3.5%. A positive boom! But even the BoE recognised that this could be a one-off. Its own forecast for growth in future years is lower.  Carney claimed that the ‘recovery was broad-based’, but this is difficult to justify, when we see that GDP per person is still well below the 2007 peak, that manufacturing output is even further down and above all, average real wages continue to decline.

Indeed, nominal pay for employees (that’s before the impact of inflation and taxes) fell in the period April to June by 0.2% (black line in graph below). And yet inflation is rising by 1.9% yoy (yellow line in graph below). So wages are being outstripped by prices in the shops, in utilities and other daily expenses. Average real incomes have been falling since the Great Recession and there is little sign of any ‘recovery’ for most British households. Indeed, the Bank of England actually reduced its forecast for wage growth this year to just 1.25% from a previous 2.5%. Real wages will continue to fall.

UK real wages

On the other hand the BoE expects the official unemployment rate to fall further towards 5.5%, but this rate would be still higher than before the Great Recession – that will be the new normal for jobs in the UK.

UK unemployment

In previous posts, I have discussed why the UK unemployment has fallen even though economic growth has been weak since the Great Recession. But the key consequence of this has been the abysmal state of productivity per worker in the UK, which remains well below pre-crisis levels. More people in Britain have been getting jobs, but nearly half of these are in self-employment where incomes are generally lower than in full-time employment and where productivity (value per worker) is poor, even though many self-employed work long hours 9for little reward). Large corporations are flush with cash but unwilling to invest in new technology or R&D that could boost productivity.

UK productivity

Flat productivity growth plus even employment growth of 1% a year (very strong, but achieved in the six years before the Great Recession), means long-term real GDP growth of just 1% a year – and that’s assuming no new recessions or slumps. No return to normal there.

 

The Capitalist Economy Heading toward the Next Financial Crisis

The following article was translated from the July 2014-August 2014 issue of Lutte de Classe (Class Struggle), the political journal of Lutte Ouvrière

Six years after the 2008 financial crisis and the bankruptcy of Lehman Brothers, the world economy is dominated more than ever by the rule of the financial markets, despite all the promises to “regulate” banking and to make finance “more ethical.”

At the end of May, Christine Lagarde, head of the IMF, openly admitted to an audience of bankers in London that she was worried about the increasing concentration of banking capital since 2008 and by the “time bombs” that these banks were fostering.

The banks have become increasingly concentrated over the last six years as the biggest banks have systematically swallowed up weak companies. In the U.S. the balance sheets of the four biggest banks are equal to half the U.S. GDP and three times that of France! The financial markets were able to squash the new rules that were supposed to restrict financial activities and impose “tougher prudential rules.” Even commentators favorable to the banks admit it. For example, Christine Lagarde regretted that “the financial sector continues to value short-term profit rather than long-term prudence.”

The few new rules that have been implemented apply only to the traditional deposit banks. Companies whose activities are similar to banking, but which are not banks as such – for instance, insurance companies, credit companies linked with big stores or with car companies – do not have to abide by the same rules. But these “shadow banks,” as they are called by the financiers, today hold 50 trillion euros, that is, half as much as the “classic” banks.

On top of this, there are many more derivatives circulating today than there were six years ago. These are the highly speculative investments, pegged to all sorts of loans and debt, which triggered the so-called subprime crisis in 2008.

The Bourgeois Economists’ Dismay in Front of the Monstrosity of Finance and the Surge of Speculation

The speeches of Lagarde or other economists reflect the real worry in leading bourgeois circles. Some of them fear the formation of new speculative bubbles. To give but one example, Robert Schiller, recent winner of the Nobel prize in economics, warns about the increase of housing prices in Rio and Sao Paolo. In Brazil, the price of housing has increased by 15% in one year. Over the five last years, it has increased as much as in the U.S. in the run-up to the 2008 crisis! Such speculative bubbles in housing are also forming in many other big cities, in “emerging” countries such as Brazil, Turkey and China, as well as in cities of rich countries, London in particular.

The same Schiller also worries about the sharp rise of share prices on the New York Stock Exchange.

Since the beginning of the crisis, financial markets have increasingly lent money to governments, even if the yield varied a lot depending on the solvency of the borrowing state. In 2011 and 2012, the financial markets kept raising the bidding, lending money to Portugal and Greece at crazier and crazier rates. On the one hand, they got the European Central Bank (ECB) and the richest states of the Euro zone to guarantee the debts of the poorer countries. On the other hand, they managed to have the laboring classes of all Europe be bled under the pretext of “reducing the debt” and the budget deficits. Today, investors have so much available capital that they fight among themselves to lend money to Greece or Portugal. In April, the latter could get a loan for five years at the rate of 5%! Less than two years ago, they had to pay 10% or 15% interest for the same loans.

But these state bonds no longer yield enough to please the bankers. This is why speculation on the shares of companies has exploded. The Dow Jones, which indicates the prices of shares on the New York Stock Exchange, has passed the record level it reached before the 2008 crash. The same thing is happening in London, Frankfurt, and to a lesser extent in Paris.

While economic growth is very weak, the market capitalization of all the companies on the various stock exchanges in the world doubled between 2003 and 2013, reaching 61 trillion dollars at the end of 2013! In other words, although these companies did not increase their real value through investments in new plants or through production of new wealth, they have doubled the value of their capital on the stock exchange. The prices of their shares are rising each time they are bought and sold. This is mainly speculation: the buyers of shares do not wait a year to receive a dividend; they sell them off as soon as possible to make a quick profit.

But all this can work only so long as share prices keep rising. So the company executives must attract investors. They must increase their rate of profit at all costs. This means increasing productivity, speed up, reducing their wage bill. This profitability comes from the workers’ muscles and the drop in their standard of living. The financial craziness might seem divorced from reality, but it has a very real impact on the real economy and on the lives of workers.

But the huge increases in productivity over the last several decades are not enough now to attract or keep shareholders. So the heads of the companies artificially increase the dividends paid to the stockholders.

This is why Apple is going to borrow more than 90 billion dollars until 2015, in order to buy their own shares and automatically raise the value of the shares remaining in the hands of the shareholders. Other companies borrow money on the financial markets to pay dividends that exceed their profits.

Borrowing money on the financial markets to increase shareholders’ value creates a vicious circle. The loan will have to be paid back to the banks, and, at the same time, big dividends will still have to be paid to shareholders. That means the companies will have to make more profits in the future. So they will have to exploit the workers even more, to reduce the wage bill even more, that is to lay off or to hire workers at lower and lower wages. These mechanisms function as a huge suction pump through which the financiers suck their portion of the surplus value created by the workers.

Speculation on share prices and the abundance of available capital is what drives the increasing numbers of huge mergers and acquisitions in various sectors of the economy.

For instance, the third and fourth largest U.S. telephone companies are in the process of merging. Sprint, a subsidiary of the Japanese company Softbank, offered 50 billion dollars to buy T-Mobile, a subsidiary of Deutsche Telekom. In the pharmaceutical industry, the American giant Pfizer offered 87 billion dollars to buy out the shareholders of the English-Swedish group Astrazeneca. Astrazeneca shareholders refused the offer… considering it insufficient!

All these deals, these mergers and acquisitions involve no productive investment. They are not aimed at investing in new production or creating jobs. They are not designed to create new drugs. No! The capitalists only want to buy and sell already existing plants and means of production to each other.

To pay back the loans that allowed them to gather such crazy amounts of cash and to pay ever-increasing dividends to the investors who grabbed all the shares, the heads of these giant companies are going to increase productivity, increase speed-up, reduce the number of workers.

All these deals, mergers, buying back their own shares, etc., are not new phenomena. They are one of the forms taken by the ever-widening grasp of finance on capitalism. But this financial gangrene takes on crazier and crazier proportions. It threatens the world economy – and thus the whole society – with a new financial crisis much bigger than the one that hit in 2008.

The capitalist economy has become completely schizophrenic. On one hand there has never been so much capital circulating in the world economy. There is so much money in the financial markets that Le Monde quoted one French banker saying, “everything is possible, everything can be bought, everything can be financed.” But the capitalists are reluctant to freeze their capital in the long run by investing in production or in new markets. They have so little confidence in their own economy and its future that, instead, they prefer to vastly increase speculative financial investments. Finance attracts more and more capital at the expense of the productive economy.

On the other hand, world production stagnates or increases very little; unemployment hits new records each month, especially in Europe; the laboring classes suffer one austerity plan after the other. Everywhere their standard of living is pushed down and their wages are reduced by all means.

Beyond the drastic consequences on the standard of living of the working class, this situation feeds the crisis by reducing demand and thus reducing the sales of goods, and then reducing production, pushing companies into bankruptcy. In this way, the solvent market shrinks even more.

Crises No Longer Play their Role as Regulators: Recovery Does Not Follow Depression

If we are to believe the commentators, this vicious circle may be fostering deflation in Europe. Deflation is the situation created when a drop in household consumption leads to a drop in the prices of manufactured goods, which are more or less at rock-bottom prices because of the drop in the sales. The drop in production leads to lay-offs and plants closing. Taking advantage of massive unemployment, capitalists impose reductions in wages to cut their costs. In the classical crises of capitalism – the cyclical crises that punctuated the 19th century and the beginning of the 20th – the collapse of prices accompanied the phase of depression, aggravating the collapse of the market. These periods pushed the weakest capitalists into bankruptcy or led them to be bought by more powerful competitors.

But in the classical crises, depression was followed by a phase of more or less quick recovery. The depression allowed companies to liquidate their stock of goods; it got rid of the less profitable companies, and it adjusted supply to demand. This adjustment was brutal, but it allowed the capitalists who “survived” to regain high rates rate of profit and allowed production to start again … until the next crash. In a market economy, crises are the only existing means to purge the economy of the weakest businesses, and to correct the imbalance between the various sectors of production.

The problem is that, with the massive financialization of the economy over the last forty years, the phase of recovery that comes after the crashes and depressions is weak and it is never massive, if it even takes place at all. Capitalists prefer to invest in financial deals likely to give a more or less good return, rather than invest in production.

We should note that the laboring classes, who are the first victims of inflation because their wages are always behind prices, are also the first victims of deflation. The fall in the prices of manufactured goods which accompanies the deflation in no way helps the ordinary classes, first of all because not all prices go down. Rents, energy prices, and transportation fares can very well go up while the prices of televisions and computers go down. And more importantly, during a deflationary period, wages fall rapidly. Le Monde quoted a Greek civil servant whose wages has been cut by 25% in a short period of time exclaiming : “I don’t care if the cell phones are cheaper, I have stopped shopping for that kind of thing for quite a while.”

Inflation or deflation: as long as the bosses have their hands on the controls of the economy, the ordinary classes get hit and pay for the crisis.

Central Banks Acting as Pyromaniac Firemen

To ward off economic stagnation and the threat of deflation – whether real or supposed – the central banks keep pumping money into the banks. Since the 2008 crisis, the central banks have continuously been lowering their interest rates, allowing the banks to borrow from them at almost no interest. For three or four years, the central banks have been massively buying back all sorts of financial assets, sovereign debts or much less reliable IOUs, in order to relieve the capitalists of the toxic assets that they will not easily be able to sell on the market.

The ECB has supposedly done this less than the other central banks. But since the Euro crisis began, it has been buying back sovereign bonds. And it announced that it will buy certain IOUs such as housing mortgages or car loans. These purchases are a means to create money, since the ECB, like the Bank of England or the U.S. Federal Reserve, pays the banks to buy back their assets. Each month the Federal Reserve pours tens of billions of dollars into the U.S. economy. The world economy is literally on an I.V. drip.

The central banks claim that they want to boost production by encouraging banks to finance the real economy, to lend money to people to buy cars or houses, to lend money to companies to finance their investments. But when banks borrow money at almost zero interest in the U.S. and Europe, they don’t do it to finance production. In fact, they are reluctant to lend to small companies or to individuals. The money they borrow is used directly to foster speculation. Thus, the threat of new bubbles. Because capitalists can borrow for almost nothing in the U.S., they speculate on housing in Brazil or Turkey. And the only cure proposed by the central banks is to inject still more cash into the markets. Capitalists are so used to these injections that they cannot do without them, just like an addict who cannot do without his drug. The “medicine” invented to cure the capitalist economy is even worse than the disease.

Last June 5, the ECB announced a new set of measures furthering this process. In the Euro zone, the banks will pay only 0.15% interest when they borrow money from the ECB! It is the lowest rate ever since the creation of the Euro. But, beware, the worker who goes to his banker to borrow money to buy a new car will not get a rate below 4 or 5%. To try to discourage the banks from depositing their assets in central bank accounts, and thus encourage them to invest, the ECB will make them pay for these deposits, while up to now it was giving them interest.

Moreover, Mario Draghi, the president of the ECB, announced that he was opening two new 400 billion euro lines of credit for the banks, under the condition – as he put it – that the banks use it to finance businesses. One can bet they will take the money, will promise anything to Draghi, but will do what they want in the end. Of course, the ECB doesn’t intend to stop them.

In fact, after these announcements, the financial markets showed their satisfaction. In Paris and Frankfurt, the stock exchanges hit their year’s records. That is to say, the financial markets do not feel threatened by the decisions of the ECB. Quite the contrary.

Capitalism leads society towards chaos and barbarism

Despite the exhortations of the most conscious and worried economists, confronted by the evolution of the economic system, neither the heads of the central banks nor the governments will ever regulate finance, be it “classical” or “shadow.” They are linked in so many ways to finance, and the role of governments and central banks is to serve finance, not to limit it.

Moreover, finance has become an integral part of the permanent functioning of the capitalist economy. The dividing line between industrialists and bankers disappeared a long time ago. There are no “good” industrialists on the one side and “bad” bankers on the other: they are the same. Contrary to what anti-globalization activists repeat, this monstrous evolution of the capitalist economy is not an ideological drift due to the “neo-liberals” that came into government in the ‘80s with Ronald Reagan or Margaret Thatcher. This evolution is the consequence of the basic contradictions of an economy where all companies are the private property of capitalists, who seek only to maximize profit, producing in a blind and anarchic fashion, without planning, without ever taking into account the real needs of the population. Sometimes they even produce as little as possible, if they can find a way to profit from ever crazier financial schemes.

The only way to regulate the banking system will be to expropriate the shareholders of the banks and to put the banks under the direct control of the population and the workers. But because the banking system is closely intertwined with the big capitalist groups in industry, transportation, and energy, which have monopolies over large sectors of production world wide, it will also be necessary to expropriate these big multinationals. To put it simply, it will be necessary to suppress private property in the means of production and all its consequences. This won’t be carried out through laws or elections. It will be carried out by a social earthquake, by a revolution.

The violent class war carried out on the scale of the planet by the capitalist class against the working class will end by awakening the workers’ combativeness. But the international proletariat, the only productive class, which operates ever more efficient and ever more concentrated means of production, will need to recover not only confidence in its collective power, but also its class consciousness and the understanding of its historic role. This won’t be automatic. It will take militants, a party which gives itself the means to implant communist and socialist ideas among the workers.

Michael’s article first appeared on his blog, here; the LO article is taken from here.

Further reading:Further reading:
How capitalism works – and doesn’t work
Karl Korsch on “tremendous and enduring” impact of Marx’s Capital (1932)
Lutte Ouvriere on the crisis of the global capitalist economy
Lutte Ouvriere on the long crisis of the capitalist economy
The rate of profit, finance and imperialism

 

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