The ‘Great Stagnation’ and spreading world social instability

By Peter Wilson

Five years into the current economic crisis it is possible to see beyond the immediate impact of the global financial crisis and recession to see clearly some of the structural shifts that have taken place. A key change that has taken place is a sharp fall in capital creation, and therefore investment, in the imperialist countries. Given that investment is responsible for the bulk of economic growth, there is no immediate possibility of rapid growth in these economies being recreated. The cumulative effect of the resulting economic stagnation in the imperialist centres lies behind the spreading of social and political instability to widening areas of the world.

The great stagnation

Overall the imperialist economies are now growing extremely slowly by historical standards.

US economic growth has been progressively decelerating since its peak in the post-World War II period. Taking 20 year moving averages, to remove any effect of purely cyclical fluctuations, in the late 1960’s US GDP was growing at over 4 per cent a year. Now average growth this last 20 years has been 2.6 per cent, over the last 10 years 1.7 per cent and the last five years just 1.2 per cent. Some revival from the most recent situation should be expected, as this includes the worst years following the financial crisis, but a return to the dynamism of previous decades is impossible for the US to achieve given its fifty years of slowing growth and current low investment levels. So the outlook for US economy in the coming period is slow growth. Growth in the EU and Japan is even more anaemic.

China’s growth remains extremely strong compared to the imperialist countries, but it has slipped to around 7.5% a year compared to previously 10% levels.

The specific feature of this situation is therefore prolonged stagnation in the imperialist centres. The term ‘Great Stagnation’ is a therefore better description of the current crisis than ‘Great Recession’ as it is often dubbed. In previous economic downturns, for example in 1973, 1982 and 1991, a sharp fall in production was followed by rather rapid recovery. Even after the 1930 ‘Great Depression’ the huge collapse in output (almost 30 per cent in US GDP) was recovered within 10 years or less with quite rapid growth rates. Although the depth of the fall in 2009 was not as great as 1930, the recovery has been slower. This time, five years into the cycle, there is still no sign of rapid growth. That is why the most apt description of the current crisis is the ‘Great Stagnation’.

This is leading some like former Treasury Secretary Larry Summers, to argue for a big increase in state investment to stimulate growth. The US government would indeed have no difficulty financing increased government investment given it can borrow at approximately zero per cent (or less than zero when inflation is taken into account).

The US ‘Quantitative Easing’ programme, has reduced interest rates whilst redistributing income and wealth towards the rich due to the rise of share prices – as money can be borrowed at 0% any asset which yields a positive return is a profitable investment, leading to inflation of shares and other asset prices. However it is striking, and worth noting, that whilst US shares have gone up, contrary to much hype, their real value remains below 2008 levels when inflation is taken account of.

QE is stoking up future problems for the US economy in a renewed credit boom, and asset price increases, based on ultra-low low interest rates and rising inflation. But it is a Catch 22, as if the US reins back on QE and therefore pushes up interest rates, it is likely to lead to a new credit crunch as the current asset structure is based on approaching six years of borrowing at zero per cent.

Spreading social and political instability

Turning to the social and political consequences of this, today’s social relation of forces does not permit capital to impose the types of political solutions to its economic problems that it pursued in the 1930s. In the 1930s fascism in Europe and a violently nationalist Japanese regime were able to utilise small proprietors, other petit bourgeois forces, and above all the peasantry (the rural petit-bourgeoisie, then a significant part of the population in Germany, Italy and Japan) in an alliance with capital to crush the working class – the political formula of fascism. Such a mass petit bourgeoisie force no longer exists so capital has to deal with the crisis in a different way.

In the 1930s working class consumption was radically slashed, rebuilding capitalist profitability. But today the relationship of forces is preventing real incomes from falling at a fast enough rate for a comparable degree of recomposition of profits to occur. In the 1930s, consumption fell by over 20 per cent in the US. This time it is well under 10 per cent. This is deeply socially damaging but not enough to turn around the situation on profits sufficiently to lead to a new surge in investment. These worse relations of forces for capital means the structural reduction in investment is not being reversed.

Foreign policy begins at home

As the current crisis initially unfolded the US capitalist class wanted to continue its policy of ‘guns not butter’, in other words to step up its imperialist military actions and maintain military spending while slashing the resources going to the working class.

It has had some success in reducing living standards, with real median household incomes sharply falling after 2008, but this has released insufficient resources to maintain both investment and military spending, leading to the prolonged period of very low growth.

Even this scale of attack on living standards has already led to significant political problems in the US. The recent budget crisis and clashes over health care will be followed by further confrontations between the main parties. The current level of internal political instability makes it difficult to accelerate further the rate of decrease in living standards.

As a result the US has been forced to choose between investing to rebuild its domestic economy and maintaining military spending. It has decided to redirect some resources into investment, which hit a low in 2010 and has risen since, but has still not recovered to its 2008 level.

Last year the US Council on Foreign Relations, in an influential study titled ‘Foreign Policy Begins at Home’ set out the rationale behind this policy. The US must generate more domestic resources to maintain its international influence and capacity to defeat its enemies. And whilst the domestic economy is being rebuilt military adventures, such as the invasions of Afghanistan and Iraq, cannot be afforded. The immediate priority is the US economy. This is not a change of fundamental international orientation or on military policy, but a necessary retrenchment to get the US into a better position for future advance.

As a result, military spending is being cut and has already fallen by one per cent of GDP since 2009, at the same time as US investment has recovered by one per cent of GDP.

Alongside this, to reduce the competition it is exposed to, the US is trying to put together protectionist trade deals directed against China and the semi colonial countries, especially those that have moved outside US influence particularly in Latin America ; the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. But these are not without problems. Negotiations on the TPP have come up against Japan’s unwillingness to liberalise its agriculture and South Korea’s unwillingness to open its economy to Japan when its high tech industries are in direct competition with Japan’s.


In China there is an on-going struggle over economic policy.

The pro-capitalist forces backed by imperialism want a reduced role of the state in investment. This takes the form of an offensive in favour of neoliberal policies.

But whenever substantial elements of such policies are implemented in China its economy slows. This was the case in the first half of 2013 when, in line with the World Bank report on China, despite a slowing economy any government stimulus was withheld leading to a sharper than expected fall in growth. Growth picked up again when that policy was reversed with a mini-stimulus last summer.

Further problems are unfolding this year with China’s Central Bank allowing a rise in interest rates which is already leading to a second credit crunch and liquidity crisis. Interest rates are being allowed to rise to prepare for greater convertibility of the RMB – a policy urged not only by capitalist forces in China but by US imperialism, both of which have a common interest in looting the Chinese economy.

However the strongest sections of China’s economy remain in state hands and a similar attempt in 2013 was defeated. It therefore remains to be seen how events will unfold.

The end of commodity boom

A key consequence of the global slowdown is that the ten year boom in commodities has come to an end. A huge commodity price boom, a quadrupling of prices from 2000 to 2008, underpinned rapid economic growth in the semi-colonial countries in that period. With the consequent rapid growth in a number of semi-colonial countries it was possible, by carrying through redistributive policies (a ‘revolution in distribution’), to increase the resources both to the population while capital still enjoyed profits from the commodities boom. Hence Lula in Brazil, for example, could be popular with the capitalists and the masses.

With that commodity boom now ended however social and political instability are spreading in semi colonial countries. The class struggle is intensifying. Where the left holds power it now faces sharper choices. Governments have to move either to the right to assist capital at the expense of the masses, as advocated by the US, or to the left in order to maintain population’s living standards. To achieve the latter changes to distribution are no longer sufficient and what is requires is a ‘revolution in production’. Some governments in Latin America are taking this course; such as in Venezuela Nicolas Maduro’s price controls on private capitalists, Ecuador’s large scale programme of state investment and potentially Chile’s President-elect Michelle Bachelet commitment to reduce inequality.

Given this economic and social background, political chaos is no longer confined to the Middle East, but spreading more generally, including in Africa, with coups and civil wars, and in India where Congress looks likely to loose the forthcoming elections. In Thailand opposition forces are carrying out an attempt at mobilisations leading to a coup and in Bangladesh there is increased political turmoil.

Middle East

As a result of its prioritisation of domestic economy over military spending the US has been reluctant to take on new direct military interventions in the Middle East. It insisted European imperialism play a significant role in the 2011 assault on Libya and last year it backed off from attacking Syria estimating that was an unfavourable domestic and international balance of forces – the UK anti-war movement playing a highly creditable role in this. As a result the US is more reliant on regional relays to assist its objectives. But these US allies intervene and also pursue their own definite interests, which do not all coincide with the US. For example Saudi Arabia backs the US objective of overthrowing Assad in Syria, but through building up different forces which are now clashing with US backed forces. Likewise France promotes its own interests in the region and in Africa.

Climate change

As the urgency of dealing with the problem of climate change intensifies the US is moving in the opposite direction. Wanting to reduce its dependency on energy imports it is making a huge turn towards fracking. China on the other hand is making a shift towards renewable energy.


The enormous offensive against real wages through austerity policies in Europe has failed in its aim of sufficiently increasing profits so that the private sector begins to invest and drive these economies back into strong growth. Stagnation continues. The tiny level of growth achieved in the UK economy is mainly driven by a mini-housing boom due to measures like Help-To-Buy, not by a rise in business investment. Nor is it providing any boost for real wages. But despite this all the main parties in Europe – from conservative right and social democratic left – remain committed to continuing austerity.

Despite this offensive, no country in Europe has seen a level of struggle in response to this that is able to force a change in fundamental policy. However, stagnation and austerity are radicalising politics in Europe, with the emergence of small but significant currents to the left of social democracy in most countries. But these are not at a level where they pose the possibility that political forces posing an alternative could win election (with the partial exception of Syriza in Greece, and SF in the North of Ireland). Instead it is the right that has taken the offensive, with the rise of the populist and far right across the continent that stand to make significant gains in the coming Euro elections, based on an anti-immigrant scape-goating agenda that feeds all forms of racism.


This is the context of the situation in Britain, where – despite attempts by the media to create an illusion of success in order to secure the return of a Tory led government – the economy is still 2 per cent smaller than its 2008 peak.

In Britain and Europe the austerity offensive seeks to drive down living standards and lay the basis for a new period of capitalist growth, while encouraging an outburst of racism and anti-immigrant scape-goating. Internationally imperialism aims to exploit political instability to impose its own authority, either through supporting pro-imperialist forces on the ground or using chaos as an excuse to intervene militarily.

This sets the tasks of socialists in Britain: to do everything possible to build resistance to the austerity offensive and the fight back against the rise of racism and the far right, while building the movement against imperialist wars and interventions. Every small step to hold back the imperialists at home – from austerity or war – is the greatest contribution that can be made to solidarity with those at the forefront of the international struggle. Sometimes this can lead to a direct blocking of an imperialist offensive. For example, the British anti-war movement made a significant contribution to the many factors that meant Britain and then the US scrapping their plans to attack Syria last August.

Direct solidarity, countering imperialist misinformation campaigns, and building understanding and direct links in the labour movement, has an important role in supporting the consolidation of a workers state in Venezuela, defending Cuba, aiding the Palestinians and supporting all those opposing imperialism in the semi colonial world. But above all, every step forward in the fight here against austerity, racism and war places obstacles in the way of imperialism’s internal and external offensives, making it more difficult for imperialism to concentrate its efforts on specific targets thereby helping provide space for other, more advanced or more critical, struggles in the world. The struggle here is just one aspect of the world-wide confrontation between imperialism and its allies and the working class and its allies on a global scale. Every grain of sand thrown in the gears of British imperialism, however small, is a contribution to that.