Tuesday, January 22, 2008

How bad can it be?

According to Soros, it's the worst financial crisis since World War II. Michael Metz of Oppenheimer Funds says it's "the worst post-war recession" so far. Despite the Fed's sharp rate cut, it looks like "the most serious recession since World War II". The Bank of America's Quarter 4 profit was 95% down on last year, and Wachovia - the fourth largest bank in the US - lost 98% of its profits. The US stock exchange and the FTSE fluctuated wildly today in reaction to the interest rate cut, but such sharp movements almost always happens before a big crash. China is taking a huge knock from the US decline, and Asian stocks were particularly badly hit yesterday. The current problems could be the tip of the proverbial iceberg and, to stretch the metaphor a bit further, the global economy is looking increasingly like the Titanic.

Well, who really knows what could happen? On the one hand, the experts always panic when the economy shows signs of tanking, and the global economy has so far survived. On the other, the reason they panic is that the fundamentals are not sound, and the next recession could always be The Big One. These are the profit rate trends for a selection of the most powerful economies:

This is the root of the problem. Without the return on investment, there is little impetus to invest. As Robert Brenner points out in The Economics of Global Turbulence, the steps taken to curtail wage growth and reduce labour costs are rational from an individual company's perspective, but the aggregate result is a massively reduced utilisation of existing capital and a decreasing willingess to invest. Investment barely rose above its 2000 level even during the recovery, which is acknowledged to have been weak. But the problem expresses itself in this way, because the decline takes place in a context in which manufacturing is already weakened. As Ha-Joon Chang points out, to demote manufacturing in the hope of growth through the services industries can be a bigger mistake than relying on the extraction of raw materials since productivity levels in the services sector are generally very low, and those that have potentially high productivity growth (banking and IT) have manufacturers as their main clients. But it would be wrong to see this as simply a mistake. The financialization of the US economy and the abolition of international restraints on capital flows was a political project. It has made it possible for the US ruling class to restore its power domestically, by breaking up labour and reorganising property forms; and it has enabled it to daringly re-assert its global hegemony on the basis of a realisation made by Wilson's government as it entered World War I - the global scale of US interests does not require direct territorial rule. Rather, the US can extract surplus value from the world as long as advantageous market relations are in place. This state of affairs demands the constant threat and use of force. Capital deterritorializes and reterritorializes very rapidly, so it falls to whoever would rule to guarantee an orderly and pliable system of nation-states based on the most sophisticated information available. The rapid re-organisation of Eastern Europe, the Balkans and the Central Asian states after the collapse of the Soviet Union is a dramatic case in point. It didn't usually require force on the part of the United States, just bribery, threats, cajoling, the steady supply of 'expertise' under the direction of Jeffrey Sachs, and so on. But some recalcitrant cases did require a bit of bludgeoning, and it was necessary to expand the system of bases. At any rate, with the decisive transformation after the Volcker recession, US companies were able to intensify their rate of extraction from the rest of the world, and the IMF and World Bank have always been on hand to assist that project.

As two stories linked by Chabert indicate, the larger part of the cost can and will be passed on to the working class (in this case African American workers) unless there is substantial resistance. The Washington Post reported yesterday that "workers who lost a job in 2001 to 2003 took an average pay cut of 17 percent in their new jobs, more than double the average cut of those displaced in the late 1990s". Recessions destroy capital, and many of the world's richest people and companies are panicking. However, from the point of view of the broader capitalist class, that destruction can be brilliantly creative. It can create opportunities for highly profitable redeployment after the smoke clears, and for the further consolidation of class power as the labour market is successfully disciplined. If the crisis is very deep, it can be system-threatening, but only if there is a movement ready with an alternative. As things stand, the global Left and the working class do not meet this crisis in an optimal condition to ensure that it results even in social-democratic reform, much less fundamental social transformation. And there is always the far right waiting in the wings. How bad can it be? Very bad.