Continuing crisis is the nature of capitalism



(This blog has been edited for clarity on November 11, 2014. The new version was also published on the Unite Union  blog.)

The decision of the US Federal Reserve to end its programme of “Quantitative Easing” signals a desire for a return to monetary “normalcy” in capitalist policy circles. The announcement was made on October 29, the anniversary of the 1929 crash on Wall Street—triggered by a previous series of monetary tightening measures by the U.S. central bank that ushered in the Great Depression of the 1930s.

But the world capitalist economy today stands at a critical juncture that is far from normal.

Stagnation is the order of the day across Europe. Output remains two percent below the peak reached in 2008 before the financial crisis and great world recession. Investment remains 15 percent below 2008 levels. The European central banks and governments are now instituting their own forms of monetary loosening after years of austerity in an attempt to jump-start the economy and escape a deflationary spiral. A similar picture exists in Japan.

A classic crisis of overproduction

The world economic crisis of 2007-09, a classical capitalist crisis of overproduction, was by far the worst since the crisis 1929-32. Like all such crises it was preceded by an explosive growth in credit as the capitalists sought to escape the basic laws of economics and produce more commodities than the market could absorb. But in the end, interest and principal must be paid and when it cannot interest rates rise, the bubble bursts, credit contracts and the economy enters a new recession. Capitalism has had this process repeat itself regularly for nearly 200 years, and yet the pro-business economists and media commentators always seem surprised.

Before the latest recession, the US economy had benefited from the Asian financial crisis starting in 1997, which saw a flow of funds to the US that pushed interest rates down to near-record lows. This fuelled the credit expansion in the U.S. and other imperialist countries even more dramatically than would have been possible otherwise. Those funds fed the series of economic bubbles that preceded the great crash—for tech stocks, the share market more broadly and finally housing. The collapse of the housing bubble threatened to bring down a number of large banks and financial institutions and a collapse of the banking system itself. The overproduction crisis was revealed for all the world to see. There were simply too many houses, cars, and other commodities to be sold—too many to be sold at a profit, not too many in terms of human needs.

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The major capitalist countries were forced to spend trillions of dollars, euros and so forth to save the banks and other financial institutions from collapse.

The Fed’s electronic printing press

Quantitative easing for the US was essentially the electronic equivalent of printing by the US Federal Reserve of some $3.5 trillion over the last six years to purchase government and mortgage bonds. This unprecedented measure was designed to achieve two main objectives. The first was to shore up threatened financial institutions and prevent a further downwards spiral of the economy. That was achieved. But the continuation of quantitative easing after that point to try and force feed the economy to grow faster does not appear to have been much of a success. Growth has remained sluggish.

Because it possesses the only truly world reserve currency (and backs up the dollar with a military budget equalling everyone else in the world combined), the US is in a privileged position compared to other countries. When dollars were badly needed as means of payment during the 2008 panic, the US was able to print them on an unprecedented scale without a disastrous inflationary devaluation. In fact, initially the dollar actually gained in value.

The European banks and governments don’t have this privilege. Rescuing their banks required expanding already large budget deficits, and those deficits had to be financed with bonds issued and sold. This was the origin of the so-called “sovereign debt crisis” that hit European countries when hedge funds and other money capitalists who buy these bonds demanded ever higher interest rates to matched the perceived risk.

The tyranny of the bond market

Through the sky-high interest demanded, the bond market was in effect insisting that these governments impose austerity programmes of cuts to basic social services, layoffs of government workers and cuts in their pensions if the governments wanted ever again to earn the right to borrow at “normal” interest rates from these vultures.

From the capitalists’ perspective, they have achieved their goal. Every government imposed austerity and so has been rewarded with sharply lower interest rates, except for Greece, where the interest rate has fallen but is still at an unsustainable (in view of tax revenues) 7.6%. However, the huge state debts that are a legacy of the costs of the bank bailouts that many European countries are now saddled with mean that when the next crisis hits they will be in an even weaker position in the face of demands of the “bond market”.

The threat of deflation

The economic consequences of years of austerity in Europe are now threatening to throw these economies into a deflationary spiral and renewed recession even before escaping the last one. Currently, Europe and Japan are trying to defeat the deflationary pressures by easing credit conditions and taking other stimulatory measures. This has the perverse effect of exporting the deflationary pressures to the US. The “stimulatory” measures are seen as undermining the currencies, causing capitalists to move their money to the US, viewed as the safest haven in troubled times.

This raises the “value” of the US dollar in gold terms (dollar price of gold falls) while inflating dollar-denominated assets like stocks and bonds, which are being bought by the foreign money capitalists, other investors, and corporations buying back their own shares. The flight into the dollar has a destabilising impact on the US (and world) economy which is certain to be amplified by the end of the Federal Reserve’s quantitative easing.

The rise in the dollar’s value against both the Euro and gold, combined with the slowdown in China and stagnation in Europe and Japan has produced a major decline in commodity prices. New Zealand capitalism feels this most keenly in dairy prices. But the Reuters/Jeffries index of overall primary commodity prices, almost entirely denominated in dollars, has dropped over 40% since 2008.

The industrial cycle

The US economy has got through the worst—crisis—phase of the industrial cycle, in which capitalist profits fall sharply or turn into losses, production is sharply cut back, and unemployment soars. The “depression/stagnation phase” that followed the crisis has given way to a phase of what Marx called “average prosperity”. A new “boom” can take hold only after more “excess capacity” is eliminated and a new wave of accelerated investment in productive capacity gets underway.

A period of depression/stagnation is a necessary phase of the industrial cycle. Given the fact that the crisis is ultimately a crisis of overproduction, before capitalist profitability can recover the overproduction must be eliminated if conditions favorable for the realisation of surplus value contained in commodities is to be restored. In the first place, that means eliminating accumulated inventories.

But real progress comes when new investment in factories, mines and other means of production once again becomes profitable. At that point industrial corporations and the banks will say it is time to start investing/lending all this money they have been accumulating over the stagnation/depression phase of the cycle or be left behind. At that point production will inevitably race ahead of the more slowly growing market. Credit will be expanded, but as that expansion reaches its limits not all commodities will be able to be sold at a profit. The boom will turn into a bust. If the usual 10-year cycle holds this time, then the next recession can be expected around 2017, give or take a year or so.

The threat of inflation

However, here we come to another risk in the system. The banks have accumulated trillions of dollars in reserves as a result of quantitative easing. The banks have also been encouraged to hold on to their excess reserves through the decision by the Fed to pay 0.25% interest on those reserves. After coming close to total collapse when the housing bubble burst, the banks have also greatly tightened lending standards on their own, at least for the time being.

Industrial and commercial corporations also hoarded funds during the depression/stagnation phase of the cycle. If they and the banks were to suddenly become bullish about the economy and draw all those accumulated funds into circulation through productive investment and lending, an inflationary explosion will likely ensue. The last time such an explosion in the US occurred, in the 1970s, the Federal Reserve under Paul Volcker was forced to raise interest rates radically to break the resulting inflation and threatened collapse of the dollar. Dubbed the “Volcker Shock”, the Fed cranked up the rate for inter bank loans—currently between 0% and 0.25%—to an astronomical 20%.

The current flight out of the euro, yen and other currencies into the dollar and resulting low interest rates could again lead to new bubbles that burst and a new crash that threatens the banking system as a whole like happened in the 2000s after the Asian crisis.

Other risks abound. The Ebola crisis could get out of hand with negative economic and social consequences. Attempts to impose a US-led order in the Mid-East–the world’s main oil spigot—have brought only more and broader disorder.

Next cyclical downturn

Working people of the world are the inevitable victims of the continuing instability and crises that plague the capitalist mode of production. In the best-case scenario, the world will be entering a new world cyclical downturn around 2017 without experiencing a robust recovery.

The “recovery” in some capitalist countries like the US and New Zealand has enriched the 1%, while wages and salaries for most everyone else have stagnated. The feeble recovery in Europe and Japan could collapse into a double- or triple-dip recession. New stock and bond market bubbles are growing in the U.S that will inevitably burst. If the current US expansion gains real traction, the Fed will soon face a depreciating dollar and resulting inflationary pressures forcing interest rates hikes that could bring the current expansion to an end even sooner than 2017.

This is the future capitalism has in store. It is a system that must be replaced. That is the task of the working class leading the oppressed of the world; we are the ones who have no stake in its continuation.



  1. Mike,
    Good post. -Check out ‘seventeen contradictions and the end of capitalism’ by David Harvey if you haven’t already.
    ‘creative destruction’ is just a masochistic response to pavlovian conditioning regarding money.

  2. Very good article.You could have added a couple of things. The flight of capital from the Asian countries during the so called ” Asian crisis” that returned to the US creating a credit boom also had the consequence of devastating the Asian economies returning millions to dire poverty and causing Asian countries to look at their own financial systems – which in my understanding is behind the reason the BRiCS are currently setting up their own development bank and Russia and China are talking about withdrawal from the dollar as the reserve currency.
    Without the broad mass of people having reasonable incomes and spending power there will be no “recovery”. With the pressure on unions, wages and conditions and capital tied up in speculative property bubbles and banks rather than being distributed reasonably evenly, there will be no increase in demand. If people don’t have decent income levels there is also not enough tax being paid ( also pressure on social services costs) to service the huge debt levels either.

  3. That’s half an article surely?
    The second part will describe an alternative system that will ensure the incredibly complex and diverse human economy will run in perfect harmony and balance?

    • That was my thinking too.I have waded through a long explanation of what is happening to world economies, yet in the last two lines no alternative system is proposed. Yes we,the average punters, are not well served by present financial manouvres, so what is the answer?

  4. Hi,

    We can’t bring “the system” to an end. Capitalism is the only system we have. What we have to do is start using it more wisely so that it benefits everyone.

    One of the measures that was proposed by Labour to ease house prices, the capital gains tax on second houses, would have done a lot to help. House prices would have fallen or at least stopped rising so quickly, capital woul have flown into businesses instead of bricks and mortar, and jobs would have been created. But now I guess it will be a long way off, not because it was economically unsound, but because National has simply declared it a new tax and is opposed to any such thing. It was a political own goal in my view, especially when we seem to be heading into choppy waters with dairy prices plummeting which will make balancing the books harder. Shoot the economy in the foot to gain votes.

    Likewise steeper progressive taxation is unacceptable to the nats. But again, while you might argue that high company tax rates stifle productivity, high personal tax rates at the uper incomes don’t have the same effect and they can funnel money into other areas to create a better, fairer and healthier society. But have any of the nats even read The Spirit Level?

    What we need is a way to unhinge politics and vote gathering from economics. Because as long as we continue to let votes decide economic policies, we will be unable to make hard economic decisions.

    Triple bottom line reporting will also help, but I don’t see any party supporting this.

    Cheers, Greg.

  5. I don’t know anyone who doesn’t have an opinion on how Capitalism could and should change for the better, but it would be nonsense to suggest that there was anything even remotely resembling a threshold for revolution building.

    The fact is that for all it’s faults, Capitalism has been extremely effective at raising the quality of life for workers over the last 200 years, and so the vast majority of workers would not support the dismantling of the current system – unless there was an utterly compelling case for an alternative.

    There is no such alternative at present.

    Look I know it’s been a long time in the wilderness, but IMO the increasingly bitter note on the Left is only further damaging the cause. Spending time on the Left at present is about as enjoyable as being mauled by a rabid Pitbull.
    All this OTT dystopian hyperbole and talk of imminent revolution only further alienates the very people who we need to regain an active role in Govt.

    Mr and Mrs Middle have a clear logic path to follow….
    I want change, but I’m actually quite comfortable and so do not want total change.
    Especially without a credible alternative system to move to.
    Mike and others on the far left have a world view that is seriously out of sync with mine.
    Mike is a Union Leader.
    Unions have a major influence on the Labour party.
    I don’t want Mike and his like to have a major influence in Govt.
    I think I’ll vote National.

    Time for the Left to pull itself together and start projecting a unified, positive and constructive message again?

  6. It is the nature of capitalism that for the capitalist there is NEVER a crisis. It is ever only a crisis for the “capital” that is human labour, and with that human beings!

    As we are seeing at present, capitalism is anything but “dead”, it is alive and kicking, and kept alive, especially by John Key and his government, and associates. The GFC was “managed”, so the merry lot continue with the gambles and profit hunting, and the socialisation of debt is assured, as always.

    The FOOLS (the common people that do not get the whole picture) are kept “entertained” and distracted, with endless social and MSM media entertainment and dumbing down, and nobody is worried, until the shit really hits the fan, that is when it is all too damned late, to prepare for a truly “managed transition”.

    Prepare for disaster, real massive disaster, dear friends, and I do not even want to mention global climate change, the world is largely asleep at the wheel re that.

    Maybe the bible was right after all, with armageddon and more, I am in disbelief, but humans are the most destructive, most incapable species on the planet, to be in harmony with nature, there is endless conflict, no harmony at all.

      • Quite obviously not capitalism to these people. I suspect they think something like the Bolivarian revolution started by Hugo Chavez in Venezuela is a viable alternative. They completely miss the point that there is nothing new in what is happening there and nothing different in terms of outcomes. The economy of Venezuela is slowly grinding to a halt due to same inherent flaws in hard left economic thinking.

        • The economy of Venezuela is slowly grinding to a halt due to same inherent flaws in hard left economic thinking.

          Or, just as likely, economies that decide to adopt an independent stance from the Washington Concensus are themselves isolated and starved of economic contact.

          Much like the US embargo on Cuba has created untold harm to that country’s economy.

          It’s called economic sabotage, Gosman. Look it up. Educate yourself.

          • Even if that were true (which it most certainly isn’t) then it would be a powerful argument not to attempt any radical policies until the power of the Capitalist in places like the US are broken first. mall countries like New Zealand will be eaten alive if they go it alone with the srt of policies promoted by Venezuela.

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