Wednesday, 20 January 2016

Capitalism in Crisis Again – Are we on the Brink of another Recession?

Stock exchanges all over the world were in sharp retreat today, with billions of dollars knocked off the value of shares, with Asian and European markets going officially into a ‘bear’ market, a fall of 20% from the level reached in April last year. The US stock exchange is expected to go the same way later today. Some market analysts are saying that this could well be worse than the 2008 melt down.

2008 is our starting point here, as you may remember, that recession was caused by an over inflated property market in the US and Europe, which was simply unsustainable, built on cheap and easily available credit (backed by the US government). This was necessary to maintain growth, as wages had been falling in the UK since 2003, and even longer in the US. At some point the chickens were going to come home to roost, and sure enough they did. The collapse was spectacular, and very damaging, and western economies have still not fully recovered to their 2008 level.

What was meant to happen was that the BRIC countries, but especially China, was going to provide the growth in the now interconnected world economy, to pull all other economies out of the slump. China now provides the bulk of manufacturing products in the global economy, and so was the prime candidate for getting the world back to economic growth.

There was a problem with this though, China needed to sell their products to somebody, mainly the US and Europe, but because wages continued to fall in the west, there wasn’t the market for what the Chinese were producing.

China countered this in a very western fashion, by inflating their own property bubble to maintain growth, but now whole new towns and cities in China are uninhabited, and property has crashed, just like it did in the US and Europe. This has put further pressure on the Chinese economy, as well as other factors which have pushed it to the brink of a massive crash.

Probably the main other factor, is the collapse in the price of oil. To some extent this has been caused by the flat lining or at best sluggish growth in western economies, producing a drop in demand, but also by more oil coming onto the world market from new sources, the Canadian tar sands and fracking in the US. Taken together there is only one way the price of oil would go, down.

This all conforms to the norms of capitalism, with its tendency to over produce, throwing the system into periodic (and it seems more frequent now) crisis. Firstly the over-production of financial credit for mortgages and other loans (credit cards etc), and then the over-production of a key product, oil, but other raw materials too, like iron ore and cement. All this with a global distribution system, cargo ships, to circulate these unwanted products around the world. So much so that even with the fall in the oil price, ships lie empty for lack of custom for their transported materials, and the downward spiral gets even worse.

What little growth there has been in western economies was boosted by the printing of huge amounts of money by central banks (Quantitive Easing), and the maintenance of very low interest rates on credit.

When the US raised interest rates last month, it looked risky with a fragile recovery of the global economy taking place. Now it looks positively foolish. Increasing the price of credit, to an already flat buying market, may have been the final straw which has tipped the world economy over the edge.

To reduce interest rates so quickly after raising them is something of a humiliation for the US, but they will probably have to do this. More importantly perhaps, Quantitive Easing can’t go on forever, and is useless anyway without a demand for credit in the system, which looks to be where we are heading.

Whilst this has been going on, rich individuals and corporations have of course got much richer, but for everyone else, this has been, and looks set to get even worse, very painful. It is hard to see what can be done from inside the logic of the capitalist system to get the problems rectified. But abandonment of the system logic is unthinkable by the elites who do so well out of it, even when most people are victims.

We the victims need to force a change on the elites, and only time will tell if we have the courage and organisation to do this? Perhaps it will get so bad that people will feel they have nothing to lose by ditching this crazy system, because that is when drastic changes occur. It is a sad thought, that we seem unable to make the connection between the economic system and all the damage that it causes, without having our noses thoroughly rubbed in the crap. But better late than never.  


  1. Not much to argue about, in fact mostly correct but would argue QE isn't money printing, in reality it's an asset swap between different Govt liabilities. Balance sheets don't change just type of asset held.

  2. "2008 is our starting point here, as you may remember, that recession was caused by an over inflated property market in the US and Europe"

    ... as indeed are all recessions. Predicted by those economists who truly understand how economic rent of land really operates.

    "China countered this in a very western fashion, by inflating their own property bubble"

    For "property bubble" re land speculation. Despite the Chinese Government owning all the land in China their system of leasing to rich individuals and companies with no rent payments for 40 or 70 years has led to rampant land speculation. Like all landowners the owners of these leases sit back and wait for tenants. They charge high rents and rely on increased land prices for their wealth to grow. Many Chinese millionaires and billionaires have made their wealth from land and natural resources - not from employing people in productive enterprises.

    China needs the Green Party policy of annual Land Value Tax (LVT) just as much as the UK. In fact if the UK Government adopted this policy and replaced taxes on production (income tax; vat; NICs etc.) with LVT then Port Talbot and other UK steel works would still be functioning as they are located on cheap land and their total tax bill (and hence their costs) would be much lower.

  3. Dave,
    If you fancy blogging, I'd be happy to post your work here, you have got some good ideas, and know how to express them.