The 2008 financial crash dwarfs in scale that of 1929. The global write-down of capital values is unprecedented in the history of capitalism.
So great is the financial disaster that central banks, finance ministries, and international bodies like the EU and the IMF have been forced to inject trillions of dollars into bankrupt banks.
This cannot solve the crisis and restore growth. The bailouts simply prop up a busted system. They are designed to prevent a calamitous economic collapse of neoliberal capitalism, and to protect the property, power, and privilege of the international ruling class.
The bank bailouts and associated austerity programmes are, in fact, the precise opposite of what is necessary to solve the crisis and restore growth.
The bailed-out banks are not lending. They are using state funds to write down debt and recapitalise their balance-sheets. And, with the economy in depression, they fear they may lose their money if they loan it.
Nor has any sort of financial stability been achieved. Bad debts have simply being moved around the system, such that a crisis of bank solvency has been transformed into a crisis of state solvency. The epicentre of this crisis – at present – is the European Union.
The euro and the EU are now in danger of disintegration. A cycle of failed summits and hovering-on-the-brink panics has exposed a ramshackle political and economic apparatus hopelessly ill-equipped to master the black hole of imploding debt that threatens to topple the European banking system.
In October 2009, a combination of bank bailouts and imbalances between the debt-based economies of southern Europe and the export-based economy of Germany threatened the EU with financial meltdown. Since, then, Greece, Portugal, Spain, and Italy (in order of vulnerability) have tottered on the brink of collapse.
The efforts of the EU, the IMF, and the European Central Bank – the ‘Troika’ – to solve this crisis in the three years since have been worse than useless. Not only is it pointless to bail out heavily indebted countries simply so that they can continue paying interest to the banks. It has been positively counterproductive to demand massive austerity as the price for this.
Austerity does not just ruin lives. It wrecks whole economies. As governments impose cuts, markets shrink, firms sell less, wages are cut, and workers are sacked. Demand falls still further. A spiral of decline sets in. This is the mechanism that helped drive stagnation in the 1930s. Our rulers are creating the Second Great Depression.
Moreover, as the economy shrinks under the hammer blow of austerity-driven deflation, the debt burden grows. This happens in two ways. First, more debts go bad as more firms and households go bankrupt. Second, as the economy shrinks, the relative weight of the existing debt burden rises.
The reduction of debt requires economic growth – expanding markets to provide the revenues to pay off debts, and increasing GDP to reduce their relative proportion.
The proof of these simple truths is all around us. Greece is the acme of the Troika’s failure. Bailouts keep the payments flowing to Greece’s creditors at the same time as austerity hollows out the economy, making further bailouts necessary.
At the end of 2009, Greece had a debt-to-GDP ratio of around 130%. After two years of bailouts and austerity, this had risen to 190%. Why had this happened? Because the Greek economy had suffered an austerity-induced collapse of around 15% in GDP.
It is not alone. Ireland was hit hard by the first onset of the financial crash in 2008. It was thereafter hammered by a succession of austerity budgets, contracting by 8.5% in 2009, and 14% in 2010.
Greece and Ireland, along with Portugal and Spain, represent the extreme end of a spectrum. Europe as a whole is sinking deeper into slump. Unemployment averaged 10% across the continent in 2011, rising to 12% in Portugal, 14% in Ireland, 18% in Greece, and 23% in Spain.
The future for Europe’s young people is especially bleak: overall, one in four of those seeking working cannot get a job, rising to one in three in Ireland, Portugal, and Italy, and one in two in Greece and Spain.
The Grim Reaper is one measure of the social crisis: the suicide rate increased by 40% in Greece in a year.
The banking crash was not a natural catastrophe: it was a human-made disaster caused by speculation and greed in a casino-economy based on neoliberal ideology. The depression we have now entered is not a natural catastrophe either: it is a direct consequence of government-imposed austerity.
As one leading mainstream economist, former Bank of England Monetary Policy Committee member David Blanchflower, explained:
‘Lesson one in a deep recession is you don’t cut public spending until you are into the boom phase. Keynes taught us that. The consequence of cutting too soon is to drive the economy into a depression. That means rapidly rising unemployment, social disorder, rising poverty, falling living-standards, and even soup kitchens.’
The problem for the capitalist class is that the ‘Keynesian’ strategy advocated by Blanchflower is itself highly hazardous. State debt is a commodity that must be sold on financial markets like any other. If record government deficits are ratcheted up to fund public spending, the risk of default rises, loans become more expensive, and at some point ‘confidence’ will evaporate and state debt become unsaleable.
State bankruptcy would then herald the very economic meltdown and social revolt that Blanchflower predicts under the austerity regime. Greece is at present the clearest embodiment of this dilemma.
The neoliberal elite is therefore trapped by the contradictions of the system on which its wealth depends. The only way out of slump is to invest in new growth. But this cannot be done within the constraints imposed by private ownership of finance-capital.
This points the world in another direction: towards the barbarism of fascism and war.
Democracy is already under attack across Europe. The power of economic decision-making is concentrated in the hands of tiny groups of neoliberal politicians and bankers.
Challenges to programmes of debt repayment and austerity are met with howls of derision and threats of financial Armageddon. The examples of both Greece and Italy have shown that elected governments can be replaced – when necessary to restore ‘market confidence’ – with bankers’ regimes imposed from outside.
At the same time, as corporations compete for profit in shrinking markets, wars become more likely. As US economic power wanes in a crisis-racked and increasingly competitive world, the temptation to use its overwhelming military power – before it is too late: before it is eroded by industrial and financial decline – will grow
The rift between the US and China may evolve into the world’s deepest geopolitical fracture. China’s growth is powered by low-cost exports. In consequence, China held an estimated $2.3 trillion in foreign-currency reserves in early 2009. Of these, some $1.7 trillion was invested in dollar assets.
China’s ‘savings glut’ is therefore recycled to underwrite US debt and fund US imports of Chinese goods. This major imbalance – reflecting the shift of economic power from a declining imperialist superpower to a rising one – is highly destabilising. It was one factor in the financial crash of 2008.
At the same time, Chinese capitalism has gone onto the offensive to secure access to vital raw materials across the globe. ‘The deals,’ as the New York Times explained it, ‘largely focus on China’s locking in natural resources like oil for years to come.’
In a depression, this can become the stuff of imperialist war for a re-division of the world.
To end the slump, it is necessary to cancel the debt, take over the banks, tax the rich, and invest for jobs, services, and a green transition. To do that, it is necessary to overthrow the rule of finance-capital and put the economy under democratic control. As in the 1930s – when the choice was barbarism or socialism – politics will be decisive.
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