As I write, the New York stock exchange index fell to its lowest level in six years as the big financial institutions and investors in company stocks slipped into the depth of despond about the state of the world capitalist economy.

And these investors have every reason to feel depressed. The world economy, by most estimates from the major international institutions, will contract this year for the first time since the 1940s. And by the world, they mean everywhere, not just in the advanced capitalist economies. 

Effects of the last Great Depression: 'Breadline' sculpture at the Franklin D. Roosevelt Memorial in Washington, DC. Photo by Tony the Misfit on flickr.

But forget the investors. It is the working class of the world who will really suffer. Globally, the UN estimates that unemployment will reach 220m this year. Out of a global workforce of about 3 billion, that’s only 7%. But this figure leaves out millions of hidden unemployed who just cannot even begin to look for work. And as a percentage of those working in sweat shop and factories around the globe, it is more like 20%.

China is now slowing to an official real GDP growth rate of just 5% a year from 11% last year (and in reality is probably hardly growing if the measure of electricity consumption by businesses, factories and homes is anything to go by). 

It’s the same story across the rest of Asia. Japan has just announced that its economy shrank by biggest amount in 27 years in the last quarter of 2008.  Singapore and other south-east Asian economies are also diving, as their exports to Europe and the US screech to a halt.

The worst-hit are the former ‘Communist’ countries of Eastern Europe. Having thrown in their lot with capitalism after the collapse of the Soviet Union, the ruling elites of these countries must now explain to their people why their economies will contract by as much 10% in one year! 

Even more disastrously, many of these countries (Hungary, Poland, Czechs, Romania, Bulgaria and the tiny Baltic states) had promoted a huge property boom similar to that in the US, the UK and parts of Western Europe.  People, thinking they were now to benefit from the fruits of capitalist progress, took out huge loans, but not in their own national currencies, but in cheaper foreign currencies like Swiss francs, euros and even Japanese yen. 

That has now backfired badly. As their national currencies have plummeted in value, by over 30% in just the last few months, the cost of paying their monthly mortgages in euros etc has rocketed. So many people are losing their jobs and their homes at the same time.

Of course, the locus of this economic slump, the deepest since the 1930s, was in the biggest capitalist economy (‘the greatest country in the world’), the United States. This huge economy, producing around $14trn a year in output value, is now falling back at a rate of 5% a year. Unemployment is racing upwards, millions of homeowners face the threat of eviction, wages are being cut and the value of pension funds built up by millions of working people for their retirement have been cut by 40%. 

In desperately trying to bail out the banks and financial institutions that triggered this crisis, the Obama administration is ploughing trillions of dollars of state funds and paying for it by increasing the public sector debt to 100% of annual output.  The cost to the taxpayer is twice the size of the cost of the Vietnam war and approaching half the cost of World War 2!  Down the road, working people will not only have to pay for this capitalist mess through job losses, wage cuts and home foreclosures, but also through sharply increased taxes to pay for helping the bankers.

It’s the same story, only worse, in the UK. The property slump (with home prices heading for a cumulative 40% fall) has made a joke of old Thatcher slogan of a ‘property-owning democracy’. The stock market slump in the City of London has been just as big as in the US – again making a cruel laugh of the stock market boasts of the privatisation era of the 1990s.  Remember, we were told by the sellers of state assets, that we could make profits by buying all those shares, and even more by getting shares for free if we agreed to allow building societies to become banks; banks to become real estate agents; and retailers to become mortgage lenders. 

Now the value of the biggest building society in Britain, the Halifax, is zero, swallowed up in the semi-nationalisation of the banking system.  British Telecom, once the state-owned telephone company, privatised in the 1980s and revamped in the 1990s, is now virtually bust in this crisis.

The UK economy is contracting by up to 4% a year and will have the worst economic performance in 2009 of all the top seven capitalist economies – so much for New Labour’s (in particular, Gordon Brown’s) boast that the ‘boom and bust’ British economy was over under their stewardship. New Labour has been even more naïve about the credit crunch and even more ‘in denial’ than the Conservative opposition. 

Overnight, from being the standard bearer of the ‘free market’, offering minimal regulation of the City of London; favouring a reduction of taxes to big business; and a major supporter of privatisation, Gordon Brown has become a fervent supporter of Keynesian policies of public sector spending and borrowing; of the regulation of the banking sector; and wanting to ‘control’ the huge bonuses paid to the top executives in the City; and even applying virtual nationalisation of failing banks.

What hypocrisy and idiocy! Gordon Brown used to argue that British capitalism, with the right policies adopted from America, could be made to expand ‘endogenously’ without slumps or ‘cycles’. That was the theme of his main economic advisor, Ed Balls, now in the government.  Now Mr Balls tells us we are in the worst economic slump for 100 years! 

And what of the bankers who kicked this all off with their greed? The heads of the British banks recently went to parliament to explain how this had all happened. They started off by saying they were very, very sorry….but.  But there was no way anybody could see this was going to happen.  It was like a tsunami sweeping away all their clever plans and investments overnight. They told the politicians it was a chance in a million that nobody could have predicted, just as nobody thought there were black swans in the world until Captain Cook got to Australia in 1780. 

The same excuse was echoed by Gordon Brown at the G7 finance ministers meeting before he had an audience with the pope (I hope they both prayed hard!): the crisis was like a hurricane that came from nowhere.

According the head of ‘Financial Stability’ at the Bank of England, the bankers did not see the credit crunch coming because their ‘risk models’ only went back ten years and did not take into account that capitalism has had slumps before that!  Indeed, the banks’ risk models said that the chance of what has now happened was once in 13.5 billion years. As scientists currently reckon the universe is about that age, that means what has happened to the British and world economy in the last 18 months, according to the bankers, was impossible!!  So much for risk models and stable capitalism. 

Of course, all these explanations are really pathetic excuses. There were a few voices even among capitalist strategists, apart from Marxists, who forecast the calamity that was coming from the massive expansion of ‘fictititious’ capital in form of cheap credit, rocketing property prices, ever-expanding stock market prices that were not matched by any equivalent expansion of real production values. But those voices were swamped by the screams of ecstasy from bankers with their big bonuses and from rich investors with their rising wealth in property and shares.

Now, whether it is the bankers, the investors, the regulators or the pro-capitalist politicians, they are all screaming murder, while at the same time, saying it had nothing to do with them and could not have been predicted or avoided. 

And all the dirt and sleaze is now crawling out of the woodwork. The workings of capitalism are full of theft, swindles and cheating. But they are often hidden when all seems well and everybody is making money. But now it is the opposite, some of the swindlers are being found out, like scum coming to surface of stagnant water. 

Bernard Madoff is an eminent New York financier. He had investment funds that you had to be invited, as a rich person, to invest in!  He had been head of the New York stock exchange’s regulation committee. He supported with funds many politicians and arts centres. He is the very epitomy of capitalism – a crook. Every year he was able to provide his clients with regular 10%-plus gains on their investments, whatever the fluctuations of the stock market. How was this brilliant work possible? Well, we now know it was a swindle.

Bernard Madoff, responsible for the biggest swindle in the history of the world. Photo by Chattanooga Endeavors, Inc. (CEi) on flickr.

Madoff was using each new amount of money invested to pay back the existing investors when they wanted their money.  Of course, many did not ask for it back and happily received their annual accounts showing their gains (these were completely phoney). Using new money to pay old is called a Ponzi scheme, after the man who first adopted this form of swindle.  Once the credit crunch began, more investors needed their money back and suddenly Madoff did not have enough new investment money to cover paybacks.  Eventually, he owned up, claiming that he did it all on his own for over 30 years to the tune of losses worth up to $50bn – the biggest swindle in the history of the world!

Many so-called ‘financial experts’ had invested client money with Madoff because as experts they knew he was good.  The British ‘superwoman’ financier, Nicola Horlick, had told her investors that Madoff represented exactly the sort of expertise that people like her provide and justified why he and she should be paid mega millions in fees and bonuses.  Her advice has led to losses of $70m for her clients. This is yet another reason for never believing anything a capitalist expert tells you!

One fraud usually leads to another. The Madoff collapse has meant that other dodgy financiers who had invested with him were also exposed. ‘Sir’ Allen Stanford is a Texan billionaire who has a set of banks across the Americas and is the biggest employer in parts of the Caribbean, where he has become a major sponsor of cricket, the sport of the British Empire.  Cricket organisers in the UK and the West Indies have fawned over him for his money; while poor Antiguans depend on him for jobs and their savings. Now Stanford has been cited by the US Securities and Exchange Commission for a similar Ponzi-type fraud worth up to $8bn. Investors and savers around the Caribbean look like losing all their money too.

Allen Stanford (left), cited by the US Securities and Exchange Commission for a Ponzi-type fraud worth up to $8bn

As capitalism descends deeper into slump, it is not just all the ‘fictititious’ capital that is being destroyed. Capitalism can only reach a bottom if it also destroys the value of real capital too. In order to restore profitability for capitalist industry, workers must be sacked and wages cut to lower the cost of what Marx called ‘variable capital’ and the factories must be closed and businesses put into bankruptcy in order to reduce the cost of what Marx called ‘constant capital’. 

Once production costs are cut back significantly, then profitability will stop falling. After all, there will still be businesses left, there will be still workers in jobs and there will still people with homes – just a lot less of them. Then the world capitalist economy will start a slow and painful process of recovery.

When will that be?  How long is a piece of string?  Most capitalist slumps last about 18 months or so. This one began somewhere in the first half of 2008.  So it will likely not reach a bottom before the end of this year. But this crisis is way worse than any capitalist slump that we have seen since the 1930s – and it could be worse than that. So it could well last beyond 2010. 

That would especially be the case if each national capitalist economy starts to turn on the others to protect itself.  ‘Globalisation’ was the theme of the 1990s, where national capitalist states combined to reduce trade barriers and allow the ‘free’ movement of finance. Now the trend is towards the protection of national interests. Barack Obama talks of a ‘Buy America’ campaign and Gordon Brown bellows for ‘British jobs for British workers’ in a feeble attempt to curry votes.  What Brown was really offering was ‘British dole for British workers’.

Neither free trade nor protectionism will save living standards under capitalism. But that is another story that we will return on another occasion.

February 20, 2009

• The crisis of world capitalism is gathering speed by In Defence of Marxism Editorial Board (December 17, 2008)
• The Crisis: Make the bosses pay! - Manifesto of the International Marxist Tendency by International Marxist Tendency (November 4, 2008)