The illusion of economic boom unravels

For years the media painted a rosy picture of the state of the American economy. Today all the hype about never-ending prosperity seems a distant memory. The myth of the “new economy” and the “end of the business cycle” has unraveled. The media is full of stories bemoaning the deteriorating economic situation. Officially the country isn’t yet in recession, although there are few economists that hold fast to this view. Elsewhere around the world, the situation is not much better with increasing signs that world capitalism is heading towards a new global, open recession. The situation is actually a lot worse than they would want us to believe.

A worldwide crisis

Capitalism has been in open economic crisis for over 30 years, going through a series of more and more devastating open recessions followed by short-lived recoveries. The devastating effects of this ever-worsening crisis on humanity as a whole are immeasurable. Under its blows what was called the third world collapsed during the 1970a and early 1980s. Then came the collapse of the so-called socialist countries -actually nothing more than a particular form of state capitalist systems - at the end of 1980s and the beginning of 1990s. Contrary to the bourgeoisie propaganda that relentlessly extolled the wonders of capitalism, the last decade has seen the world economy to sink even more into the abyss. The most powerful economies in the world, in the heart of capitalism, have been finding it increasingly difficult to push the worse effects of the crisis onto the peripheral countries of the system. In fact, the so-called recovery following the recession of 91-92 was the weakest since the beginning of the open economic crisis at the end of the 1960s. With the exception of the US, the other powerful capitalist countries have not been able to point to much to back up their claims of prosperity. Western Europe has had at best anemic rates of growth, while Japan has not been able to revive its economy for the last ten years.

Currently, with Japan’s continuing economic decline, and the US plunge into a new recession, world capitalism is heading towards new convulsions, and we are already seeing their first manifestations: the Asian economies, still suffering after the 97-98 financial crisis, are reeling under the impact of the troubles in the US and Japan, Europe is slowing down, while in Latin America, the three most important economies -Argentina, Brazil and Mexico - are facing increasing difficulties. Of these countries, Argentina is already officially in recession, while Brazil seems headed towards a new round of hyperinflation. Since January 1, the Brazilian currency, the real, has fallen 10 percent. Mexico, with 89 percent of its exports headed for the US, is uniquely placed to be affected by American economic troubles.

The end of the illusions in the US

We have frequently published articles in Internationalism unmasking the myth of a healthy American economy during the decade of the 1990s. We have shown that what the bourgeoisie portrayed as the “longest running recovery in history” after the 1991-92 recession, was based on a sickly growth that in the long run was bound to lead the economy into new convulsions. To start with, the American bourgeoisie was able to overcome the worst effects of 1991-92 recession thanks to an aggressive monetary expansionist policy leading the Federal Reserve to cut interest rates 33 times between 1991 and 1992. This cheap money was the secret of the economic growth fueled by the so-called thecnological revolutions, which together with a massive wave of lay-offs and permanent insecurity of employment, gave the US an important competitive advantage over its commercial rivals.

This growth began to lose its momentum after 1995 with successive financial crises that culminated in the “Asian flu” of 1997-98 and stagnated between 1996 -98. At that time the American bourgeoisie was able to avoid a new fall into open recession by resorting to an historically unprecedented speculative bubble. Playing in the casino of the stock market was turned into the “only profitable investment.” What is worse this investment was not directed towards classical industrial enterprises, but towards the infamous dot-coms, most of which never turned a profit. Families and businesses in America were pulled into the aberrant mechanism of taking out debt in order to speculate on the stock market and using the acquired stocks as collateral to fuel domestic consumption. This form of investment ruined businesses and led to a 300% rise in the level of debt between 1997 -99. Following a period of positive savings levels for 53 years, since 1996 savings levels have been negative. At the same time, the American balance of payments suffered a spectacular degradation, going from a deficit of -2,5% of GDP in 1998 to -4,7% by the end of 2000.

The speculative financial bubble finally burst last year, sending the economy into a tailspin, the first consequences of which we are seeing today. Economic growth has gone from a 7% annual rate in the last half of 1999 to a 1.8% annual rate in last six months of 2000. For the current year, according to the economic indicators that the bourgeoisie uses to measure the performance of its economy, the economic decline continues: GDP is running near zero, industrial production has declined for six months in a row, company bankruptcies are setting records, profits are falling… For its part the stock market continues feeling the pain of the burst speculative bubble. Billions of dollars of paper wealth had been wiped from the economy. And yet, for most analysts the stock market still remains overvalued, presaging that the worst is still to come. The illusion of easy riches that drove millions into the frenzied speculation on Wall Street has for many turned into a nightmare. Many have lost their life savings, others are overburdened with debts contracted in the hope of striking it rich in the so-called ‘new economy.” Some former stock-option millionaires are finding their once lucrative stock options worthless after plunges in their stock prices.

As usual the working class is bearing the brunt of capitalism’s economic troubles. Lay offs are at the order of the day in every sector of the economy. In the “new economy” sector itself the job cuts that began last year at the now-disintegrating dot-com firms have widened considerably to include some of the most prominent technology firms, including chip giant Intel Corp. and networker Cisco Systems. Since December the tech industry has shed more than 38,000 jobs, according to government statistics, and thousands more layoffs are expected. The slowdown in the tech industry is symbolic of the collapse of the economy because it has contributed more than one-third of the US economic growth in the last three years. Kodak has just announced a further cut of 3,500 jobs on top of the 23, 000 that that it has eliminated since 1997. Texas Instruments is laying off 2,500, 6 percent of its work force. The Timken Company will cut 1,500 jobs. Experts say all this bad news hasn’t really shown up yet in government statistics, partly because companies have yet to carry out all their planned cutbacks.

The American dominant class is doing its best to manage this new descent into the abyss. The Federal Reserve has started a new aggressive expansionary monetary policy cutting interest rates already three times this year, while tax cuts are being considered by the central government. However after years of the abuse of the drug of credit, the margin of maneuver of the bourgeoisie has been greatly diminished. There is not much enthusiasm being shown by the bourgeois economists themselves about the chances for an immediate economic revival. By their own account, things will get worse rather than better.

From the working class perspective there is only one response to the worsening economic crisis: fight on its own terrain for the defense of its class interests and for the final overthrow of capitalism.

ES, 15/05/01.