This document was written as part of Socialist Alternative's pre-conference discussion bulletin in September 2009.

OVERVIEW[1]

The current economic crisis has been the deepest in world capitalism since the 1930s, a fact acknowledged not just by socialists but by scores of mainstream bourgeois commentators as well. Figures 1-3 demonstrate that at least for the first 12 months of the current crisis, the downturn tracked or was significantly worse than the Great Depression in terms of world industrial production, world trade and the stock markets. Figure 4 provides data on the drop in GDP in the G7, with output falling by anywhere up to 7%, equivalent to hundreds of billions of dollars.[2] In the first quarter of 2009 business investment in the US fell at an annualized rate of 40%.

A driving factor in the crisis has been the meltdown in world trade as globalisation has gone into sharp reverse. Whether in the traditional core of the world system in the USA and Europe or in the so-called BRICs (Brazil, Russia, India, China), which were meant to save the system in the event of a crash in the core, imports fell by anything from 15% to nearly 45% in the year to Q2 2009 (Figure 5). Deflation set in: prices fell across the G7 by 2.4% between Q3 2008 and Q1 2009 and in the US by 3.3%. House prices in the US in July 2009 were 30% below their peak three years earlier and were back down to the levels last seen in 2003.[3]

The implications for the working class have been severe. It is true that the jobless situation is not yet as bad as in the depths of the Great Depression in 1932, when unemployment in the US peaked at 25.2% and employment fell by 7% in a single year (although the fudging of figures in the past three decades makes a precise comparison difficult).[4] With US government spending at 20% of GDP, as against 5% of GDP in the early 1930s, and the figure higher still in Western Europe, even prior to the stimulus packages, there is an automatic buffer against the kind of collapse in employment that we saw in the Thirties. Nonetheless, the situation is still dire: more than 18 months after large scale retrenchments took off in earnest in December 2007, the scale of sackings in the USA has been significantly worse than in any other recession since 1945, with 5% of all jobs gone (more than seven million jobs) (Figure 6). By May 2009, the number of jobs in manufacturing in the developed world was down by 12% on a year previously.[5]

Across the developed world as a whole, unemployment was 46% higher in April 2009 than a year previously.[6] With an additional 7.4 million unemployed, the United States has seen the most rapid rise in unemployment in the G7. Fifteen million are now unemployed in the US, and one in three have been out of work for six months or more. Another 22 million are jobless in the EU as more than eight million workers have lost their job in the past year. Unemployment rates are rising steadily (Figure 7): in the Eurozone unemployment stands at 9.5% and is forecast to rise to 11% in 2010.[7] In the Baltic States, which were regarded as minor economic miracles for most of this decade, unemployment is 16-18% under the impact of a 20% collapse in GDP in the year to Q2 2009.[8] Unemployment has hit the young in particular: unemployment amongst teenagers in the USA now stands at 25% and at 18% amongst young workers aged 18-24 in the EU. Elsewhere, unemployment in Russia soared by 2 million between May 2008 and January 2009 and in Korea by 1.2 million. Half of the unemployed across the OECD, and 80% globally, receive no jobless benefits.[9]

If underemployment is added, the US total of workers either out of work or forced to work part-time for lack of full-time jobs is now (August 09) 16.8%, up from 10.9% one year earlier.[10] Underemployment was on the rise across the G7 even before the onset of the crisis; the rate of increase has now sped up. The Independent newspaper refers to "the shadow unemployed", those working reduced hours or in part-time jobs. Half a million British workers are temping because they cannot find permanent jobs and one million are doing part time work because they cannot find full time jobs.[11] Others have simply dropped out of the labour market. In the EU, labour market participation has dropped from 66% to 63.5% in the past year.

Even amongst those still working full time, weekly hours and overtime have been cut back. Average weekly hours in the US private sector are at the lowest since 1964.[12] Total hours worked by production workers in US manufacturing fell by 16% in the year to August 2009 and now stand at 25% lower than in 2002.[13] In Asia, working hours have been reduced across the board.

The bosses are using the whip hand of unemployment to drive down wages and conditions. An ILO report in June 2009 noted that

"Freely negotiated collective agreements are no longer respected, and workers have to concede hard won wage levels and benefits in order to retain any credible prospects of future employment and income. The risk of clandestine labour or illegal child labour as cheap alternatives is growing in many countries, as is the recourse to forced or compulsory labor."[14]

In the USA real wages have on average remained stable between Q3 2008 and Q2 2009.[15] Hourly rates of pay rose a fraction but the effect was cancelled out by shorter hours.[16] The average, however, disguises the fact that many hundreds of thousands of workers have experienced severe wage cuts. General Motors paved the way when it negotiated a contract with the UAW in 2007 to allow all new hires to start work at half the going rate for established workers. The auto industry, once the pioneer of high hourly rates of pay for US blue collar workers, is now dragging wages down. One third of all US employers plan to introduce similar two-tier contracts when current contracts expire[17] and the US is re-positioning itself as a low-wage economy after decades when manufacturing wages in the unionized sector were the envy of blue-collar workers around the world. German auto workers are now paid twice or three times as much as new entrants to the US auto industry. All the while, employers are pushing workers harder: productivity in the US rose in the second quarter of 2009 at an annualized rate of 6.4%, as labour costs fell at 5.8%.[18]

With unemployment on the rise, the 2008 US Census records that median household incomes fell sharply, by 3.6%, last year.[19] Household incomes are predicted to decline even more in 2009 given the further increases in unemployment this year and are now lower than they were a decade ago. Such a decline has not occurred since the 1930s. New York Times journalist David Leonhardt points to the causes:

"One, economic growth in the current decade has been lower than in any decade since before World War II. Two, inequality has risen sharply, so much of the bounty from our growth has gone to a relatively small slice of the population".[20]

Forty million Americans now live below the meagre poverty line of $22,025 for a family of four.[21]

Along with capitalists in the private sector, governments and the IMF are piling on the pressure. It was the Obama administration that insisted on wage cuts in the auto industry as a condition for the bailout earlier this year. In February the Irish government increased the pension levy by 7%. The IMF, i.e. the governments of the major imperialist powers, is using the bust to squeeze the weaker developed countries. The Latvian government, for example, was required to cut public sector wages by 10% in 2008 and is scheduled to cut them by another 20% as a condition of an IMF loan.[22] The Hungarian government, likewise, has cut pensions, social benefits and public sector wages on the orders of the IMF. The Icelandic government is slashing public spending in order to repay money loaned by the British and Dutch governments to bail out the bust Icelandic banks which went under last year with debts equivalent to one-half of the country's entire GDP.

The crisis is having a devastating impact on many parts of the developing world as well. The Asian Development Bank reported in July that developing Asia is "experiencing a precipitous drop in foreign direct investment" and that "funding for infrastructure project is fast drying up".[23] The crisis shut down export markets for raw materials and manufactured goods. The ILO noted in June that "Tens of millions of young people are about to leave school and enter a depressed labour market. A lack of decent work opportunities at an early age may permanently compromise the future employment prospects of youth".[24]

The crisis is also leading to a sharp reduction in remittances by the world's estimated 200 million migrant workers. The World Bank estimates conservatively that migrant remittances, which are worth approx $300bn and make a major contribution to poor families, will fall by more than 7% in 2009 as migrant workers are thrown out of their jobs in the Gulf States and elsewhere and sent home. Foreign aid by OECD governments has been cut. This, on top of the food price inflation that occurred in the first half of 2008, has seen living standards squeezed for tens of millions. Food prices traded by commodity markets fell sharply in the first half of 2009 but prices in the shops have remained at record highs. As a result, the UN estimates that the number of hungry around the world will rise by more than 85 million to one billion this year.[25]

A (TEMPORARY?) END TO THE FREEFALL

In January and February the first mention of "green shoots" began to appear from the mouths of leading government figures in the UK and USA. At the time this was no more than wishful thinking: GDP in Q1 2009 was as bad as in the previous quarter as the world economy continued to plummet. However, by June economic data began to suggest that the freefall was indeed ending, and by August the talk was of a "recovery" under way. Figures 1-2 and Figure 8 demonstrate the basis for this optimism. After two quarters of sharp retreat, the rate of decline in GDP in the G7 economies slowed down, with positive growth recorded in France, Germany and Japan. China, which appeared to be slumping to only 6% growth in the first quarter (well below the rate required to keep unemployment from increasing sharply), was back on track to 8% by August. After catastrophic slumps in GDP in Q4 2008 and Q1 2009, growth returned to Singapore, Korea, and the Philippines in Q2. The rate of price deflation began to slacken.

Looking to the current situation and near future, the various international Purchasing Managers Indices, which measure current manufacturing activity and which had fallen to the low 30s in December 2008, had recovered by August to the low 50s (50 indicates the break point between contraction and expansion), the highest level for between 16 months and two years. Likewise, the OECD's Composite Leading Indicators bottomed out in March and are now pointing towards recovery.[26] House prices in the US edged upwards in June and July, albeit to a level still 15% lower than a year earlier.[27] After months when every successive prediction for growth and every report on past results was being downgraded, predictions for the second half of 2009 going into 2010 are now being modestly upgraded. OECD predictions in June of a 4.1% decline in G7 GDP for 2009 were revised in September to a drop of "only" 3.7%.

Three things have been responsible for an end to the freefall since April. The first was the un-gumming of the world's credit markets due to the government guarantees (i.e. open taxpayer-funded cheques) given to the banks over the northern winter. The US alone has shored up the big banks with $250bn in taxpayer funds since late last year. Joel Geier suggests that the total of bank subsidies, loans, credits and guarantees amounted to US$13 trillion.[28] The result was that the banks regained confidence that money lent to other banks would not evaporate, and credit began to flow again, albeit by no means as freely as before.

The second factor has been the massive stimulus packages by the big 3 economies, the USA, Japan and China and, to a lesser extent, those in Britain and Europe. Martin Wolf of the Financial Times describes these as "the most aggressive fiscal and monetary stimuli and financial rescues ever seen".[29] The USA has thrown in a stimulus package of $787bn, China, about one third of the size of the US economy, has devoted more than $585bn to boosting spending and infrastructure, Japan, $270bn, and Germany, $122bn ($290bn across the EU). Across 50 countries, stimulus packages totaling $3 trillion have been unleashed. In the Great Depression, the budget deficit averaged across the 24 largest economies was less than 4% of GDP. In the USA today, thanks to its stimulus package, it is 13%. The effect of the government stimulus packages was boosted by lower oil prices (for a period) and lower mortgage rates. All over the world big government is back in favour as the ‘market solutions' beloved of the neoliberals are quietly shoved into the background. Production in the auto industry began to recover in the northern summer with the "cash for clunkers" deals by American and German governments.

The third factor responsible for an end to the freefall was the decision by the major central banks to print money and reduce interest rates to virtually zero in late 2008. Again this is in sharp contrast to their reaction in the Great Depression when the central bank rate in the major economies never fell below 3%. This time around, money supply has expanded rapidly, whereas in the Depression money supply collapsed.

Aggressive and semi-coordinated action by governments around the world has therefore halted the catastrophic drop in all the major indicators experienced in the northern winter. This has not, however, ended the crisis. These measures are essentially unsustainable and in the long term only create their own problems.

A SYSTEMIC CRISIS

We are currently experiencing a systemic crisis in the world economy and there is no prospect of sustained economic growth returning to the world economy in the next few years. The more sober-minded bourgeois commentators recognize the depth of the crisis and the fragile character of the "green shoots". The United Nations Conference on Trade and Development argued in September 2009 that "The likelihood of a recovery in the major developed countries that would be strong enough to bring the world economy back to its pre-crisis growth path in the coming years is quite low".[30] US Treasury Secretary Timothy Geithner told the US Congressional Oversight Panel in the same month that "We still have a long way to go before true recovery takes hold" and pointed to "substantial headwinds" from the financial sector because of foreclosures continuing at an "aggressive pace for some time".[31] The Wall Street Journal in August referred to "a barrage of negative reports" in the middle of that month amidst all the hyperbole about the recovery in the stock market: "personal bankruptcies surged 34% in June compared with last year, the number of homes subjected to foreclosure proceedings rose 32% as against a year ago; the number of people out of work for 27 weeks or longer reached a record 5 million; and retail sales dipped in July".[32]

A series of factors continue to weigh on the system, some of which have their origins in the factors that brought on the freefall in Q4 2008 and Q1 2009, and some which arise from the very measures that were taken to arrest the collapse.

Mountains of financial sector debt

The main means by which capitalism resolves its crises is by destruction of capital through recessions and wars.[33] Since the Great Depression however, governments have been reluctant to allow the cleaning-out process to work its way through for fear of multiple collapses following the failure of one or two large companies. The result was that the crises of the postwar decades were shallower but also that the recoveries were not as rapid or large. In the past 10 years the situation has changed a little as the US government has in fact allowed some large companies to go bust (e.g. Enron, WorldCom, and now Lehman Brothers) but the experience of the last was that the costs were simply not worth it. The entire financial system threatened to melt down as banks refused to lend for fear that their debtors too would go out of business. In order to "un-gum" the system, the US government injected billions of dollars to bail out the banking system. Although huge quantities of capital, both fictitious and real, have been wiped out in the current crisis, including the bankruptcies of some giants of corporate America such as GM and Chrysler, the destruction has been insufficient to allow the system to rebound.

The IMF estimates that total write-downs in the banking system in the US amount to $2.2 trillion, $1 trillion in Europe and another $800bn in the rest of the world.  New York University economist Nouriel Roubini estimates potential US losses at $3.8 trillion. Only a fraction of this has so far been accounted for and dealt with. As the losses are gradually unwound, prudential regulations require banks to cut their lending by ten times the amount of the losses revealed. If Roubini's estimate is borne out, US banks will have to cut lending by $38 trillion, nearly double US GDP, the so-called ‘deleveraging' process. They have only just started down this road.

Uncertainty about the exact extent of accumulated write-downs results from the fact that a vast amount of debt has been hidden from view. In August the US Congressional Oversight Panel gave new meaning to the concept of "oversight" by declaring that "It is impossible to resolve the argument about whether banks are or are not solvent because of the uncertain value of their loans".[34] Early in 2009, fearing further collapses in the banks, President Obama allowed US banks to revalue their "assets" (the various toxic debts, the derivatives and so forth that precipitated the crisis in the first place) to their original "book price" rather than their likely price if sold presently on the open market ("mark to market"). This has allowed US banks to report a return to solvency. This suits US banks and the US Government but in the long term prevents a full resolution of the crisis that might accompany the kind of wholesale write-down of assets necessary for a reboot of the US financial system.

While the major US banks were bailed out with virtually unlimited funds from the US government earlier in the year, the US banking system as a whole was in a worse state in Q2 than Q1 as banks were hit by a sluggish economy and rising unemployment.[35] The US housing crisis which sparked off the financial crash is still in play. Sub-prime mortgages are faring worse than they were a year ago: 40% are now overdue.[36] The real news in the past year, however, is the jump in the delinquency rate on prime mortgages, the "gold standard" of the US banking system, from 5.3% to 9%.[37] Further weighing down the market is the increasing number of mortgage holders stuck with ‘negative equity', that is, they owe more on their mortgage than their house is worth. House prices rose in June and July, but two swallows do not a summer make. The Deutsche Bank predicts that the percentage of US householders with negative equity will rise from 26% in March to 48% by 2011.[38] That is, 25 million mortgagees will be ‘under water' in two years time. Some areas are facing a total disaster. In Florida, 23% of all home mortgages are either past due or in foreclosure.[39] With no end to the sackings in sight in the US, the housing market is not likely to recover quickly. And thus the banking system will continue to be bogged down with bad debts.

Speculation is rife that there may be a second round of financial failures in the US sparked off by a collapse in commercial real estate.[40] Building values have fallen as much as 50% around the USA and there are dire predictions for refinancing commercial mortgages.[41] Unrealized losses on their holdings of commercial real estate are a deadweight on the banks' balance books and further hinder their preparedness to lend.

The situation is worse again in Europe where banks have double the leverage of the USA. Banks in Austria and Sweden are taking heavy hits to their books because of investments in Eastern Europe. During the boom years of 2002-06 Eastern European businesses and householders took out loans denominated in Euros to take advantage of lower interest rates. With the rise of the Euro and the collapse of their own currencies during the current crisis, the repayments are crippling them. Further defaults are likely, threatening a chain reaction in the Western European banking system. The flood of foreign investment into Eastern Europe in 2007 and 2008 has now turned into a flight as banks and investors try to get their money out.

Endemic excess capacity in the world economy

Although the rate of profit is higher in the major economies than during the dog days of the 1970s, it is still insufficient to prompt the revival of capital accumulation.[42] This is significant because it exacerbates another systemic problem in the advanced economies, excess capacity. Traditionally the gap between production and working class consumption is met by business investment. However, business will not invest where the rate of profit is inadequate for its needs. Robert Brenner records that capital accumulation in the major Western economies was successively lower in every decade since the 1960s.[43] With no sustained recovery in profitability in sight, the capitalists are not going to gamble on investing in production of new goods for sale onto glutted markets. Lower rates of capital accumulation may restrain the rise in the organic composition of capital, and therefore slow down the tendency for the rate of profit to fall, but they do nothing to solve the problem of excess capacity. In Japan, where excess capacity has been most obvious, the economy stagnated for 14 years, the so-called "lost decade". With the onset of a fresh crisis, the problem of excess capacity in the advanced economies has become more urgent. Manufacturing in the EU and USA is now operating at 70% capacity. In addition, bank lending to business for investment is constrained by the banks' own underlying solvency problems and the weight of toxic assets on their books.

If business will not step into the breach of inadequate effective demand by expanding investment, what of working class consumption? Here the capitalists are stuck with an inherent contradiction. Governments around the world would like households to spend up to reflate their economies. This is particularly important in the US where consumption accounts for 70% of the total economy. However, at the same time governments are using the crisis to attack working class wages and living standards. Working class spending will not be able to contribute to any resolution of the crisis in the short term when workers are on short hours, facing retrenchment, unemployed, suffering negative equity on their homes, or staring at default on their mortgages. Between Q2 2007 and Q1 2009, household "net worth" in the US fell by 22%.[44] In Q2 2009, net worth rose by 3.8% on the back of a surge in stock prices, but this is not likely to affect the spending plans of working class households.[45] The result is obvious in the retail sector where sales in July were 8.3% lower compared to a year previously. Saving and reducing debt is now the priority for US consumers, not spending, even if this holds back economic recovery - the so-called paradox of thrift.

European workers now face the same situation experienced by US workers for the past 30 years: declining real wages as the jobs crisis begins to hit home. In Europe (Germany, France, Belgium and Holland), the rise in unemployment has been delayed by short-time working and government subsidies to cover part of the wages of workers in hard-hit companies. In April two million German workers were on short-time. Hundreds of thousands of workers have avoided retrenchments due to such arrangements, and this has maintained working class consumer spending. However, government subsidies will run out in 2010, and economists predict that unemployment in Germany will soar from its current 3.5 million (8.3%) to 4.4 million, more than 10%, when this occurs.[46] "As much as it hurts me to say it, the worst is yet to come for the labor market," Wolfgang Franz, the chairman of Chancellor Merkel's panel of independent economic advisers, told reporters in September.[47]

Likewise in the UK, unemployment is forecast to rise from its current 2.4 million to 3 million by the end of the year, figures last seen during the early Thatcher years. The chief economist of the Chartered Institute of Personnel and Development in the UK said in August that "it was far too soon to rule out another avalanche of private sector redundancies later in the year".[48] In France, where the economy has not plunged as far as its neighbours, this fact did not protect workers' jobs as unemployment rose from 8.9% in Q1 to 9.5% in Q2. Japanese workers, too, face similar pressures. In July, unemployment reached a record high of 5.7% and average household spending in July was 2% lower than a year previously.[49] The handouts which were part of many stimulus packages gave a temporary shot in the arm to household spending but the amounts involved were woefully insufficient. Governments rescued the banks but turned a blind eye to the hardship of the working class.

A third possible source of effective demand is world trade. However, with world trade likely to fall by 10% in 2009, there is little potential that the developed countries can reflate on the basis of surging exports. And with US consumers snapping their wallets shut, the Asian economies, which recovered from the "Asian crisis" of 1997-98 by exporting vast quantities of goods to the United States, will also likely remain subdued.

Unsustainable public debt and stimulus packages

The inability of business, households or world trade to significantly boost demand at present means that government spending is still playing a major role in preventing the freefall from resuming. This fact lies behind the decision of the meeting of the G20 finance ministers in early September to maintain the stimulus packages. Pressure from the German and French governments to begin to wind back the stimulus was successfully derailed by the British and American governments well aware that the stock market surge of mid 2009 and apparent stabilization of the financial system were dependent on governments keeping a floor under demand and being ready to step in to prop up banks in difficulty. Any withdrawal of the stimulus would threaten to reveal the underlying lack of solvency amongst hundreds of British and US banks.

Nonetheless, the continued use of the stimulus packages has consequences - they are draining the government purse at an alarming rate. Public debt as a share of GDP in the OECD is forecast to rise from 73% in 2007 to 100% in 2010.[50] In the US the debt will rise from 63% to 98%, in the Euro area from 71% to 89%, and in the UK from 47% to 89%. Japan, where debt already soared from 64% of GDP in 1991 to 167% in 2007, faces the most significant dangers as its public debt is now forecast to rise to 200% of GDP by 2010. The amounts involved are staggering. US debt in early 2009 stood at $11 trillion. By 2020 it is forecast to rise by another $9 trillion to $20 trillion.

A series of problems present themselves from the escalation of US public debt. First, it raises the spectre of a major financial crunch in the US if overseas governments and financial institutions decide to stop amassing US dollar securities. If they continue to buy Treasury securities, they will likely demand higher interest rates. Upward pressure on interest rates may in turn choke off any early recovery as it will exacerbate the housing crisis and prevent any recovery in business investment. The interest bill alone on the debt will eat up an ever increasing proportion of US government funds. A rise in the US debt of $9 trillion, with higher interest payable down the track in the order of 5%, means that the interest bill on the US debt alone will rise by $450bn, equivalent to about 3% of GDP. In other words, the US government will have to find another 3% of GDP simply to pay off the additional interest.

Over time, the continuous accumulation of debt threatens the US role as the centre of the world financial system and the US dollar as the reserve currency. And while the USA may be able to sustain a debt of this size, such is the global appetite for US dollar assets that the same is not true of any other government. Governments around the world are therefore under pressure to wind back the stimulus packages. President Obama is committed to reducing the budget deficit to no more than 3% within five to ten years. That will mean an immense scaling-back in budget spending or tax hikes. The Republicans have already announced a plan to cut spending by $75bn a year.

While most sober-minded capitalists and think tanks advise the continuation of high government spending for the foreseeable future, they are all agreed that governments around the world will need to axe social spending down the track. In its July 2009 World Economic Outlook the IMF said

"Relevant reforms should aim at strengthening fiscal rules and institutions and reducing the buildup of future pension and health liabilities. Commitments to raise statutory retirement ages in line with life expectancies and to slow down health services costs through efficiency improvements could help to achieve the latter objective."[51]

Translated, this means attacks on government spending. There has been a long-term propaganda campaign by Western capitalist classes about the unsustainability of current systems of pensions and public healthcare. Even before the crisis, US Democrats and Republicans alike were arguing that Medicaid, Medicare and social security (retiree pensions) had to be wound back. Obama's healthcare package is one early victim of this pressure in the current crisis. In Britain, Martin Wolf spelled out the capitalist common sense in May: "The UK has lost control over public spending. It has to get it back again. Whether they like it or not, UK voters will have to elect a government willing to achieve this end... Government spending must be cut down to size."[52] In August the Financial Times ran an editorial in which it said that "Whoever wins the election [due in 2010] - and however strong their reforming zeal - the next government will be remembered as a cutter".

However, winding back public spending presents its own problems. Wolf spelled out the dilemma faced by governments:

"Two opposing dangers arise. One is that the stimulus is withdrawn too soon; as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend. The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability, worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world's key currency."[53]

Contradictions in the Chinese economy

With the USA and Japan both having fallen into a deep hole in the northern winter and showing few signs of any substantial real growth since touching bottom, the world's hopes have rested on China to pull the rest of the world out of recession. This is an unlikely outcome. Understanding why means coming to grips with the key components of the Chinese growth of recent decades.[54]

Chinese growth since the early 1980s has been built on its (until recently) unstoppable export machine. Exports have risen from 20% of GDP in 1997 to 40% today. Domestic consumption, by contrast, is only 35-40%. China's ‘economic miracle' has been built by suppressing working class consumption and encouraging very high savings rates.[55] Workers' savings deposited in the banking system have furnished a large pool of investible funds for the development of export-related infrastructure. Investment as a proportion of Chinese GDP is about 40%, as against 10-20% in the OECD.

Keeping a lid on wages through direct repression of trade unions has the added advantage of attracting foreign manufacturers eager to set up operation in what has become the new workshop of the world. Low wages have also reduced demand for imports, enabling the Chinese government o pile up huge trade surpluses. State control of the banks and industrial enterprises has allowed the government to stimulate or cool down the economy by manipulating lending and investment more effectively than is possible in the OECD.

Left unchecked, China's export success and enormous trade surpluses would have driven up the yuan and made exports more expensive and imports cheaper. The Chinese Government has not wanted this to happen. In order to protect the interests of the export-driven economy, the Chinese central bank has bought vast quantities of US dollar-denominated assets and printed money to keep the yuan-dollar exchange rate down.[56] The Chinese government now holds $776bn in US Treasury securities and more than $2 trillion in foreign currency reserves in total. This accumulation of dollars allowed the Chinese government to power through the Asian crisis of 1997-98. The fact that the Chinese government has been willing to hold US debts in US dollars has allowed the USA to rack up huge trade deficits in the past decade and in turn has contributed to the expansion of the Chinese economy.

China's gang-busters economy gave rise to speculative excesses. In 2005-07, there was a huge rise in the Shanghai stock exchange and the real estate market as newly wealthy enterprises and billionaires splashed their cash. The Shanghai stock market shot up five-fold from mid 2005 until October 2007. House prices followed a similar trend, rising fast through 2006-07. Investment also poured into export industries and export-related infrastructure - roads, ports, airports and so forth. The result in China, as elsewhere in the world economy, was the development of massive excess capacity. Even before the crash, when US demand for Chinese goods was running hot, 75% of Chinese industries were plagued with excess capacity. The Chinese auto industry was capable of turning out twice as many cars as could be absorbed.[57]

In late 2007 the stock market bubble burst - the Shanghai exchange fell by 65% over the next 12 months. The property market boom came to earth in early 2008 with house prices forecast to fall by anything between 10% and 30% before the bottom is reached. The construction sector has been crippled as a result, and ten million construction workers lost their jobs in 2008. The sharp downturn in world trade in the second half of 2008 was therefore only another heavy blow to an economy that was already staggering. China's export industries nose-dived.

The Chinese government responded quickly in November 2008 with a massive 4 trillion yuan stimulus package which had two elements. One was large-scale government handouts and subsidies to small business to lift domestic consumption in order to provide a market for Chinese businesses. This was largely successful - retail sales were 15% higher in July than a year previously.[58] The second was the release of a flood of credit by the state-owned banks to the construction industry for infrastructure development. Investment in urban areas in fixed assets such as roads, rail lines, canals, airports and power plants in the first half of 2009 was up 33% on a year previously.[59] These initiatives have re-started Chinese industry and growth is back on track for 8% this year. They have also underpinned strong demand for raw materials and minerals which have helped stave off the worst of the crisis in Australia.

Several contradictions remain, however. First, there are real limits to the degree to which domestic consumption in China can continue to be raised. Government handouts serve a useful purpose in stimulating consumption but, vast though the Chinese government reserves are, the handouts cannot go on forever. The stimulus packages will be exhausted at some stage. Further, the Chinese government is loath to allow wages to rise significantly. Rising wages in the mid-2000s led to increasing anxiety amongst both local and foreign investors and a preparedness to shift investments to countries with still-lower wages such as Vietnam. Any sustained shift towards an economy based on higher domestic consumption - aside from short-term boosts from state stimuli - is going to be restrained by the fact that higher wages would begin to price Chinese workers out of world markets. Thus, the kind of structural shift away from a reliance on exports towards domestic consumption is limited by a countervailing force - a tendency by business to shift offshore - that will slow down such a shift. A concern to keep a lid on wages in the context of the crisis is evident in the decisions by the Chinese government in 2008 to rescind a lift in minimum wages and to defer improvements in labour standards foreshadowed by 2007 labour legislation.

Short of a big surge in strikes capable of pushing up wages substantially, therefore, the Chinese economy is not going to drive the world economy out of its slump. It can help: modest growth in the French, German and Asian economies in Q2 2009 was underpinned by rising exports to China (up 6.3% in Q2). However, it is nowhere near enough: the Chinese economy is only one-third the size of the US, and the consumer market in the US stands at $9.5 trillion as against only $1.6 trillion in China and India combined.[60] It is the US consumer market that still matters for any expansion of world trade and that is going to be subdued for the indefinite future.

A second significant contradiction in the Chinese economy is that infrastructure development is only exacerbating excess capacity in world and domestic manufacturing. Jobs in construction have bounced back and industrial output was up 12.3% in August compared to a year previously.[61] However, most of the expansion is still aimed at the export sector. And, with domestic consumption limited by the factors above, and with exports hemmed in by depressed markets in the USA and Europe, expansion of Chinese export capacity is simply contributing to further excess capacity in world markets and at home. Despite the surge in domestic spending in the first half of 2009 on the back of the stimulus package, the steel industry was still operating at only 71% capacity in Q2 2009.[62]

The Chinese Government's determination to keep the yuan from appreciating significantly and to maintain stimulus to the export sector means that fixing up some of the trade imbalances in the world system will be postponed further. The tyre industry provides a case study. Between 2004 and 2008 Chinese tyre production capacity rose by 152% and is forecast to rise by another 16% by the end of 2010.[63] Capacity now far exceeds the ability of the domestic economy to absorb it by a ratio of three to one. The result is that Chinese tyre producers have flooded world markets, with US imports rising from 14.6 million tyres in 2004 to 46 million in 2008. Under pressure from the United Steelworkers union the Obama administration slapped a 35% tariff on imported Chinese tyres in September. Such measures only exacerbate trade tensions and threaten retaliation.

Third, with the resumption of growth in China, billions of yuan poured back into the share market in the first half of 2009 as Chinese investors looked for quick returns. The Shanghai stock exchange, having plunged in 2008, rose by nearly 80% in the first seven months of the year. In August, however, the stock exchange fell back by 20% before steadying. Speculation, underwritten by bank loans, shifted to property. If property prices tumble, therefore, the heavily leveraged Chinese banks are in big trouble. A prominent Chinese economist wrote in August that the Chinese stock and properties markets were over-valued by 50-100% and were like "a giant Ponzi scheme".[64]

Further adding to anxiety about the Chinese economy is concern about the integrity of Chinese economic data.[65] Simply put, they are subject to extraordinary manipulation. Perhaps even more than the US, the Chinese government has little interest in revealing the true value of assets that Chinese business corporations have accumulated through speculation because the politicians are frequently executives on the relevant boards and have grown rich from the process. Second, provincial premiers frequently report quite unrealistic growth figures to the central government in order to curry favour and promote their own careers. Thus, China reported growth in industrial production of 7.9% in Q2 2009 compared to a year earlier. However, exports were down 22%, power generation dropped by 2.2% and oil demand fell by 3.5%, suggesting that this growth figure is almost certainly exaggerated.[66]

A series of economic and political factors, in particular the potential for explosive social struggles, therefore limit any potential for China to act as the new locomotive for the world economy.

SUMMARY AND CONCLUSIONS

The fragile "green shoots" that have appeared in the past four months are no indication that the world economy has escaped the crisis into which it fell in the latter half of 2008. In early September, the UN Conference on Trade and Development attacked the "green shoots" hypothesis head on. It's worth quoting at length:

"But the real economic winter is far from over; tumbling profits in the real economy, previous overinvestment in real estate and rising unemployment will continue to constrain private consumption and investment for the foreseeable future. As the crisis is global, reliance on exports offers no easy way out, since trade is expected to decline by about 11% in real terms and any new trade expansion requires a recovery of consumption and investment somewhere in the world. Given the weakness in macroeconomic fundamentals, an upturn in financial indicators in the first half of 2009 is more likely to signal a temporary rebound from abnormally low levels of prices of financial assets and commodities following a downward overshooting that was as irrational as the previously bullish exuberance. They are not a reflection of strengthened macroeconomic fundamentals but of a restored "risk appetite" among financial agents. Consequently, they could be reversed at short notice, depending on the pace of recovery and financial market sentiment."[67]

UNCTAD is not alone in its sombre perspective. The World Bank said in June: "While the global economy is likely to begin expanding again in the second half of 2009, the recovery is expected to be subdued as global demand remains depressed, unemployment remains high, and recession-like conditions continue until 2011".[68] The US Federal Reserve anticipates growth in the second half of 2009 but is not at all confident about this being sustained into 2010. A weak labour market, tight credit and reluctance of business to expand underpin their nervousness. The European Central Bank is predicting a meagre 0.2% growth in the euro area in 2010. Many pundits agree. Roubini predicted in August a good chance of a double dip recession[69] while Wolf suggested in June that "Those who are sure that we are at the beginning of a robust private sector lead recovery are almost certainly deluded. The race to full recovery is likely to be long, hard and uncertain".[70]

Regardless of any recovery in economic growth, the prognosis for workers is more grim. Following the resumption of growth in output at the end of each American recession since World War II, it has taken steadily longer for employment to return to its pre-recession levels.[71] The typical lag following the recessions of the 1940s and 1950s was 18-21 months. After the recession of 1974-75, it took 26 months and, following the early 1980s slump, 29 months. During the George Bush administrations it took a whopping 48 months, or four years, for employment to recover after the 2001 recession.[72] It is anyone's guess how long it will take for the US to generate net job growth of seven million jobs, the toll thus far. The Director General of the ILO declared in June that "In short, the world is looking at a deep and prolonged jobs crisis" stretching out over the next six to eight years, with employment not recovering fully for four or five years after output starts to recover. [73]

The crash of late 2008 was not simply the result of a financial meltdown but had its roots in a crisis of profitability and excess capacity that has plagued Western economies since the 1970s. The devalorisation of capital that has occurred has been huge but still insufficient to restore vitality to the system. This is why the bailouts, stimulus packages and low interest rates can work for a while, but they cannot end the crisis. It is why unemployment is forecast to keep rising. It is possible that the latter half of 2009 going into 2010 may see positive growth, but it will be relatively anaemic and prone to worse shocks.

Like a sick patient suffering multiple diseases, one ailment might be cured to return the patient to apparent health, only for another disease to break out elsewhere on the body economic. This has been the pattern for years. Fixing up the Asian crisis of 1997-98 involved the US stepping in as the buyer of last resort, sucking in imports that only contributed to its long term indebtedness. Lower interest rates in the late 1990s only spurred on the tech bubble of 1998-2000 which brought forth the Enrons, the WorldComs and the eventual crash in 2001.

Still lower interest rates sparked off the housing boom of 2002-06, which in turn allowed workers to supplement their declining real wages by tapping into the equity on their homes. Working class indebtedness soared, housing prices skyrocketed and the whole thing ended with the subprime crisis of 2007-08 which shredded house prices, produced hundreds of thousands of foreclosures and brought about the credit crunch in 2008. The stimulus packages are another adrenalin shot in the arm to the sick patient. They may speed things up for a while, but they will not resolve the underlying problem.

Essentially, there are two ways of resolving the system crisis in the world economy: the capitalist classes will seek to restore some bounce to their system by programs of immense restructuring and further destruction of capital stock. This means more decades of austerity and attacks on the working class. Worst case, the crisis may foster a drive to a fresh inter-imperialist conflagration as it did in the 1930s. Or the working class solution, of resistance, fight-backs and opening the way to a socialist resolution of the crisis based on democratic planning and production for human need, not the anarchy of the market and the profits of the few which brought us to this catastrophe.

The figures and graphs referred to in this article can be downloaded as a PDF document .

NOTES

[1] This document does not provide an analysis of the causes of the crisis. Nor will it be a study of the rise and fall of neoliberal economics since the early 1980s. For these, members can refer to the various recent ISJ and ISR articles and books by Chris Harman, Joseph Choonara and Joel Geier. Nor will the document touch on the impact of the crisis in Australia. The NE will be issuing another document on the Australian situation; see also the article in the September 2009 issue of the SA magazine by Mick Armstrong.

[2] Note all $ figures are US dollars unless stated otherwise.

[3] ‘Home prices on an upswing in the second quarter of 2009', Standard and Poor's Press Release, 25 August 2009.

[4] In the three years 1930 to 1932, net job losses as a proportion of total employment were 4.8%, 6.5% and 7.1% respectively. Bradley Schiller, ‘Obama's rhetoric is the real "catastrophe"‘, Wall Street Journal, 13 February 2009.

[5] www.ilo.org statistical database.

[6] ibid.

[7] David Jolly, ‘EuroZone unemployment hit 10-year high in July', New York Times, 2 September 2009.

[8] Karsten Staehr, ‘The economic downturn in the Baltics - it is time to call it a depression', European EconoMonitor, 17 August 2009.

[9] ILO Director General, ‘Tackling the global jobs crisis: recovery through decent work policies', International Labour conference, ILO, Geneva, 2009.

[10] Bureau of Labor Statistics, ‘The employment situation - August 2009', news release, 4 September 2009.

[11] Julie Hyland, ‘Official unemployment in Britain tops 2.4 million', World Socialist Web Site, 17 August 2009.

[12] RGE Monitor, www.rgemonitor.com, 7 July 2009.

[13] Bureau of Labor Statistics, ‘The employment situation - August 2009', news release, 4 September 2009.

[14] ILO Director General, ‘Tackling the global jobs crisis'.

[15] David Leonhardt, ‘Wages grow for those with jobs, new figures show', New York Times, 16 September 2009.

[16] ibid.

[17] Bureau of National Affairs, Employer Bargaining Objectives 2008.

[18] Jack Healy, ‘Worker productivity grows at a rapid pace', New York Times, 12 August 2009.

[19] David Leonhardt, ‘A decade with no income gains', Economix blog, New York Times, 10 September 2009.

[20] ibid.

[21] Eric Eckholm, ‘Poverty rate rose in 2008, Census finds', New York Times, 11 September 2009.

[22] Paul Taylor, ‘Economic crisis is prompting a rethinking in Europe', New York Times, 1 June 2009.

[23] Ross Gittins, ‘Spare a thought for poor countries', Sydney Morning Herald, 15 July 2009.

[24] ILO Director General, ‘Tackling the global jobs crisis'.

[25] Jerry White, ‘UN reports 1 billion of the world's people going hungry', World Socialist Web Site, 18 September 2009.

[26] OECD, ‘Composite Leading Indicators News Release', 7 August 2009

[27] Standard and Poor's, ‘Home prices on an upswing'.

[28] Joel Geier, ‘A new phase in the crisis', International Socialist Review (Chicago) July-August 2009.

[29] Martin Wolf, ‘This crisis is a moment, but is it a defining one'?', Financial Times, 19 May 2009.

[30] UNCTAD, 2009 Trade and Development Report, September 2009, p.i.

[31] Michael R. Crittenden, ‘Geithner sees "long way to go" for recovery', Wall Street Journal, 11 September 2009.

[32] Syndicated and republished in The Australian, 17 August 2009.

[33] The treatment of crisis that follows in this section and the next rests on an analysis set out by Chris Harman, Zombie Capitalism: Global Capitalism and the Relevance of Marx, Bookmarks, London, 2009, Chapters 8 and 9.

[34] Patrick O'Connor, ‘Another major US bank collapses', World Socialist Web Site, 17 August 2009.

[35] Gretchen Morgenson, ‘What the stress tests didn't predict', New York Times, 22 August 2009.

[36] Nick Timiraos, ‘Good credit borrowers now feeling repayment strain', The Weekend Australian, 22-23 August 2009.

[37] ibid.

[38] James Pethokoukis, ‘About half of U.S. mortgages seen underwater by 2011', www.reuters.com, 5 August 2009.

[39] Charles Knause, ‘Study reports worst of US mortgage crisis still to come', World Socialist Web Site, 10 September 2009.

[40] Terry Pristin, ‘For commercial real estate, hard times have just begun', New York Times, 2 September 2009.

[41] ibid.

[42] Chris Harman, Zombie Capitalism, pp.195-201; 231-38.

[43] Robert Brenner, The Economics of Global Turbulence, Verso, London, 2006, p.282.

[44] Ann Zimmerman and Sara Murray, ‘Shoppers hold on to their wallets', The Australian, 20 August 2009.

[45] The Associated Press, ‘Net wealth rose in 2^nd quarter', New York Times, 18 September 2009.

[46] Taylor, ‘Economic crisis'.

[47] ‘Unemployment declines in Germany', Hurriyet, 1 September 2009.

[48] Hyland, ‘Official unemployment'.

[49] ‘Japan's jobless rate hits record', Hurriyet, 28 August 2009

[50] OECD Economic Outlook Annex Table 32: General government gross financial liabilities as per cent of GDP.

[51] IMF World Economic Outlook Update, 8 July 2009.

[52] Martin Wolf, Financial Times, 7 May 2009.

[53] Martin Wolf, ‘The recession tracks the Great Depression', Financial Times, 16 June 2009.

[54] The following analysis of the Chinese economy from boom to bust to recovery is drawn from David Whitehouse, ‘Crisis and class struggle in China', ISR, September-October 2009.

[55] With the withdrawal of state-provided healthcare, education and pensions and permanent jobs (the ‘iron rice bowl') since the early 1980s, Chinese workers now save nearly half of their incomes to prepare for sickness, unemployment and retirement and to pay for their children's education.

[56] The Government allowed a partial revaluation in late 2007 and early 2008 to help suppress inflation but with inflation tumbling since then, the yuan has been held steady.

[57] Walden Bello, ‘Don't hold your breath. Can China save the world from depression?', Counterpunch, 27 May 2009.

[58] Reuters, ‘China output misses forecasts', New York Times, 10 August 2009.

[59] ibid.

[60] Joel Geier, ‘More than a recession: an economic model unravels', ISR, March-April 2008.

[61] Reuters, ‘China's economic data tops forecast', New York Times, 10 September 2009.

[62] Whitehouse, ‘Crisis and class struggle'.

[63] The following data are from Jonathan Weisman, ‘US aims to burst Chinese tyre surge', The Australian, 14 September 2009, p.29.

[64] John Chan, ‘China's dubious statistics cover up economic crisis', World Socialist Web Site, 10 August 2009.

[65] ibid.

[66] ibid.

[67] UNCTAD, 2009 Trade and Development Report, pp. ii-iii.

[68] World Bank, ‘The financial crisis: charting a global recovery', 22 June 2009.

[69] Nouriel Roubini, ‘The risk of a double dip recession is rising', Financial Times, 24 August 2009.

[70] Wolf, ‘The recession tracks the Great Depression'.

[71] Wall Street Journal, 4 April 2009.

[72] ibid.

[73] ILO Director General, ‘Tackling the global jobs crisis'.