The pundits of capitalism are talking up success. In the US, each piece of economic data is greeted with enthusiasm. All the ‘experts’ on the business TV channels and in the newspapers are crowing that the American economy is really motoring. The officials in the Bush administration grin with pleasure at all this talk of economic recovery.

And it is not just in the US that economic growth is on the lips of the apologists of capitalism. After 14 long years of stagnation and deflation, Prime Minister Koizumi of Japan tells his parliament that Japan is now growing even faster than the US. Profits are up and consumer and company debt is coming down. It’s all looking good in the land of the rising sun.

And indeed, at first glance, the economic figures seem to justify all the euphoria. In the first quarter of this year, the US economy expanded at an annual rate of 4.5%. Japan rocketed up at over 6%. Similarly average household incomes were reported to have risen at a 5% rate in the first three months of this year and as we complete the half-year, that rate has hardly slackened. And it is not just consumer spending. Jobs are coming back in the US and Japan. For three years, Japanese and American workers have suffered over 3million job losses as corporations cut costs and shifted factories and operations overseas to places like China, India and Eastern Europe.

But now in 2004, the jobs are coming back – so the figures argue. Since April, over 700,000 extra jobs have been created in the US. At the same time, the average wealth of the American, British and Australian households has risen as house prices continue to rocket up. Much of this extra wealth has been spent as families take out larger mortgages and spend the difference.

So the crisis is over? After the threat of major recession back in 2001, has the capitalist world turned the corner? Well, all is not what it seems. First, Europe is conspicuous by its absence from this tale of joy. In the heart of Germany, France, Spain and Italy, unemployment remains stubbornly high at anything between 8-15%. Economic growth is below 1% in Germany and barely above 2% in France or Italy. And in Germany house prices are actually falling despite mortgage rates below 3%! As a result, German and French households are tightening their belts. They are keeping control of their spending.

But that’s not the full story. The reality is that America’s prosperity is skin deep. In the heartland of America there is little sign of increased income, rising house prices or more jobs. Much of these most desirable things are to be found on the coasts of California or New York, or in the desert resorts of Las Vegas or Tucson. In Detroit, Cincinnati and Chicago, there is little joy.

The reality of daily existence for even so-called middle America or for that matter middle England is two parents working long hours in order to obtain sufficient income to get decent health insurance, good schools, a reliable car and pay for a big mortgage and the annual holiday. There is no end to this process for many families with children. US healthcare premiums have surged over 40% in the last three years and another 15% is in the pipeline for this year. And increasingly, there is the prospect of working until you are 70 in order to get a decent pension, now that contributions have been squandered in the stock markets by pension fund managers.

The prosperity that is talked about goes to the top only. Take the US. In the 1950s the chief executive of the average corporation earned about 40 times more than the average worker. Outrageous you might say. Well, in the year 2000, the average CEO earned 530 times the wage of the average worker. And even after the clampdown on corporate executive pay following the scandals of Enron etc., and the recession of 2001, CEOs are still ‘earning’ 250 times more!

Basically the working class of America has not benefited from the economic recovery since 2001. According to official figures, their share of total national income has fallen to its lowest level since 1951. Indeed, the average salary of a US worker dropped to $35,310 last year from $44,570 in 2001! And the workers of Indiana, Ohio, Illinois and the other big industrial states of the US still see no new jobs that can replace the ones they’ve seen disappear over the last four years, many of which have gone overseas to China, India, etc.

And there is no future for many older workers. Listen to this comment in a letter to the Wall Street Journal complaining about that journal of capitalism praising globalisation as benefiting all. “I am the son of an elevator operator and an A&P checker. The former job has been replaced by automation and the latter is being done by part-timers and high school kids, though the formerly retired are now competing for those jobs. Despite only nine years of Depression-era education between them, they were able to raise me and provide a decent primary education. Blessed with the abundant opportunity America offers, I was able, after an infantry stint in Vietnam, to be graduate from college and law school at night. We are losing those low-skilled jobs of my parents. Recently, I attended a Vietnam-vet reunion and 90% were blue-collar workers and farmers. They were terrified of globalisation. Now they are pushing 60 and have not been in a classroom for 40 years. Even assuming they had the energy, it would take two years of remedial classes, four years of college and two years postgrad to prepare to work in hi-tech, by which time many would be dead. So does globalisation mean that these people just have to work in WalMart?”

Apart from the grotesque injustice that global capitalism imposes on people who no longer deliver any profit for the owners of capital and have been thrown on the scrapheap with no safety net of support, what is revealing about this letter is the changing nature of the major capitalist economies. The US, the UK, Japan and most major European economies are now increasingly dependent for their prosperity not on the production of goods or the extraction of minerals, but on the earnings of ‘services’. And by services, we mainly mean financial and professional services. The US and the UK manufacture fewer and fewer TVs, cars, computers, clothes, food etc., and instead deliver legions of lawyers, estate agents, bankers and stock brokers. As one American financier admitted: “We are not becoming a nation of hamburger flippers but of stock and bond flippers. Between 1960 and 1980, the financial sector accounted for around 15% of total business profits. Now the financial sector contributes 45%!”

It was in the year 1956 that the US first reached the point where more people worked in ‘services’ than in industry or agriculture. Indeed, that was the first time in history that any capitalist economy did. Now industry in the US and the UK, in particular, employs less than 20% of the workforce. Over 70% of the newfound jobs trumpeted in the US over the last few months were in government administration (particularly ‘homeland security’), healthcare and office staffing.

The point is that never before has the financial sector come to dominate the economic engine of capitalism by so much. This rentier capitalism, as it is called, is parasitic. Financial profits may come from the labour of workers in banks, insurance companies, estate agents, stock brokers etc. But financial sales come from fees and interest charged to the productive sectors of the economy, manufacturers and transporters, increasingly owned by foreigners. Indeed, many of the manufacturers have turned themselves into banks as well. In 1980, 92% of General Electric’s profits were from manufacturing. In 2003, half its profits were from its credit division. It’s the same with General Motors and Ford.

We’ve often argued in these columns that the financial sector cannot drive an economy forward indefinitely. Without the manufacturing sectors creating new products that people can use to live, the financial sectors cannot make profits and employ all the people they do. Sure, some countries can become rentier economies (Switzerland or the UK), but only if others take over the reins of capitalist production to make new goods, like Germany and Japan after the war and now Korea, China, Mexico, Brazil and India.

But the really frightening story of 21st century capitalism is that this huge grip of the big financial sectors means that if they collapse, then the productive sectors will go down with them. Never in the history of capitalism has its future depended so much on the stock market continuing to rise. Any slump in the prices of stocks and bonds means the collapse of credit and with that the closure of real production. Capitalism is now so parasitic that it threatens to be paralysed.

And that is the danger of the next year or so. In a desperate attempt to sustain ‘prosperity’ and avoid a slump, the managers of capitalism have created the biggest financial bubble the world has ever known. Mr Greenspan at the Federal Reserve Bank in the US, the governor of the Bank of Japan and the President of the European Central Bank have driven up paper credit in the form of bills and loans. In the US it has risen from $4.7trillion in 1980 to $28.9trillion in 2001 and now to over $35trillion. This huge amount of debt is now three times the annual national product of the US.

American households and companies are managing to pay the financial sector its interest and repay its loans only because interest rates have been kept as low as 1%. With inflation at 2-3%, in effect the Federal Reserve Bank is ensuring that Americans can take out loans for free!

But now, interest rates are set to rise. Indeed, by the time you read this, the Federal Reserve Bank will have reluctantly agreed to hike interest rates by 0.25%. Elsewhere, the Bank of England, the Reserve Bank of Australia and the Swiss National Bank have already raised rates. So now that huge debt built up to keep capitalism booming is going start to cost the borrowers (house owners, corporations and governments) much more to pay back. This could spell the collapse of this financial house of cards.

Why are the banks raising interest rates when increased borrowing costs could threaten the financial sector and with it the whole capitalist economy? The problem is that inflation is coming back because the huge increase in credit is driving up demand for goods and services (particularly by workers in the financial sector) and the productive sectors of capitalism cannot match it with enough supply. The result is that prices are rising. That spells catastrophe for the profits of the financial sector. So they want to raise interest rates to restore their share of total profits.

The future of capitalism now depends on its parasitic financial sector. But its need for profit could actually destroy the golden manufacturing goose that lays the eggs of profit. Beneath all this talk of prosperity lies this fundamental paradox.