"As the events of Black Wednesday show, global financial markets can now turn a country upside down within 24 hours." Larry Elliott, Guardian economics editor, 17/9/99.

The British economic recovery - heralded by Gordon Brown - is hanging by a thread. It rests on the the fragile foundations of a consumer boom in Britain, and far more importantly, in the United States. Moreover the US economic bubble is keeping the world afloat at the present time. This is a fact recognised by all the economic pundits.

"America, in turn, has become the global economy's buyer of last resort, soaking up the goods churned out by factories in Japan, Germany, Indonesia, South Korea and Brazil", stated Larry Elliott. (Guardian, 1/7/99)

But how long can this last?

Elliott correctly concludes: "Should demand in the US dry up, the retrenchment could trigger a second leg to the world economic crisis that started with the devaluation of the Thai baht two years ago tomorrow."

The "New Paradigm"

The gurus of the New Paradigm say this will not happen. America has sustained growth with low inflation, its industries are lean and fit, and the rest of the world is happy to finance the deficit. The situation can last indefinitely.

But this is false. According to Stephen King, chief economist at HSBC, periods of strong growth and low inflation are characteristic of previous bubbles, including the period leading up to the crash of '29, which followed a seven-year period in which growth averaged 4.7%, unemployment was below 4%, and General Motors and RCA Victor were the Microsoft and Intel of their day. "The US bubble is likely to burst through a combination of rising interest rates and a falling dollar," says King, a process that is already taking place.

On Wall Street shares have gone through the roof. "Oh yes, share prices are absolutely crazy", declares Prof Tim Congdon, managing director of Lombard Street Research.

While it took the bench mark Dow Jones index 88 years from its launch in 1896 to crawl permanently past 1,000, it has needed only another 15 years to sprint from 1,000 to 10,000. In the Nineties alone, the longest bull run in history, the market has more than trebled!

With a price-earnings ratio of more than 35 times and an income yield of just 1%, Congdon says, Wall Street "is just not expensive: it has never been remotely like this before." Internet shares have in particular entered the twilight zone. eBay, the online auction company floated last year with a share price of $9, has rocketed to $190 per share, a price-earnings ratio of 3,762. One "expert" has predicted a steady rise for the next twenty years, bringing out a book entitled Dow 40,000!

At the time of the South Sea Bubble in 1720, Sir Isaac Newton, who lost more than £621,000 in today's prices, sighed: "I can measure the motions of bodies, but I cannot measure human folly."

Classic bubble

It is a classical bubble, agrees Prof J. K. Galbraith, author of 'A Short History of Financial Euphoria'. "When you hear it being said that we've entered a new era of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover", says Galbraith.

"Let us not assume the age of slump, recession, depression, is past."

Incredibly, this view is now shared by the extreme right wing monetarist Milton Friedman, who believes that the world is on the verge of a new 1929 crash. In an interview with Germany's Handelsblatt newspaper, he says that the USstock market exhibits uncanny parallels to the market of the 1920s before the Great Crash of 1929, as well as similarities to the Japanese market in the 1980s before the collapse there.

"The US stock market exhibits some of the characteristics of a bubble," said Friedman.

"If this turns out to be true, then the United States will experience a deep collapse of the stock market. That would be a true danger for the continuation of the unusual economic expansion of the past nine years."

No speculative bubble has ever broken gently. From the Tulip Mania of the 1630s to the South Sea Bubble, through the Railway Mania of the 1840s to the Wall Street Crash of 1929, and from the Japanese crash of 1990 to the S. E. Asian crisis of 1997, all have had huge economic ramifications. The present bubble on Wall Street is the biggest speculative bubble in history, with all the consequences that goes with it.

US economic cyle

Alongside this, the economic cycle has entered its ninth year in the United States. It is the longest boom of the post war period. It cannot last indefinitely. The signs are at present that it has reached its peak. Profits have begun to fall. Overproduction has appeared or is developing in a number of sectors, notably in agriculture, steel, cars, and computers. Whatever comes first, a world slump beginning in the USA, or a market crash that will bring down the economy is hard to say.

The signs of a revival in S.E. Asia and in Europe are being heralded as a turnaround for world capitalism. But the underlying problem of overproduction still remains, and will be exacerbated with these countries struggling to sell their cheapened commodities on the world market. With the scarcity of markets, competition amongst the international monopolies and the trading blocs has already reached cut-throat levels. This explains the trade conflicts between Europe and America.

The coming slump will shatter any revival in Europe or Asia. It will certainly blow a hole in the British economy, and with it the pro-capitalist policy of the Blair government.

Slump and crisis is endemic to capitalism. Only socialist policies can resolve the problems facing the working class here and abroad. A socialist Britain would take the economic power out of the hands of the bankers and capitalists, and put and end to the anarchy of the market. It would be a beacon to workers in crisis-ridden Europe and throughout the world. That is the only alternative, as envisaged by the pioneers of the Labour movement, to the barbarism of capitalist crisis, mass unemployment, poverty and war.