Nos. 33 & 34, December 2002
Real Reasons for the US Invasion:
Even as the US prepares to launch an invasion of Iraq (and perhaps of other countries as well), its economy is trapped in a recession with no clear prospect of recovery. True to their character, the worlds giant media corporations have not seen it fit to explore the causal connection between these two outstanding facts.
No doubt the recession has been extraordinarily mild by historical standardsin fact, going by the narrow official definition and available data, the US economy is now out of the recession, and has begun to grow again. However, this upturn is illusory: all signs point to the US returning to recession soon, if indeed it has not done so already. Moreover, the official definition of recession is itself dubiousfor instance, there has been no real pick-up in employment during the so-called recovery. The US corporate sector knows the truth: corporate profits and business investment have experienced their steepest decline since the 1930s.
Importantly, the US is not alone in its fate: Japan has been stuck in recession for a decade, and Europe has now joined the club. Whereas, in the recent past, buoyant US demand was the motor pulling the world economy out of recession, today the US itself is in the doldrums and no other economy is taking its place as the demand-motor. Prospects for a global recovery are bleak. Indeed, the giant overhang of debt and excess capacity dictates that the recession must deepen.
Three years ago, economic analysts and the financial press were still celebrating the American economys seemingly endless capacity for growth. Alan Greenspan, the head of the US Federal Reserve (the American central bank), was treated as a media star for his genius in fine-tuning interest rates to avoid both inflation and recession. Some advanced the novel theory that new technology, continuous productivity growth, and globalisation had made the American economy recession-proof.
Crisis of overproduction in full bloom
The Tribune sees a swamp of excess capacity in airline, auto, machine tool, steel, textile, and high-tech industries, even commercial space and hotel rooms. According to the Federal Reserve, manufacturers are using only 73.5 per cent of capacity, far below the 80.9 per cent average of 1967-2001, and 3.5 percentage points below the level during the 1990-91 recession. In an effort to attract customers, airlines have slashed their fares to five-year lows; United Airlines, the second largest in the country, has filed for bankruptcy; and Boeing says its deliveries of aeroplanes will be down 28 per cent this year.
The telecommunications industry took on $2.1 trillion in debt between 1996 and 2000 and jacked up investment by 15 per cent per year in real terms (Robert Brenner, Enron Metastasized: Scandals and the Economy, Against the Current, Sept.-Oct. 2002). Each firm tried to steal a march on the others, on the basis of projections of a massive growth in demand. By 2000 the telecom industry accounted for a quarter of the increase in the US economys equipment spending. Today the world has 39 million miles of fibre-optic lines, and telecom networks are operating at three percent of their capacity.
Despite 45 semiconductor fabricating plants having shut down in the US, the American semiconductor industry is said to suffer from 15 per cent overcapacity. This figure is set to rise: apparently China has just built some of the largest advanced semiconductor plants in the world.
The US automobile industrystill the most important industry in that countrycan produce two million more cars than it can sell. The big three manufacturersGeneral Motors, Ford, and Chryslerare dealing with the collapse of demand by financing customers at zero per cent interest. Sales are projected to fall from 17.5 million last year to 17 million this year and 16.5 million next year. Ford is planning to slash production by 16 per cent, or 900,000 vehicles, by 2004, shutting five plants and slashing 12,000 jobs.
Under monopoly capital the build-up of overcapacity doesnt immediately result in a cutback in investment. Indeed, firms are driven to invest on an even grander scale, to outspend their rivals and thereby grab market share away from thema strategy pursued by all the firms, with predictable results. In 1998 the world automobile industry, the largest manufacturing industry, could make 18 million more cars than it could sell, and Japanese car makers were running at 50 per cent of their capacity (Economist, 10/5/98); that gap has risen to 20 million. Automobile giants have been setting up plants in their rivals countries the better to penetrate their markets.
Investment now not responding to stimuli
Even more unsettling, says the Tribune, is the fact that falling pricesor deflationhave taken hold in the manufacturing sector. Prices of goods have been dropping as a global excess capacity has developed. There are some indications that deflation is beginning to spill over into the services sector, in areas like retail trade, which is indirectly related to manufacturing. The U.S. hasnt had a generalized deflation since the Great Depression in the 1930s. In a deflationary environment, people postpone purchases in anticipation that prices could be lower in the future. Demand drops. Profits spiral downward. Jobs are lost. Retrenchment sets in.
Unemployment rose from 3.9 per cent in September 2000 to six per cent in November 2002, and wont fall for foreseeable future. Three million jobs have been slashedtwo million in manufacturing. The vast excess capacity means that even the slight pick-up in growth hasnt translated into more jobs. A year ago, there were one million people who had been unemployed 26 weeks or longer; now there are 1.7 million. The retrenchments are particularly large in the new economy sectors: Brenner points out that In the very brief period between the end of 2000 and the middle of 2002, as more than sixty companies went bankrupt, the telecommunications industry laid off more than 500,000 workers, which is 50 per cent more than it hired in its spectacular expansion between 1996 and 2000.
Not to worry, says the Federal Reserve. More interest rate reductions are on the way. But by now, says the Economist (28/9/02), the Fed has shot most of its ammunition: with interest rates and inflation already so low, there is little room for further easing if the economy stumbles. That raises the spectre of falling prices, which would be devastating in an economy so awash with debtas the value of assets for which people have borrowed plummet, this sets off a devastating chain of defaults and bankruptcies throughout the economy.
In fact overcapacity in US industryand indeed the worldisnt new. It has been a perennial underlying feature of monopoly capital, and so of the American economy. Capacity utilisation in US manufacturing has been on a steady downward trend since the sixties (see Stagnation and the Financial Explosion, Harry Magdoff and Paul Sweezy, 1987, p. 83, Chart 2). It is huge overcapacities in manufacturing worldwide that explain the decade-long recession in Japanan economy that is at the forefront of manufacturing efficiency.1 It is again giant global overcapacities in industries such as computer chips that underlay the collapse of the southeast Asian economies in 1997-98. The southeast Asian economies were shortly followed by Russia and Brazil, and then Argentina in 2000. Recession in the US and Europe is only the latest act in this as yet unfolding drama.
Endemic to capitalism
However, in this process the growth of productive capacity soon outstrips demand. (Seriously redistributing income throughout society would no doubt increase demand, but it would take away profits from capitalists, going against the very reason for existence of investment under capitalism.) As demand weakens, the profitability of investment declines; capitalists therefore cut back on investment; demand for investment goods suffers, and, as workers get retrenched, demand for consumer goods further weakens. This is how recessions come about.
Capitalist theorists claim that the scrapping of capacity and the depression of wages (due to mass unemployment and the desperation of workers to work at any price) eventually make it profitable for capitalists to invest again. In fact, these factors may work the other way. Workers may be available more cheaply, but with less money in the hands of workers in general, demand would stay depressed, and the capitalist would be reluctant to invest again. In the absence of some counter-acting force outside the forces just described, production and employment would remain at a level far below the productive capacity of the economy. The Great Depression persisted through the thirties despite wages falling dramatically.
Such a crisis is peculiar to capitalism. Under earlier historical social systems, there were no doubt periods when growthor even production itselfdeclined. However, the causes were generally natural calamities or war. Unique to capitalism is the strange phenomenon of production falling because of the ability to produce too much. The further growth of production is held back not by physical limits to production (equipment, raw materials, labour power) or by physical limits to consumption (even if needs for a particular commodity were completely satisfied, investment could move to fulfilling other needs). Rather, production is held back by the fact that it is not profitable for the capitalists to produce more.
The only way to resolve this contradictionestablishing the social control of the surplus, so that it is deployed not according to private profit but social needis by definition impossible under capitalism. Instead, capitalists and their governments employ various methods to deal with the effects of this contradiction. These methods do deal with some effects for some time, without making the contradiction go awayin fact, the use of these methods could even accentuate the contradiction when it finally once again surfaces. It is important to grasp that it is not the policy of one or the other administration or country, but this contradiction itself, a necessary part of capitalism, that propels the entire dynamic.
Why arent capitalist economies always in crisis, then? Because they have been able to draw on various counter-acting forces outside the process of capital accumulation described above. In the past century, such forces generating demand came from different sources. It was only once it entered World War II, and the needs of war created full employment of labour and industrial capacity, that the US really emerged from the Great Depression that began in 1929. After the war, there were the needs of post-war re-building, as well as pent-up demand for consumer goods postponed during the War; then demand continued to be boosted by wars in Korea and Vietnam, and the Cold War, requiring massive arms expenditures even in peacetime.
Finally, however, the economy came to rely, for generating demand, more and more on an explosion of debt (consumer, corporate, national), and on a financial-speculative sector whose growth far outstripped the growth of commodity-producing sectors. (Magdoff and Sweezy, p. 35)
The biggest bubble in Americas history
Despite this share prices soared, fuelled by cheaper and cheaper funds as the Federal Reserve repeatedly loosened interest rates. What took place was the biggest credit boom in US history. The wealthy, finding the prices of their shares soaring, consumed more. Corporations borrowed and bought back their shares, pushing up their share prices further and thus getting access to cheap funds. With these funds they made massive new investments. No doubt, profitability kept plummeting, but unscrupulous auditors were hired to dress the books. Among the 27 major corporations so far found guilty of such practices are such stars as AOL Time Warner, Enron, Worldcom, and Xerox. The two top US banks, Citigroup and J.P. Morgan Chase, as well as Merrill Lynch, and the countrys top auditing firm, Arthur Andersen, are also deeply implicated.
In the words of the Economist (28/9/02),
The outcome has been catastrophic:
Yet to hit bottom
Even as American households do borrow massively for consumption, the American manufacturing sector has become increasingly unable to compete with imports. For every dollar of goods it exports, the US is now spending $1.43 on imports. It is running a monthly trade deficit of more than $40 billion a month, or nearly $500 billion a year. American commentators worry that the American manufacturing base is being whittled away. Smaller American manufacturers are pressing for a substantial devaluation of the dollar to make American goods cheaper than foreign ones, and thus better able to compete. As we shall see below, this solution is ruled out for the US, since it runs counter to the interests of the USs global financial hegemony.
The secret to a limitless debt: Dollar Hegemony
However, till now the United States has been able to run up a truly giant national debt for a special reason. Being the worlds leading capitalist economy, and a military superpower, its currency has been used for payments between countries (and therefore for their reserves of foreign exchange as well). When it needs to pay its debts it merely issues a treasury bond (ie borrows from the capital market) to which investors from around the world rush to subscribe. Foreign investors buy not only bonds issued by the government, but also American corporate bonds, shares, and real estate. These inflows, soaking up as they do the worlds savings, ensure that the US is able to import more than it exports, year after year, without suffering the treatment handed out by the IMF and World Bank to countries like Argentina, Brazil, India, and so on.
This endless supply of golden eggs depends on the US remaining the supreme imperialist power and the dollar remaining the currency for international payments. However, that is precisely what is now threatened.
The role of oil in dollar hegemony
Alarmed at its declining gold supplies, the US first devalued the dollar relative to gold in 1971 and, in 1973, unilaterally declared it would no longer be convertible into gold. If, despite this severe shock, countries continued to accept the dollar as the currency for international payments and investors continued to put their money in dollars, it was because of Americas continuing supremacy worldwide and the absence of a competing international currency. US control over oil producers played a crucial role. Arjun Makhijani notes that
It is worth summing up the points made above:
Implications of the euro
The euro has become attractive for three reasons.
First, since the EU is a large imperialist economy, about the same size as the US, it is an attractive and stable investment for foreign investors.
Secondly, since foreign investors holdings are overwhelmingly in dollars, they wish to diversify and thus reduce the risk of losses in case of a dollar decline: they are increasingly nervous at the size of the US debt mountain and the failure of the US government to tackle this problem.
Thirdly, certain countries smarting under American military domination sense that the rule of the dollar is now vulnerable, and see the switch to the euro as a way to hit back.
Thus even in November 2000, when the euro was 30 per cent down against the dollar, Iraq demanded UN approval to be paid in euros in the UN oil-for-food programme. This despite the fact that the currency markets at the time did not see a rebound for the euro and despite the fact that Iraq would make the switch at considerable immediate cost, losing 10 cents a barrel to compensate buyers for their currency conversion costs. Iraq also asked that the $10 billion in its frozen bank account in New York be converted to euros. The UN, a plaything of the US, resisted the change until Iraq threatened to suspend its oil exports. (Iraq: Baghdad Moves to the Euro, Radio Free Europe, 1/11/00; Iraq uses the euro in its trade deals, Arabic News.com, 7/9/01)
Iran, which the US has now labelled, along with Iraq and North Korea, as part of an axis of evil, is also contemplating switching to the euro. The Iran National Oil Company welcomed the launch of the euro in 1998 itself, saying that This money will free us from the rule of the dollar, and we will adopt it. The national oil company and other major Iranian companies have made it clear to both their European and Latin American oil partners that they would prefer the euro. While Iran continued using the dollar thereafter, there are indications it could follow Iraqs example. The Iranian government budget for the year to March 2002 was tabulated in dollars, but in December 2001 an oil ministry official said that could change in the future. Iran News (29/12/01) called for a switch to the euro for both oil and non-oil trade: The euro could become our currency of choice if it made gains on the dollar. Since then the euro has climbed 14 per cent against the dollar. (Iran sees euro as way to free itself from the US dollar, Agence France Presse, 31/12/01)
Some in Saudi Arabia have called for switching to the euro as a more effective punishment [than an oil embargo] for the United States, Israels principal source of financial and political support. (Protest by switching oil trade from dollar to euro, Oil and Gas International, 15/4/02)
At the Russia-European Union summit in May 2001,
Another likely candidate for switching to the euro is Venezuela, whose leader Hugo Chavez the US has been attempting to oust over the last year, without success (at the time of going to press). It is not only the oil economies that would make the switch (for example, North Korea too recently said it would convert its foreign exchange reserves to the euro); but the shift of the major oil exporters to accepting payment in euros would indeed have a major, potentially devastating, impact on the dollar.
The more countries that switch to the euro, the more attractive would be the euro.
Dollar slide threatens
The revelations that a stellar gallery of American corporations led by Enron and Worldcom have been cooking their books, and that US manufacturing corporations profits fell by 65 per cent between their 1997 peak and 2002 (Brenner, op. cit.), would also unnerve foreign investors who own a reported $1.5 trillion in US corporate equities (Dollar crisis may be close at hand, Nick Beams, World Socialist Website, 18/6/02).
Of course, there are certain checks on these trends. For one, the worlds major financial centres are still New York and London, and Britain has still not joined the euro. The euro has as yet no financial centre to rival London and New York. Thus Iran is hesitant to actually make the switch to the euro because London is still the financial centre for Iran overseas business.
Moreover, neither Europe nor the Asian economies want to see the US economy collapse. First, they would not be able to liquidate their holdings in the US before that happened, and therefore would suffer huge losses. Secondly, the collapse of the US market for their goods would deal them a heavy blow. Thirdly, if the dollar lost value American goods would become cheap in terms of other currencies, and displace European and Asian goods in their home markets. So, unlike Iraq, the EU and Asia would want to proceed slowly, protecting the value of their investments as they withdrew them.
However, that is assuming rational collective behaviour
on the part of investors, far removed from reality. Once a sudden shift
takes place, herd behaviour takes over. As each investor races to pull
out his investments, investors collectively drag down the value of all
their investments. We seem to be approaching the cliff edge,
says Avinash Persaud, head of research at State Street, a leading New
York-based investment bank. Even if everyone expects just a modest
fall in the dollar they end up getting a violent one, simply because everyone
will wait before buying the dollar. (Dollar slide could gather
dangerous speed, Christopher Swann, Financial Times, 25/6/02)
It has dismissed the binding obligations of the Kyoto Protocol on Climate Change, and thus thrust the burden of preventing global warming on the rest of the world.
It has refused to be bound by the newly-set-up International Criminal Court.
It has refused to sign the treaty banning anti-personnel mines.
It has dumped the process of strengthening the Biological Weapons Convention.
It has rejected the Comprehensive Test Ban Treaty which the previous US administration was trying to force third world countries like India to sign, and is preparing to test a fresh generation of nuclear weapons, which it now calmly says it plans to use against non-nuclear countries as well.
It has unilaterally withdrawn from the Anti Ballistic Missile Treaty, and is racing to set up a space-based shield against missiles (the National Missile Defence, which will indeed enable it to strike others with nuclear weapons and not fear reprisal). It thus creates scope to seize control of outer space.
It has openly threatened the UN that it would be rendered irrelevant if it did not follow American dictates.
After extracting an unprecedented declaration from NATO that the September 11 attack on the US would be treated as an attack on all NATO member-states, the US ignored NATO for the Afghanistan invasion, and assigned European forces only such lowly jobs as policing.
In trade, the US has levelled heavy tariffs on European steel imports in order to protect its own industry. It has unilaterally retaliated at what it sees as European restrictions on imports of American beef and bananas, each retaliation accounting for a hundred million dollars or so of annual trade, and has rejected all European efforts to resolve these disputes. Without sanction from any international body, the US levels sanctions against European firms that deal with American enemies such as Cuba and Iran.
More trade clashes loom. The worlds biggest aeroplane makers, the American Boeing and the European Airbus, are fighting a frenzied battle for shrinking orders. In 2003, a dispute is set to explode over agricultural subsidies, genetically modified products, and overall agricultural trade. (Americas Two-Front Economic Conflict, C. Fred Bergsten, Foreign Affairs, March-April 2001)
In Asia, the threat to the US could come from the increasing trend towards the setting up of an economic bloc on the lines of the EU. China, Japan, South Korea and the southeast Asian countries are moving slowly toward an East Asian free trade area. South Korea, Indonesia, and Thailand have suffered the humiliation of begging for IMF loans during the 1997-98 crisis. The loans were given on condition that they followed austerity measures that merely suppressed economic activity and made their firms cheap for American corporations to buy up. This experience has spurred the moves to set up cooperative arrangements to prevent currency collapses, and eventually establish an Asian Monetary Fund (AMF) for this purpose. Since these countries have $1.5 trillion of foreign exchange reserves between them, the AMF would rival the US-dominated IMF. These developments may move in the direction of a common currency at some point in the future. (Bergsten, ibid) The US is strenuously attempting to prevent the emergence of such a separate bloc. It sees the growing integration of capitalist China with the southeast Asian economies as an important threat. (China Races to Replace US as Economic Power in Asia, Jane Perlez, New York Times, 27/6/02)
As the global recession sets in, with the US, Europe and Japan sinking together, tensions are likely to sharpen between these three blocs. Cooperative effort to boost global demand is less likely than is competition among them to get the biggest share.
All material © copyright 2015 by Research Unit for Political Economy