the Voice of
The Communist League of Revolutionary Workers–Internationalist
“The emancipation of the working class will only be achieved by the working class itself.”
— Karl Marx
Jun 20, 2022
When the Federal Reserve announced that it was hiking interest rates and tightening credit in order to “fight” inflation, this led to plunging stock market prices and sudden big interest rate hikes on all kinds of loans. In different ways, these chaotic gyrations in the financial system directly impact the livelihoods of the entire working population in this country.
The drop in the stock market has already erased three trillion dollars in individual retirement accounts, including 401(k)s and IRAs, since the beginning of the year. Few employers provide regular pensions anymore. So, outside of Social Security, these retirement accounts are the main way workers are supposed to save for retirement. No employers actually pay workers enough to save for retirement. Instead, the bosses and news media present investing workers savings in the stock market as a sure-fire way to increase what little they manage to accumulate. In fact, individual retirement accounts are nothing but a bonanza for Wall Street. Financial companies swallow up a lot of whatever hard-earned money workers set aside through big fees and commissions. Whether investments go up or down, the “house” takes its cut. The plunge in stock prices is taking the rest.
Public sector workers who still have pension benefits, from teachers to fire fighters, could also get hit by plunging stock market prices. Currently, more than 60% of the money in public pension funds is invested in the stock market. Rather than actually funding pension benefits, politicians and officials at cities, states, counties and various other public agencies and boards, push those funds to rely on the increase in stock prices, as well as the rise in the price of other speculative markets, from real estate to junk bonds, to get most of their funding. So, those retirement plans are based on big speculative gambles. These too are huge cash cows for big Wall Street companies. A falling stock market has already led those pension plans to shrink by close to 20%, putting those funds in danger, as well.
The sharp rise in interest rates is the first step on the road to recession and mass lay-offs. From home construction to the manufacturing of big-ticket consumer items, such as autos and trucks, companies rely on consumers getting big loans with low interest rates to buy their products. But relatively cheap financing has now dried up. Since the beginning of the year, mortgage rates for home buyers have nearly doubled. As a result, the real cost to buy a house has officially spiked over 50% in just six months. This has led to a sudden drop in home sales, as well as a sharp drop in the construction of homes and multi-family dwellings.
A similar trend may soon begin in the auto industry. Before the big increase in interest rates, the average amount paid for a new car or truck was more than $45,000 and the average car payment ran about $650 per month over six years. Now, a shortage in cars may soon turn into a glut, as big increases in interest rates and finance charges will put payments out of reach of more consumers. Car company executives have already announced that they are planning for production and employment cutbacks. (As GM and Ford executives recently told the Wall Street Journal, they are “modeling the outcomes of different recessionary scenarios”).
Housing and auto production are still the two bellwethers of the U.S. economy, since they are tied to a vast network of contractors, suppliers, and retailers. Once production cutbacks and layoffs hit those sectors, the layoffs will spread throughout the economy.
Interest rate hikes will also hit the corporate sector in a big way. Corporations have feasted on low interest rates to build up a record ten trillion dollars in debt (about one-third of the size of the entire U.S. economy, or GDP). This debt was not used to fund productive investment, but to increase their payouts to their biggest investors, the capitalist class, through stock buybacks and dividends. One result is that an estimated 20% of the biggest 3,000 companies in the U.S. are considered “zombies”. Zombie companies are so highly in debt, they are only able to stay in business due to relatively cheap loans and ready credit. Higher interest rates, more expensive debt may soon force these companies over the edge… leading to more mass layoffs and economic convulsions.
The rise in interest rates will obviously hit consumers, who have historically taken out a huge amount of debt just to make ends meet. During the pandemic, consumer debt actually went down, as consumers stayed home, while they got government aid. But when inflation came roaring back last year, consumers began to pay more for everything, from groceries to gasoline, and household income did not keep up, leading to more hunger and a big increase in the number of people relying on food banks. Many relied on their credit cards to pay their bills, and credit card balances increased by $52 billion to a total of $860 billion in the last three months of 2021, according to the latest data from the Federal Reserve Bank of New York. That’s the largest increase in the 22-year history of that data. That will only get worse. As interest rates rise, working people are forced to devote more of their income just to make the payment on their various interest and finance charges.
No, the Federal Reserve’s interest rate hikes are not “fixing” the economy. They are only one more step in an ongoing, slow-motion depression that has lasted for close to half a century, dating back to the early 1970s. This crisis is not due to the supposedly “wrong” policies of the Federal Reserve, or the U.S. government and its politicians. It is due to the very inner workings of capitalism, a system in which the entire economy and society is under the control and run in the interests of a tiny minority of capitalists, who are only out to get ever richer and accumulate more power.
This latest crisis is one more proof that this system should have been done away with a long time ago. But that can only be accomplished by a revolution of the only class in society that has the power and the interests to run the economy in the interests of the entire population: the international working class.