The global economic crisis is entering a new phase, as production declines and governments desperately try to stop a global recession turning into depression. China has seen a fall of 18 per cent in its exports over the past year. But China’s imports have plummeted by 43 per cent. Those were the imports Kevin Rudd was relying on to save Australia from recession. That’s not likely now. The Chinese boom is well and truly over, and it’s the same story in South Korea, Taiwan and Japan.
The Japanese economy shrank 3.3 per cent in the last quarter—an annualised slump of 12.7 per cent. Despite stimulus packages of billions of dollars, the world’s second largest economy, in recession since November 2007, seems headed for depression.
The International Monetary Fund has been warning of global deflation—a situation where prices fall because businesses can’t sell goods and do anything to unload their stockpiles.
In Britain, where government strategy was to base the economy on a profitable financial industry, the pound has fallen to its lowest level in a quarter of a century and unemployment is rising.
In the US, corporations that were once among the largest in the world—like Ford and General Motors—are headed for bankruptcy. House prices have fallen by an average of 25 per cent and are still falling, and a quarter of all mortgages are now behind in payments.
In California, the government of Arnold Schwarzenegger has run out of money, and is issuing IOUs to pay its bills.
America’s largest banks are almost certainly insolvent, kept alive only by government guarantees.
This is the background to the breath-taking rescue packages being dreamed up by governments. Twelve months ago, the Australian Reserve Bank was still increasing interest rates in an attempt to stop inflation.
It was unthinkable then that Kevin Rudd might propose a $10 billion increase in government spending; now he’s spending another $42 billion.
Malcolm Turnbull is complaining about the debt that will be incurred, but it is chicken-feed compared to the US government’s deficit which is now running at around $3 trillion a year—that’s three million million dollars. Even as he pumps money into the economy, Obama told Democrat leaders, “We are not going to be able to perpetually finance the levels of debt that the federal Government is currently carrying.”
The global financial system is simply incapable of coming up with the money to fund such a deficit, so the US government will simply print the money. The result will be inflation; probably not immediately because of the looming collapse, but eventually.
The growing crisis is a direct product of the preceding boom. The last years of the boom were largely speculative. Cheap and widely available credit fuelled financial engineering that made it seem that there were profits where none existed in reality. The result is that much of the world’s financial institutions are either bankrupt or crippled. There is also a collapse in borrowing, and hence a collapse in demand for goods.
Traditionally, in a capitalist crisis like this, the most careless banks and unproductive businesses would go broke, eventually allowing the more efficient enterprises to emerge from the slump and begin to expand again. The trouble this time is that the system is so interconnected and the devastation in the financial system is so great that a laissez-faire market policy would see most of the world’s banks collapse and threaten the whole capitalist system.
The risk to the system is what has turned neo-liberals into enthusiasts for bail-outs.
So governments are spending billions and trillions to keep the banks afloat, and creating incredible new levels of public debt to do it. Similarly they are trying to prop up production in the hope that a recovery will emerge from the ruins. And they’re telling us to spend, spend, spend.
This may provide some short term relief. Rudd has so far prevented a collapse in the housing industry and car retailing in Australia—but it simply won’t work in the longer term.
Companies getting government assistance in America are still going ahead with mass sackings. The bankruptcy of capitalism is on display for all to see. The priorities of the system have to be turned on their head.
If the billions being spent to prop up the banks was instead spent on jobs, and public services, society could begin to meet people’s needs, give everyone work, and start seriously tackling environmental crises. That’s the challenge that lies ahead. We don’t need to bail out the system, we need to change it.
By Phil Griffiths