Four unknowns and a certainty

Issue: 120

The biggest financial crisis for 79 years, followed by the most expensive nationalisation of all time; a combination of recession and inflation with completely unpredictable effects; a new explosive flashpoint of international tension, this time on the Black Sea midway between Europe and the Middle East; the unknown outcome of the most passionate US election campaign for four decades; a crisis of the New Labour government in Britain from which there seems to be no way out. Those who preside over the system face unknowns on every side—as do those of us who fight them. There is, however, one certainty about the next few months. There will be sudden turns in the political situation, nationally and internationally, which will create new challenges—and new opportunities—for the left.

New twists to the double crisis

The first big unknown is the way the “double crisis” of the financial crunch and inflation will pan out. The instability was shown graphically as we were producing these notes. The US government stepped in to take over the two giant mortgage corporations Fannie Mae and Freddie Mac—probably the biggest nationalisation in world history—in order to stop a catastrophic collapse of the financial system. Just seven days later it allowed one of the US’s biggest investment banks, Lehman Brothers, to go bust, causing such a reaction that the US government then promised to absorb an estimated $700 billion in bad debt from across the system.

It is in the nature of capitalist economic crises to be unpredictable. Feeding statistics into supposedly elaborate mathematical models produces daily economic forecasts. They are invariably wrong. The models produced in July last year could not predict the credit crunch that suddenly broke out in August 2007, so today they cannot predict what things will be like in three or four weeks time—let alone in the coming years.

Back in the spring, when it was already clear that things were going badly in the US, there was a lot of talk of the “decoupling” of the different major economies—some of it from the same people who had previously claimed they were seamlessly welded together. Don’t worry, they said, the US is not as important as it used to be, Germany is growing, and China and India are storming ahead. Then in August a couple of favourable economic figures led them to say that the US was not doing too badly and that the problem was that Germany was contracting, and maybe things were not going as well as expected in China and India. Since then there has been an unexpectedly sharp rise in American unemployment, the panic move over Fanny Mae and Freddy Mac, fears that nationalisation is going to cost hedge funds billions through credit derivatives, the collapse of Lehman Brothers, the nationalisation of the giant insurer AIG, warnings by the former head of the Federal Reserve Alan Greenspan that more banks would go bust, the $700 billion “bad bank” buy up…who knows what the situation will be by the time you read this?

Some things, however, are clear:

  • What is happening is more than simply a financial storm. It reflects deeper imbalances in the system. We have given our own analyses of these in the four most recent issues of this journal. We have also carried commentary from slightly different perspectives by Costas Lapavitsas and Fred Moseley, as well as a piece critical of our analysis by Jim Kincaid. In this issue Andrew Kliman writes on the very important implications, as he sees it, of the US state’s attempt to manage the crisis.
  • The political impact of what is happening is bound to be enormous. Recessions lead to splits within capitalist classes between those who are going to lose a lot and those who, losing little in the short term, hope to gain in the long term. Meanwhile the impact on the mass of the population can also lead to sudden explosions of bitterness—as with the militant demonstrations during Margaret Thatcher’s first two years in office (1979-81) or the pit closure revolt of 1992. But if the explosions do not produce positive change, a sense of hopelessness can increase receptiveness to the message of racists and fascists.
  • Inflation can also lead to explosions of anger, as with the rash of riots in the Global South over food price rises. These have the potential to take a structured, more stable, form than reactions against joblessness, because workers can look to collective struggles through industrial action to keep wages in line with price rises.
  • The combination of recession and inflation is particularly worrying to governments and ruling classes. They fear that any moves to limit the impact of recession on businesses by cutting interest rates will stoke up inflation and with it class struggle that can take on a political edge. That is why there are so many references in the media to crisis of the mid-1970s and “stagflation”. That is also why our rulers are divided on how to react today, with the US Federal Reserve lowering interest rates in an effort to ward off recession while the Bank of England and European Central Bank are keeping them high for fear of inflation, causing huge problems for Spain and Italy.
  • What is happening has enormous ideological implications. Since the 1980s our rulers have sought to justify capitalism through an appeal to neoliberal ideology, in particular the allegedly miraculous properties of free markets in “liberating entrepreneurial spirit”. But while they tried to impose neoliberalism on workers at home and weaker governments abroad, the ideology always contradicted reality in the established industrial economies. Here the interaction of states and corporations remained very marked—through defence contracts; tax subsidies; investment grants; the state’s promotion of national corporate interests in the World Trade Organisation, the International Monetary Fund and the European Union; and so on. In the past this contradiction between ideology and reality was a hidden one. Now the nationalisations and the billions shoved into the banking system bring it into popular view just as people are demanding state action to protect them from the dual crisis. This can give old socialist arguments about the insanity of capitalism a popular resonance unimaginable a decade ago.

The British dimension

Back in March the OECD argued that Britain was experiencing “solid growth”. Now, in a complete reversal of its position, the OECD sees Britain as the worst placed among the world’s major economies to withstand the impact of a global slowdown—and the only one it forecasts to be in recession this year.1 The warnings are echoed by Charlie Bean, deputy director of the Bank of England (“The malaise could drag on for some considerable time”); David Blanchflower, of the Monetary Policy Committee (two million may be unemployed by Christmas according to the ILO measurement); and, to everyone’s surprise, by chancellor Alistair Darling (“The economic times we are facing are arguably the worst they’ve been in 60 years”).

It remains to be seen how accurate these predictions are. But the impact of the double crisis is already visible in Britain. House sales and new building are at record lows, repossessions are rising, food prices were up 12.5 percent in the year to August and unemployment was up 20,000 in July, with the total claiming dole at 864,700. The ILO measurement of joblessness puts the figure far higher at 1.67 million (5.4 percent).2 There is widespread fear of what the future holds—and price rises are already leading workers to cut back on expenditure. Reports tell of a switch to supermarkets’ “own brands”, a decline in organic food sales, a fall in car use and fewer cheap flight bookings. Increases in gas and electricity prices announced in August will add considerably to the number of households in fuel poverty—already 4.5 million in April.

Such things cannot avoid affecting the whole political mood in Britain. Over the decade and a half after 1993 inflation and recession were no more than bad memories for people, with the exception of those stuck in abandoned industrial and mining areas. For young people entering the workforce or in education today they are not even memories—they have never been experienced. Now they are suddenly realities worrying old and young alike. The impact can already been seen in the misery and backstabbing on the New Labour front bench. But it is unlikely to end there.


1: See, for instance, “OECD Say UK Is Worst Placed In G7 To Withstand Global Downturn”, Independent, 3 September 2008.