From One Economic Crisis to Another

Sep 6, 2022

The following is a translation of an article appearing in issue #226 of Lutte de Classe, the political journal of Lutte Ouvrière, the French Trotskyist organization, with which Spark is in solidarity.

This summer, barely twelve months after the world began to emerge from the Covid-related economic paralysis, there have been increasing signs of a further slowdown. In the wake of rising commodity prices and the war in Ukraine, the growth of many economies, as measured by international agencies, has declined. The gross domestic products (GDP) of the United States and of the United Kingdom were negative in the second quarter of 2022. That of the United States had already been negative in the first quarter, as was France’s. According to calculations by the International Monetary Fund (IMF)—for what these figures are worth—the entire global GDP declined in the second quarter of 2022.

Forward into the Wall

This could be just a foretaste of the crisis to come. The IMF’s chief economist said on July 26: “We may well be on the verge of a global recession.” Last October, the IMF’s growth forecast for the world economy was 5.9% for 2022, but today it is only 3.2%. And for 2023, the IMF’s central scenario (i.e. the average estimate, not the worst) forecasts growth of 1% in the United States and 1.2% in the euro zone, i.e., weak rates. The IMF notes that inflation is becoming more widespread, and it approves of the central banks that changed their policies in recent months to try to slow it down. Their main strategic lever is to raise their key interest rates, which steer interest rates in financial markets, or which follow them, depending on the period.

According to the theory behind central bank action, if interest rates rise in the markets, businesses and households borrow less, demand for consumer goods and investment falls and prices fall. The question on the minds of central bankers is how much they can or should raise rates. Their stated priority is to curb inflation by tightening credit conditions for households and businesses, but the risk is that they will cool the capitalist machine to the point of paralysis. They are looking for a way to “soft-land” the economy, as they say, without repeating the situation of the early 1980s. During 1980 and 1981, after years of inflation, the U.S. central bank (the Fed) raised its key interest rates, going from 11% to over 20%. The effect was immediate: a brake was put on access to credit; the supply of money in circulation fell; inflation declined. But the U.S. economy, followed by the overall world economy, stalled. In 1982 and 1983, production in all industrialized countries fell sharply, as it had at the beginning of the crisis in 1975. A new wave of layoffs hit the working class, and austerity was in order for the laboring classes.

Today, the leaders of the central banks have to choose between curbing inflation or supporting economic activity—from the viewpoint of the interests of the capitalist class. From the point of view of the working class and the other laboring classes, this alternative boils down to two evils: more unemployment if activity is reduced, or reduced income if inflation continues. That is all the capitalist system has to offer.

The central banks have finally decided to raise their rates because an inflation that remains durably high poses problems for the capitalist class as a whole, even though it has made the working class and the petty bourgeoisie bear the brunt of the price increases. But since each capitalist is both a seller and a buyer, a borrower and a lender, price instability slows down business, makes it more uncertain and less profitable, as it did in the 1970s. Today, the oil and gas trusts, the raw materials trusts, and any others who have monopoly positions may be able to get along, posting record profits, but the rise in prices poses many problems for other industries.

Thus the metal processing industries and the producers of zinc and of aluminum, which are major consumers of electricity, have shut down their least profitable plants in recent weeks. Perhaps in anticipation of a coming recession, they shut down 50% of Europe’s production capacity (according to Les Échos of 20 August). While some companies, such as ArcelorMittal, have managed to compensate for the drop in production by selling at higher prices, even announcing record profits, this is not the case for all of them.

The surge in electricity prices also reflects the crisis in the energy sector, which did not start with the war in Ukraine, but is deepening with the rise in gas prices the war caused. If Putin cuts off Germany’s gas, its economy will largely grind to a halt. This is part of the worst-case scenario envisaged by the IMF. Because the energy sector was already on the verge of exhaustion, against a backdrop of widespread under-investment, the war could only make things worse....

Central Banks in the Fog

The rise in key interest rates is the subject of debate among central bankers, economists and journalists. Is it too much or not enough? In reality, no one has much control over it. A year ago, everyone was betting that the rise in prices was transitory and that there was no need to intervene. A year later, it turns out that it is not a transitory phenomenon linked to the post-Covid economic recovery but a lasting one. Economists attribute this phenomenon to an “overheating” of the economy, an excessive demand for consumer and investment goods.

But what overheating are they talking about? The growth indicators they cite in fact are at their lowest. In the industrialized countries, real wages are falling because of inflation, forcing consumers to dip into their savings. China is not coming out of its paralysis. Companies are postponing their investments. In reality, they pretend the economy is overheating, because the rise in prices has forced itself upon them. Inflation comes down primarily to the ability of a handful of trusts to safeguard their margins, or even increase them, by imposing significant price increases despite, or thanks to, a decline in their production. In other words, they are pursuing a Malthusian policy, particularly in the case of the oil and gas trusts. Under these conditions, how effective against inflation can the current rise in interest rates be? What is certain is that the bill is being presented to the laboring population.

The central banks have another reason behind the rise in interest rates, in addition to their stated desire to fight inflation. They are trying to give themselves the means to act in the face of the crisis which is coming. This increase in rates is even an indication of what central banks think about the economic situation in the relatively short term. In order to limit the consequences of crises, governments and central banks have made it a habit to pour ever greater amounts of money into the financial circuits, offering capitalists liquidity so they can survive despite the crisis. Lowering rates plays this role. A fall in rates is like lending money for free, or almost free. In 2001, 2008, 2020, rates were reduced to almost zero as soon as the crisis broke. (In 2008, the rate cut was not enough; central banks had to invent other mechanisms to inject hundreds of billions into the financial circuits.) The Fed’s rates have remained at their lowest since 2020; the European Central Bank’s since 2014. Those who direct the central banks may have deemed it urgent to raise rates in order to have the means to meet the storm when it arrives—unfortunately, at the risk of triggering it.

From Currency Crisis to Debt Crisis?

For the United States, the rise in rates has the consequence of making the dollar rise against other currencies, the euro in particular, which also confronted the aggravating factor of the rise in the price of gas, related to the war in Ukraine. The rise of the dollar allows American capitalists to lower the cost of what they import and to strengthen their margins. The fall of the euro allows European industrialists to export more easily, but it makes imports in dollars more expensive, especially energy, oil and gas, at the heart of the current inflation.

In Europe, the European Central Bank (ECB) followed the Fed’s rate hike, but with several months delay. In Europe, due to the lack of political unity, the ECB has to contend with tensions over the debt of certain countries. In December 2021, the German government could borrow on the financial markets for ten years at negative rates of -0.38%. The Italian government had to borrow at the same time at +1.04%. While banks that lent to Germany were willing to pay for the opportunity, Italy was paying higher interest on every loan. The rise in ten-year rates that can be seen on the markets since the beginning of 2022—a sign that speculators are betting on a worsening economy and lasting inflation—has amplified this divergence. In July, Germany was borrowing for ten years at 1.08% while Italy had to do so at 3.36%. Italy’s debt burden has thus more than tripled in a few months. Moreover, the fact that Italy’s debt ratio is so much higher raises the possibility of a surge in debt speculation, like we saw in 2011.

The ECB’s rate hike at the end of July, which will further push up market rates, must have been met with mixed reactions from the German and Italian governments. In an attempt to prevent the unleashing of speculation, which would threaten the euro zone, the ECB had to invent an “anti-fragmentation” instrument, promising European solidarity to States in difficulty on the financial markets, subject to “budgetary discipline,” which leads Les Échos to say that the scope of the mechanism is limited and that tensions within the euro zone are not about to end.

The recession which is coming could thus be combined with a debt crisis. The U.S. economist, Nouriel Roubini, stated in Les Échos on July 14: “With private and public debt levels having risen from 200% as a share of global GDP in 1999 to 350% today, a rapid normalization of monetary policy and a rise in interest rates will push highly indebted and already troubled households, companies, financial institutions and governments into bankruptcy and default.” He expects the next crisis to combine stagflation (stagnation and inflation) and a debt crisis, preventing states from using additional fiscal measures to support the capitalist economy.

Nor will the global economy be able to rely on China, as it did in 2008, taking advantage of massive Chinese government investment in real estate and infrastructure. In China, the central bank has just lowered its rates a little, considering that the Chinese economy is already in crisis and needs to be revived. In particular, beyond the repeated Covid lock-downs, the real estate crisis is continuing, which can be seen in the drop in steel prices on the international markets. According to the IMF, this crisis, combined with the sluggish global economy, which is depriving Chinese companies of a certain number of outlets, will lead the country to its weakest level of growth in 40 years, excluding 2020.

The war in Ukraine is also having its impact with Russia’s withdrawal from the world market and the economic crisis that the war propagates. More and more poor countries are asking the IMF for help, help that their people will pay dearly for. The latest is Bangladesh, which has asked for 4.5 billion dollars. Sri Lanka is in default, Tunisia is negotiating an aid package, Ghana has just officially asked for help, and Pakistan and Laos are also in trouble. The economic recovery from Covid lasted only a few months in the industrialized countries. But it was non-existent for many other countries, which went straight from the health crisis to famine and economic collapse.

Capitalism, which regulates human activity through profit and markets, demonstrates once again, with the skin of the peoples, what a dead end it represents for humanity.

Jobs, Inflation, Wages

To justify the Fed’s latest rate hike, limited as it is, Fed Chairman Jerome Powell said that although GDP was falling, the U.S. was not in recession. He pointed to the large number of jobs created by the U.S. economy and the fact that it is close to full employment. In the United States, “full employment” is a reality only in the statistics. Almost 100 million people over the age of 16 are not working, but are not counted in the unemployment statistics, five million more than on the eve of the health crisis. They are considered to be “not in the labor force.” Nonetheless, the employment rate in the United States, 62.3%, is rising, gradually reaching its level in early 2020, before the health crisis.

But even in the United States, France, Germany, Spain and Italy, where the capitalist economy is gradually catching up with the level of employment before the health crisis, real wages are not increasing, they are even falling. According to the latest figures from the Dares (a statistical service that depends on the Ministry of Labor), the average basic wage in France has lost 3% of its real value over one year. In the United States, hourly wages rose in July by 5.2% over one year, while annual inflation was 8.8%; the decline in real hourly non-farm wages was 1.7% over one year. Despite what a number of economics professors and journalists say, while unemployment is falling, wages are also falling—contrary to their theories.

There is no automatic link between jobs and wages, nor is there one between wages and inflation. Outside of monopoly situations, the prices of goods represent the quantity of labor socially necessary for their production. The distribution of this value between wages and profits depends on the relationship of forces between the social classes, in particular on the capacity of the workers to oppose the capitalists and to impose higher wages. It is this relationship of forces which determines the rate of exploitation, that is to say the proportion of the quantity of labor which the capitalists steal from the workers. The fall in unemployment is therefore not a necessary and sufficient condition for wages to rise, especially because the number of official and unofficial jobseekers, the industrial reserve army, remains very high and puts this fall in unemployment into perspective. This is all the more true since governments take it upon themselves to pressure the unemployed to accept the wages that employers are willing to pay, as shown by the unemployment benefit reforms that tighten the conditions for compensation.

There is no automatic link between employment and inflation any more than there is between inflation and wages. Once again, “the matter resolves itself into a question of the relationship of forces between the combatants,” as Marx wrote (in 1865, in Value, Price and Profit).

The class struggle today is all the more tense because it takes place in a context where labor productivity is progressing more and more slowly. The jobs created in the rich countries are in the tertiary sector, in sectors where labor productivity increases more slowly, in particular in personal and business services. And these jobs come with ever lower real wages. Low wages are becoming the condition of employment. This is a fundamental trend. In this capitalist world, where the markets have remained globally saturated since the end of the 1960s, where capital is diverted from production to finance, the slowing down of the progress of labor productivity is a constant. In these conditions, the capitalist class can only maintain its profits by being permanently on the offensive against the workers, by putting pressure on wages but also trying to monopolize all the wealth and all the sectors that still escape it.

Therefore, while fighting for wages and jobs, workers “must not forget that they are fighting against the effects [of the wages system], but not with the causes of those effects, that they can only retard the downward movement, but not change its direction; that they are only applying palliatives, but not curing the malady. They must not, therefore, let themselves be absorbed exclusively by these inevitable skirmishes which are constantly springing up from the uninterrupted encroachments of capital or changes in the market. They must understand that the present system, with all the miseries it imposes upon them, is at the same time creating the material conditions and social forms necessary for the economic reconstruction of society. Instead of the conservative motto: ‘A fair day’s wage for a fair day’s work,’ they ought to inscribe on their flag the revolutionary watchword: ‘Abolition of the wages system!’” (1865, Karl Marx, Value, Price and Profit)