The Spark July 2009
The sub-prime crisis and credit crisis have finally brought an end to the “good times”. As trade has slowed down, unemployment has begun to rise and in some countries, large scale demonstrations have occurred in anger against the collapse of the economy and the attacks on workers that have followed.
If workers do not fight back, the recovery when it comes will leave workers worse off than before. As always, workers’ wages and working conditions will be cut in response to the recession and unemployment.
It was in the United States that the problems started to surface. The sub-prime crisis proved to be only the beginning. High profile collapses and the massive state bail outs finally revealed to the world the degree to which the banking and finance sector had got out of proportion to the real economy where real value is produced. The collapse has spread to the industrial economy with the auto industry in crisis and unemployment rising to 8.9% in April. More than five million US workers have lost their jobs since the crisis began.
Western Europe was quick to feel the effects of the problems in the US. Events like the collapse of British bank Northern Rock revealed that the so called “toxic debt” had spread beyond the American financial sector. German unemployment is expected to pass four million by the northern autumn and hit five million next year. The German economy is expected to shrink by six percent this year and have zero growth next year. The German manufacturing sector is in serious trouble. According to Hans-Werner Sinn, the president of the Munich-based Ifo Institute for Economic Research, German banks will have to make write-downs equivalent to up to 90 percent of their capital. In France, closures and threatened lay-offs have resulted in boss-nappings and demonstrations involving millions of workers. In the fourth quarter of 2008, French GDP fell by 1.2 per cent, and the French economy lost more than 90,000 jobs in January of this year. French Finance Minister Christine Lagarde has predicted that France will lose 300,000 jobs this year.
In Eastern Europe, banks offered cheap mortgages using money sourced from Austrian, Italian and Swedish banks. But with these debts being paid in the currencies of the originating banks, the Euro, these mortgages have become unaffordable as the local currencies have collapsed. Property prices have plummeted leaving many people with negative equity. Hungary’s growth fell by 7.8% in 2008. Unemployment has risen to 8.4%.
In Japan, in the 2008 fiscal year, more than 16000 businesses closed down, an increase of more than twelve percent on the 2007-8 year. Sales of cars and other motor vehicles declined by 15.6 percent in the 2008 fiscal year. This year Toyota announced its first ever operating loss. Electronics giant Sony went from a record profit last year to its first loss in fourteen years. Hitachi has recently announced the largest ever loss by any Japanese corporation.
South Korea’s economy has also been hit very hard. In just the December quarter, the republic’s GDP fell by 5.6% over the previous quarter. Leading this fall was a 12% decline in manufacturing. Exports are down by 11.9%, imports are down 13% and private consumption fell by 4.8%, particularly hard hit being the area of consumer durables. South Korea’s economy is predicted to grow only 0.7 percent this year, the weakest growth since the Asian financial crisis a decade ago.
China has seen a massive contraction of its export manufacturing industry. In the first 10 months of 2008, 15,661 enterprises in Guangdong province closed down, over half of those occurring in October. The implications of this in human terms has been huge, with somewhere in excess of 20 million internal migrants losing their jobs. China’s exports fell by 25 percent in February and Taiwan’s fell by 30 percent in March.
As for the poorest parts of the world, according to a report by the World Bank and the IMF, the global recession will plunge up to 90 million into extreme poverty and drive up the number of chronically hungry people to more than 1 billion.
In analysing the current period, it is worth addressing the claims that this crisis is the closest thing there has been to the great depression of the 1930s. There are certainly similarities in the way in which the crisis has unfolded. There are similarities in the way the bubble economies of the 1920s and 2000s were consumption fuelled and occurred in an environment where people believed things could not possibly go wrong. President to be Herbert Hoover declared in 1928 that “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.”
But there are contrasts too that make the situation very different today. Unemployment in the depression hit twenty five percent in the USA but currently it is less than ten percent there. The share market lost ninety percent of its value in the 1929 crash. In this crash, it has lost about half its value – still serious, but not the same as the devastating fall that occurred eighty years ago.
We are not seeing the end of an era in the sense that 1929 was. But it is the end of an era in one respect. After the end of WWII, with the commencement of the long boom, the economic orthodoxy, and popular opinion to a great extent also, held that we had beaten the business cycle – the boom-bust pattern that had plagued capitalism since the beginning of the industrial revolution. That belief remained largely unshaken despite the end of the boom in the mid 1970s and the so called “jobless recovery” that followed the 1987 crash. That confidence that crisis capitalism is over has been shattered. In 1997 Nobel Prize winning economist Paul Krugman wrote in “The Age of Diminished Expectations” “The initial fall in US stock prices in the 1987 crash was as large as that of 1929, and the collapse spread around the world faster and more thoroughly. Could such a crash generate another depression? No. It didn’t in 1987 and it almost surely won’t the next time it happens.” This year, asked – Is 2009 a new 1929? he answered, “It’s impossible to rule out anything at this point.”
But a crisis without the prospect of social change means nothing but misery for many people. Nothing progressive will come out of this crisis in the absence of an organised left. It is no coincidence that it is primarily in areas with a strong left tradition that significant resistance has taken place. In countries like New Zealand, where the left is weak, working class resistance to the recession has also been weak.