Capital’s global crisis

First published: October 1998

The post-1989 triumphalism of the international imperialist system suffered two shuddering blows at the end of August. First, on the economic plane, it became clear that all of the efforts to contain the 1929-scale slump which has afflicted east Asia since last summer have failed – its fall-out is progressively extending its effects to the entire world economy. Second, the chain of the international capitalist economy broke at its weakest link – Russia – and this posed the most serious political challenge to imperialism since 1989, namely, the realistic possibility that the capitalist course imposed on that country since the end of 1991 might be over-turned. The shudder of doubt which passed through the world of capital manifested itself in stock market prices, innumerable articles on the ‘backlash against the free market’, through to the farcical powerlessness of the Clinton/Yeltsin summit.

The driving force of this crisis was the realisation that the east Asian economic crisis had not been confined to that region. But its political punch was delivered by the palpable risk that capitalism could yet be overturned in a country, Russia, whose nuclear weapons rule out the direct Western military intervention which would otherwise be used in such circumstances. The latter political reality was reinforced by the inevitability of rising social and political opposition to imperialism’s prescriptions for east Asia.

The first victims of the economic shock waves emanating from east Asia were the emerging markets of Latin America, eastern Europe, the Middle East, Africa and the rest of Asia – driven down relentlessly as western investors pulled their money out. By the beginning of September, the stock markets in each of these regions had fallen by between one third and one half from their levels at the end of 1997. The Russian stock market collapsed completely – losing 87 per cent of its value. Brazil raised interest rates to nearly 50 per cent in a desperate attempt to stem capital outflows.

The second row of dominoes to be hit were the commodity exporting countries. With the most dynamic sector of the world economy in deep recession – Indonesia’s output, for example, falling at an annual rate of 15 per cent -– demand for primary commodities, like oil and metals, fell dramatically. Commodity prices plummeted to their lowest levels in decades. This transferred the impact of the Asian crisis directly into all of the economies dependent on exports of raw materials – hitting South Africa, Latin America, Russia, the Middle East and Africa, as well as countries like Canada, Australia and Norway. With oil and gas now accounting for half of Russia’s export revenues, the impact of the 40 per cent fall in oil prices was particularly devastating.

Third, the massive devaluations of the east Asian currencies, and of the yen since 1995, unleashed a flood of cheaper manufactured goods onto the world market undermining the profits of manufacturing companies throughout the rest of the world. The impact was all the more dramatic as it coincided with the shrinkage of markets caused by the east Asian slump.

By August this combination of economic forces was starting to impact upon the US economy. US business profits started to fall for the first time in nearly a decade. With US companies already facing a series of militant struggles by trade unions strengthened by a tight labour market, and a ballooning balance of payments deficit, it became clear that the US economic cycle had peaked and was about to turn downwards. Sooner or later the squeeze on US company profits was bound to impact onto the stock markets, whose shares had reached the highest prices relative to dividends in history – once it became clear that profits would not justify the share prices, they were bound to fall.

Unlike at the time of the last great stock market crash in 1987, a Japanese rescue of the US economy is no longer possible – due to the deep economic and financial crisis in Japan. So a collapse on Wall Street, this time around, if it happens, could usher in the worst world recession since the 1930s. In fact, underlying the inability of the Japanese economy to regain its previous dynamism is precisely the strain imposed upon it at the end of the 1980s to prevent the US stock market crash resulting in a 1930s-level depression. It was the ultra-low interest rates of that period, to allow Japanese capital to flow into the US, which inflated the bubble in property and stock market prices, whose subsequent collapse has undermined the Japanese financial system.

The contamination extending through the world economy is unlikely to stop the launch of the European single currency but the EU will be unable to escape the consequences of a world slow-down or recession. The strains of having a single monetary policy – irrespective of different economic conditions – will produce more and more political fall-out in Europe. The British economy, in particular, will now be severely hit because Gordon Brown’s high interest rates and over-valued pound will magnify the negative shock of the turn in the world economy.

This situation in the international economy shows that the conditions for a prolonged new economic upswing of the world capitalist economy – an ascending Kondratiev wave – do not exist.

The precondition for each such long rising wave of economic growth has been a qualitative increase in the share of the economy devoted to investment. Because increasing levels of investment increases the scale of production, this in turn requires a larger and larger market. It was the international scale of production already in existence by the 1920s which meant that the break-up of the world market into protectionism after 1929 produced such a catastrophic slump. Given the vastly greater scale of production today, and the globalised markets this requires, any similar breakdown of the world market would produce an economic collapse which would make 1929 appear relatively benign.

A qualitatively higher level of investment would require a higher rate of profit to fund it. This has not occurred. Access to the resources of the former Soviet Union has reduced raw material and energy prices. But, with the partial exception of the United States, the attacks on real wages and the welfare state have not been sufficient to allow a qualitative increase in profit rates in the main capitalist centres.

The further globalisation of the world economy through opening up capital markets to allow US capital, as well as goods, to penetrate the Asian economies has also run into a major obstacle – Japan. The US, in conjunction with the IMF, is utilising the present crisis in east Asia to try to tear down these barriers and take over at very low prices major financial and industrial companies, but it has not yet overcome the resistance of Japan – which in the form of its enormous holdings of US bonds and stocks has weapons of its own powerful enough to trigger a collapse on US financial markets.

Having gloated over the east Asian crisis, and dictated via the IMF deflationary policies which made it worse, the US and Western Europe now face the threat that contagion will end up in the worst global crisis since the 1930s.

At the end of the 1980s, it was the international character of the world capitalist economy which allowed US imperialism to crack the Soviet economy – Ronald Reagan funded the biggest military build-up in history on the basis not merely of US resources but also of funds from Japan. The crisis of that international economy at the end of the 1990s has broken the momentum of the imperialist offensive which followed.