The fear of depression similar to the 1930s provoked US and other capitalist countries to pour in so much money. Estimates show that between July 2007 and March 2009, the loss of global wealth comprising equity and other asset prices was over $25 trillion or almost 45 percent of global GDP.
Along with massive stimulus, revival in the global economy began in the second half of 2009 with further upturn in the first half of this year. The huge profit was accumulated constantly by the banks amidst shoot up in the equity market prices. The International Monetary Fund’s (IMFs) July forecasts indicated that the global growth rate in 2010 and 2011will be around 4.6 percent and 4.3 percent respectively, higher than the pre-crisis period. But after hardly two months of these forecasts, IMF has warned that the downside risk has again surfaced. The receding in the growth rate in Europe and US has already taken place in this second half. Now, a new form of crisis is emanating from these countries with a more deep-rooted nature.
Three sequential developments reinforce such a possibility. One, the stimulus was mainly funded by mammoth budgetary deficits. In 2007, public debt to GDP ratio of 67 countries was about 80 percent. According to IMF, it will shoot up to 125 percent by 2014. More alarmingly, projections of Bank for International Settlements indicate that if present trends continue in the next decade, debt to GDP ratios will rise to 300 percent in Japan, 200 percent in the UK and 150 percent in France and the US. New trends thus point out that although stimulus helped to rescue the economies for the time being, the funding sources and their use point at yet another crisis. The colossal sovereign debt problem in Greece and other peripheral Euro Zone countries like Portugal, Spain and Ireland is a vivid example of this.
In the pre-financial crisis period, marked-led mammoth cheap credit expansion through whatever means created bubble in the economies which ensured appropriation of huge profit by the financial oligarchic, brokers and market manipulators. This ultimately became disastrous as already proven. What is interesting is that similar route of bubble creation was pursued to overcome the financial crisis as well. This time, it was under the state-led stimulus and bailout plans funded almost solely through deficit financing. Such means were employed this time to compensate or ensure huge profits to the same oligarchic, brokers and market manipulators.
The events and turning points unveil that so long as the financial oligarchy dominates and controls the political system, a cycle of bubble and bust will be a rule rather than an exception.
The problem this time reemerged because the stimulus and other means by and large ignored the deepening structural problems including systemic crisis in the financial system. As a result, despite so much outpouring of money, the revival of the economy could not gain momentum in a broadbased or sustained manner which, unlike the pre-crisis period, could have contributed to revamp the crisis-prone real sector. This could have helped to bridge the widening gap between the real value of the physical wealth and artificially-created value of the financial wealth that has been a major source of economic instability and crisis in the contemporary world.
Was it because the capitalist countries were unaware of this? The answer is flatly no. Most of the capitalist countries have now reached such a saturation point in the absence of new innovation amidst keen competition that without such a bubble-type route even for the time being, the overnight profit to the monopolists and speculators cannot be ensured which, as obvious, is a pre-requisite to run the present form of financial capitalism. A jobless recovery amidst fragile recovery base is the best example of this. Recent data indicate that in peripheral European countries, the unemployment rate ranges from 15 percent to 24 percent. Very recent data of US show that the unemployment rate has gone up to 9.6 percent from 9.5 percent a few months back. As an offshoot, the poverty rate has also increased in the US in the post-financial crisis period from 13.2 percent in 2008 to 14.3 percent now.
In the US, the saving rate is only marginally positive that too now amidst mammoth budgetary deficits. The deindustrialization is continuing since early 1970s with falling rare of profit in the real sector added by burgeoning of trade deficit. The economy, therefore, is relying excessively on the profits of the financial sector. The share of finance in total corporate profits went from less than 10 percent in 1980 to around 40 percent in 2007. This means that inherent contradictions and tradeoffs are manifesting. On the one hand, for the working of the present form of capitalist system, there is a need of ensured huge profit in the finance and banking system by any means and, on the other, that can not be a solution even from the medium-term perspectives so long as structural problems and systemic crisis in the banking system of above nature persists. How long deliberate attempt at skyrocketing of equity prices with artificially-created value followed by similar inducement to commodity and bullion market will make the present form of financial capitalism workable has now become a big issue for debate.
In such backgrounds, added by the fear of spillover in debt default, capitalist countries are now pursuing harsh austerity policies by phasing out stimulus packages. There is indeed a u-turn. Massive cuts in social programs, jobs, wages and pensions together with hiking of rates in the regressive indirect taxes are the main elements of the stiff measures. Thus, in a way to reduce deficit rapidly, they have now intensified reversing of social welfare schemes continued even in the heydays of neo-liberalism. Initiated from Greece to all peripheral countries of Europe, very strong asymmetry measures have already been introduced with strong resistance from the working class as well. Countries like UK and Germany have already announced big spending cuts. The US is also following the same path but with some dilemma. President Barack Obama during the election promised that big tax cuts made by the Bush administration to the richest will be reversed. Now tax cuts among the richest have already been started. Amidst criticism, a meager $50 billion has been announced to the infrastructure sector. This has been supplemented by a small business employment act with some tax cuts and loan facilities provisions. Apparently, today’s debt crisis emanating from the huge compensations made to the oligarchic and monopolists during the financial crisis period is now being recovered by victimizing the working class deliberately, at the same time awarding the rich through big tax cuts. In conformity with what a leading thinker David Harney said some years back, accumulation by dispossession has further intensified.
A very recent study by prominent political economists on Europe points out that austerity is compressing public expenditure and weakening private consumption leading to the collapse of investment and retreat of credit. It warns that worsening income distribution along with shifting of power from labor to capital is exacerbating the risk of recession. Indeed, unprecedented austerities are holding back basic social rights of the working class and lowering their living standards markedly. It is a process of depressing economies leading to enlargement of gap between haves and have nots coupled with intensification in economic crisis and class conflict. The events and turning points unveil that so long as the financial oligarchy dominates and controls the political system, a cycle of bubble and bust will be a rule rather than an exception.
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