Economy:
A Discussion about the Current Stage of the Crisis

Apr 9, 2013

The following article is the conclusion of a discussion about the economic crisis carried out in the April meeting of the whole Spark organization. Some of the questions and comments were prompted by the article, “The Crisis of the Capitalist Economy,” by Lutte Ouvrière, the translation of which had appeared in the previous Class Struggle (Issue #77, February-March 2013).

Another New Deal?

Someone commented on the fact that the U.S. government hasn’t done another New Deal program in order to stimulate the economy. Underlying this question are all the faulty assumptions about both the New Deal and current government policy.

Following the 1929 stock market crash, the economy went into the worst depression in history. After several years, it became clear that there was still no recovery in sight. Eventually, the government intervened in a massive way. Part of that intervention was in spending on large public works projects, including dams, roads, bridges, and rural electrification programs that employed millions of workers. But only a small minority of the unemployed were ever employed at one time. And the pay was kept so low, it helped keep down the wages paid in the private sector. The main purpose of those programs was not economic relief for the working class and unemployed, but support to the capitalists by handing them big, fat government contracts with guaranteed profits.

Despite this massive increase in government spending, the economy remained mired in a depression. In other words, the New Deal did not end the crisis. Consumption remained depressed, and the capitalists did not reinvest their increasing profits in production. In 1937, the government reduced some of its own spending and began to deduct a one per cent tax out of workers’ wages to fund the new Social Security program. That was enough to set off another big collapse in the economy, a new depression inside the Great Depression.

In the years leading up to World War II, the government boosted military spending, and production began to recover somewhat. But military spending alone did not end the depression either. In order for that to happen, investment had to increase. And what set the stage for a big increase in investment was the massive physical destruction of World War II, including the destruction of Japan, Germany and other parts of Europe. For the capitalists, all this destruction and misery finally cleared the decks to make investment profitable again. U.S. companies were often in the strongest position to profit from the reconstruction. U.S. exports skyrocketed, and U.S. companies nailed the contracts to do the work and make new investments in the devastated regions.

The quarter century that followed the end of World War II is usually referred to as a kind of Golden Age, when the capitalist economy expanded and living standards increased. But in reality, much of this expansion rested on rebuilding the industrial plants the war had destroyed and on continuing military spending. The so-called Golden Age was short lived. By the early 1970s, a new economic crisis took hold, a crisis that began over 40 years ago and has continued to this day.

If massive government spending could really be an answer to the crisis, then this current crisis would have ended a long time ago. Today, federal spending makes up about 25 per cent of the entire economy. Compare that to the 1930s, when under the New Deal, federal government spending increased from less than three per cent of the entire economy to seven per cent. In other words, the state is intervening much more massively today and the capitalist class is much more dependent on the state than it was during the time of the New Deal.

On the Devaluation of the Japanese Yen

Someone raised the question of the current fall in the value of the Japanese yen, compared to the dollar. How big a problem is this? Given all of the propaganda that has been peddled about Japan, we have to put things in perspective. The fact is that over the last four decades, there have been enormous fluctuations in currency values in relation to each other in the world economy. Remember that between 2002 and 2007, the value of the dollar fell by 40 per cent in relation to the euro. Over the last decades, there have been even sharper fluctuations with the Japanese yen. For example, between 1985 and 1988, the value of the Japanese yen doubled in relation to the dollar. And after the fall of Lehman Brothers in 2008, the Japanese yen increased in value by about 25 per cent in relation to the dollar.

Certainly the devaluation of a currency is a problem, just like all the other fluctuations, devaluation, revaluations. These fluctuations in currencies, which are often brought on by bouts of speculation, make it more difficult and tricky for businesses to plan anything—since they never know what the value of the foreign currency will be. A company that guesses wrong can be on the hook for a big loss. And this tends to disrupt and act as a brake to world trade and investment.

One person commented that if the Japanese yen declined by 20 per cent in the period, then Japanese cars will be 20 per cent cheaper to export to the U.S. But most Japanese cars that are sold in this country are not made in Japan: They are built in the U.S. or nearby Canada and Mexico. In North America, Japanese companies produce five million vehicles, which is not that much less than the number they produce in Japan (a little more than eight million). The same is true for Korean cars and German cars. Since the U.S. is the biggest consumer market in the world, many foreign companies have no choice but to bring their manufacturing facilities here in this country or nearby.

Whatever eventually happens to the Japanese yen, we can be sure that someone in the government, companies, and unions will use these latest fluctuation in the exchange rate of the Japanese yen to threaten workers here once again. They will claim that American workers will lose their jobs if their wages aren’t more “competitive.” Ford executives already hinted at it!

The Falling Rate of Profit

There was a discussion about the falling rate of profit. Someone referred to the following statement from “The Crisis of the Capitalist Economy”: “One of the indications of the shift from a period of growth—or economic boom—to a period of crisis is the falling rate of profit. For the bourgeoisie, it is also the most preoccupying aspect of any crisis.” One person asked, doesn’t the rate of profit always fall? Yes, the rate of profit falls, but that is a long-term historical tendency. In the short and medium term there can be wide fluctuations. During the post-war years, the rate of profit rose. It hit a high in 1965, and then began to fall. The rate of profit remained low throughout the 1970s, and didn’t really begin to turn up until the early 1980s.

The article explains that the capitalists’ reaction to the fall in the rate of profit was to increase exploitation by waging a real war against the working class and that this war was a success—for the capitalists. It brought their rate of profit back up—at least temporarily. By increasing the exploitation of the working class and lowering its standard of living, they lifted profits. But the results of these sacrifices were very different from what bourgeois economists promised. As the article says, “The consequences of the return to a pre-crisis rate of profit did not result in an increase in productive investments, nor new jobs, nor a new economic cycle. More profits simply meant that more money was going to be injected into finance.”

In other words, the crisis is not over. All the sacrifices that workers made resulted only in a drop in consumption and less demand for goods. Without a growing market for consumption, the capitalists did not invest more in production and hire more workers. They simply placed their profits in the financial sector. The growth of profits just fed the growth of finance. As the article says, “What has become known as the economy’s ‘financialization’ is the tendency of big capital, confronted by the lack of creditworthy buyers on the market, to decrease productive investments and devote an even bigger share of profits to financial investments. As time goes by, the ‘financial industry’ becomes cancer-like, permanently inventing new, more sophisticated and more speculative financial ‘products.’”

The Role of Crises

Many noted how the article discusses the role of crises: on the one hand, the capitalist system cannot operate without crises—crises are needed to regulate the capitalist economy; on the other hand, the growing financialization of the economy has weakened and modified the regulating role of crises.’

What does that mean? In the 1800’s, crises broke out almost every decade. There was a boom-bust cycle. There was a boom in production. Markets got saturated. Companies went bankrupt, and this led to a crash. Then, after some years there was a recovery. The cycle repeated itself, over again. In human terms, crises were horrible. Much of what had been produced by people’s hard work was destroyed. And, not just consumer goods, but capital goods as well. And of course, lives were destroyed by the growth of unemployment, poverty and misery. But in a blind and anarchic system, in which each capitalist looks out only for his own profits, a crisis was the primary way to re-establish the equilibrium between production and solvent demand, that is, the demand of people with enough money to pay for those products. As the article says, “By destroying part of the capital engaged in production, by getting rid of the less profitable companies, crises create the conditions for launching a new cycle, in which the rate of profit begins to increase, investments start back up and hiring begins.”

But over the last 40 years, that isn’t what happened. Crises didn’t serve their regulatory role, that is, they didn’t destroy enough capital to lay the groundwork for a new recovery of production. And they didn’t do so because each time production was about to be hit by a recession, governments reacted by opening up the credit gates, by increasing the quantity of money, of debt certificates or of circulating credit. As the article noted, “From rescue to rescue, the economy has now ended up with this hypertrophy of the financial sector. And it cannot escape from it.”

Because of government intervention a complete collapse was avoided. But the crisis still worsened. And one aspect of this worsening crisis was the enormous growth of the financial sector. Two things linked together are feeding the financial sector: The capitalists themselves didn’t invest in production, and instead placed their profits in the financial sector. At the same time as the crises built up, the government bailed the capitalists out. To pay for those bailouts, the government borrowed money from the financial sector. And that just led to a huge growth in government indebtedness to the financial sector. Thus, more of the revenue that the government took in went right back out to the financial sector in the form of interest on the debt the state owes to the banks. That crowded out other spending. The government cut spending on social programs, education, health care, public sector jobs, public sector wages and benefits, with the result we know, austerity.

Over the last four decades, the underlying crisis has gotten worse. After each recession, the recovery in production and employment has gotten progressively weaker, while the financial sector has grown incredibly larger.

In this country, there are liberal economists like Paul Krugman, who writes for the “New York Times,” calling for a bigger increase in government debt in order to pay for more government programs to stimulate economic growth. Krugman argues that this growth in government debt is not a problem because interest rates on government debt in this country are so low. But Krugman is wrong in three ways. First, despite the low interest rates on federal government debt, the debt service is relatively large. In fact, it is more than half the entire domestic budget. If interest rates were to rise, even a little bit, like one percentage point, it would make those payments much larger. To pay for it, the government would try to impose even more austerity, that is, more cuts in social programs in education and health care; cuts in the number of public sector jobs, cuts in what those employees are paid—austerity that would come on top of the cuts that have been going on for decades. The second reason this argument is wrong is that the U.S. government debt is by far the largest in the world. It is almost 17 trillion dollars. Compare that to the 41 trillion dollars, which the article says is the total debt owed by all the governments in the world. It means the U.S. public debt is over 40 per cent of the debt of the total public debt of all the governments combined! When you add on the three trillion dollars owed by state and local governments, it brings total U.S. public debt to 20 trillion dollars. Finally, U.S. public debt is about 20 per cent larger than the entire U.S. economy, if you compare it to Gross Domestic Product (GDP) as the measure of the economy. Every increase in the debt only puts more money into the financial circuits. The proposal to increase public debt leads to increasing the financialization that underlies the crisis.

This brings us to Quantitative Easing.

Quantitative Easing

There were several comments on Quantitative Easing. The United States is living through its third Quantitative Easing Program, which consists of the Federal Reserve’s printing more paper money to buy U.S. bonds from the banks. That gives the banks more liquidity and, at the same time, maintains artificially low interest rates on the U.S. debt.

One of the major reasons for such low interest rates on U.S. government debt, that is, the bonds that the government issues, is that government debt is being bought up by the Federal Reserve. Since 2009, the Federal Reserve has bought up over a trillion dollars in U.S. government debt. It is continuing to buy U.S. debt at a rate of about 40 billion dollars per month. This debt is in the form of bonds. Now, who do you think the Federal Reserve bought these bonds from? Often it was the banks. They’re the ones who bought the bonds the government issued to cover its debt. To pay the banks, the Federal Reserve printed up money. To justify this, government officials said that if the banks would hold more money, they would lend the money out to consumers and industry, that is, stimulate the economy. But that’s not what happened. The banks simply deposited most of the money it got from the Federal Reserve back into the Federal Reserve. The Fed then paid the banks more interest. So, the money circles between the government, the banks and the Federal Reserve. Each time money changes hands between the banks, the Fed and the government, the banks get paid again.

The Federal Reserve is also buying about 45 billion dollars a month from the banks in mortgage backed securities. That’s another part of the Fed’s quantitative easing program. So far, the Fed has bought up over a trillion dollars in mortgages or mortgage-backed securities from the banks. The banks and Fed officials say these are supposed to be only the highest quality mortgages. Others call it the Fed’s cash-for-trash program because the banks are unloading their worst mortgages on the Fed. Just as with the bond buy-up, the Fed pays the banks money for their mortgages. The banks are supposed to re-lend that money to home owners at low rates, and thus boost the recovery in the housing sector. But what did the banks really do with this cash they got from the Federal Reserve? Most of it they deposited right back in the Federal Reserve. And the Federal Reserve pays them interest on that money too.

So far, the Federal Reserve has printed up two trillion dollars under its three quantitative easing programs, money that the Federal Reserve exchanged with the banks for either government bonds or home mortgages in a giant scheme that accomplished little but to boost bank profits.

Some asked why all this printing of money hasn’t produced hyper inflation, since as we know, inflation in prices is ordinarily the work of an inflated money supply. But trillions of dollars that the Fed has printed are not circulating. They are simply deposited with the Fed earning interest for the banks. That may be one reason the inflation of the money supply has not caused hyper inflation.

Some of the money that the Fed gave to the banks has fueled speculation, which has led to much higher prices for some vital goods. The banks either speculated with it themselves, or they lent the money out to other capitalists, who speculated. And that partly explains why there has been such a run-up in prices on the stock market, as well as big fluctuations in currencies, commodities, gold, silver, oil, wheat. This inflated money supply—even with most stored at the Fed for now—just feeds new speculative bubbles, bubbles that cause a notable increase in prices in certain products.

This money that the Fed gave to the banks is also feeding speculation in the housing market. It seems like almost every day the media is bombarding us with news about how the housing market is picking up, hyping stories of supposed shortages in houses for sale in some regions—which is quite a trick, considering that there is still a huge oversupply of houses, due to the ongoing foreclosure crisis. What is really happening? About 30 per cent of all home sales today are for speculative purposes. Speculators either flip the homes and make a big profit. Or else, they rent them out for a time. They often get the houses very cheaply in foreclosure sales by the banks. Now think about that for a second. If the banks had written down the mortgages to the levels that speculators are paying, many of those people who lived in them would have been able to make their payments and they wouldn’t have been foreclosed on. But the banks make more money when they foreclose on a home than when they write down the mortgage. The speculators scooping up these homes are often big Wall Street investment funds, that is, private equity companies and hedge funds, run by the very same cast of characters who made a fortune out of subprime mortgages and, when the housing market collapsed, benefited from government bailouts. These companies have been swooping down and buying hundreds and thousands of houses at a time. The biggest of these companies, the Blackstone Group, is spending 100 million dollars per week buying up homes.

If anything, the supposed housing recovery is more likely the beginning of just another speculative bubble, a bubble that could burst very quickly. At the first hint of a downturn, one could expect big investment funds and other speculators to try to unload a big part of their inventory.

This is the fake housing recovery.

It goes along with the fake jobs recovery that was supposed to be stimulated by the Fed’s monetary policy. Over the last several months, the news media and government officials have been trumpeting this jobs recovery. They were silenced a bit by the obviously poor jobs report for March. But in reality, few new jobs have been created in any of those months. And most of the new jobs were part-time. That’s the so-called jobs recovery. Since 2008, 5.8 million full-time jobs were lost, while there was an increase of 2.8 million part-time jobs.

As a recent article in the Wall Street Journal pointed out, most of these part-time jobs aren’t going to the unemployed. They are second or third jobs going to people who are already working. In February alone, 679,000 more people were working multiple jobs. Most of those newly hired workers are still desperately looking for more work. That puts a huge downward pressure on wages and compensation.

This is just the latest stage in an ever downward spiral in workers’ living standards that has gone on for more than 40 years.

During the first phase, some working class families found ways to make up for the drop in wages and benefits by working more. More women entered the labor force in larger numbers. Workers took on second or third jobs, and gobbled up all the overtime they could get. Workers sacrificed their personal time, their week-ends, vacations, their time with their families, to work more. As a result, family income did not drop very much, and sometimes even increased.

But pretty soon, this was not enough. To maintain consumption levels, workers took on more and more debt—that is, they sacrificed future earnings. That soon blew up in workers’ faces.

In fact, workers have been treading water, hoping to stay afloat in ever rougher seas. Workers sought individual solutions to a worsening social and economic situation, while making little or no collective fight.

In this situation of crisis, that could change, and it could change very quickly. There’s no way to know which group of workers might decide to fight and, if they did, which other workers might also fight. Ahead of time, no one can predict what might set off a resurgence of workers’ fights. But when this happens, it would be a tragic waste if there are no organized forces able to provide an historical perspective to the working class, a view of its historical mission.