After black friday… if she blows!

If she blows? by Humphrey McQueen 11 October
If it is dodgy to speculate about the timing of, or the immediate trigger for a depression, six consequences can be predicted with almost 100% accuracy.

>Above all, a collapse of real existing capitalism is not going to move the world one toenail closer towards being a kinder place in which to live. On the contrary, a depression will make every problem worse. Those whose labours paid for the boom will pay seven times seven for its collapse.

>On the macro-economic front, the normal process of oligopolisation will spike. The benefit of a depression to capitalism as a whole is, as the conservative economist Joseph Schumpeter recognised, from a gale of creative destruction. That means the destruction of firms of the size of GM and Ford.

>At the micro-economic level, even a serious recession will shatter generations X and Y, who have never known more deprivation than retail envy. Their harrowing will be much harsher than poverty was on the 1930s victims who had been weaned on frugal comforts, not expecting super-affluence. Far fewer will know how to feed themselves once they are no longer compelled to eat out because of their excessive hours at work.

>This material deprivation will provoke identify crises. Bourgeois individualism has shrunk from being defined in the Renaissance by what one creates, to what one makes, to what one owns, and now to whatever gadget one has most recently bought. Self-esteem is reduced to the exchange of credit for a commodity which loses its prime use value by being purchased. What happens to the sense of self when the buying has to stop?

>The social consequences of an end of retail therapy will rip through civil society.

Reflecting on the recession of the mid-1970s, the then head of CRA, Sir Roderick Carnegie, warned that “A society raised on champagne tastes may not be a polite or a pleasant one if it is reduced to a beer income.” That shadow over bourgeois democracy is larger in this era of anti-terrorism.

>The environmental consequences will be catastrophic.

Although the burning of fossil fuels and the use of other non-renewables will be cut as a result of the slashing in effective demand, the corporations and the poorest alike will be driven to plunder the wealth of nature for survival.

Expensive renewables will be out of the window. It remains to be seen how many promoters of carbon markets will be happy to pass the fate of their goddess to the traders who brought on this pillage.

That skim through the consequences leaves us with a pendant to the pivotal question: if capitalism can indeed collapse, can it also rise again?

To approach an answer, we must look again at the 1930s. The conventional belief is that Roosevelt’s New Deal rescued the US.

In truth, the downturn of 1937-8 was as steep as that at the start of the deflationary cycle. What dragged the world out of depression was global war. That gale of destruction lost some of its creative promise at Hiroshima.

(Crikey declined an earlier version in July 2007 as “too depressing”.)

For economist steve Keen’s critical analysis of the crash, go to

http://www.debtdeflation.com/blogs/

Not the 1930s (9 October) by Humphrey McQueen

Eleven years after the Asian financial tail-spin and twenty since a flight of funds cut 30% off stock prices, central bankers are running up warning flags about the fragility of their global system.

As far back as June last year, the International Bank of Settlements raised the stakes by using the D-word – a Depression of 1930s dimension – not just a recession like that of the late 1970s.

Returning from two years in Toyko in April 1990, I waited for the bursting of its real-estate and stock-market Bubbles to torpedo the world economy. Instead, Japan’s technocrats navigated through a protracted deflationary cycle by ignoring the advice of free-market economists to deliver a short sharp shock of the kind with which Jeffrey Sachs was harrowing post-Soviet Russia.

Having got Japan wrong, and not keen to join those commentators renowned for predicting eight of the last three recessions, I stopped asking “When will capitalism collapse?”, instead, pondering the question “Can capitalism collapse?”

Whatever happens next will not be a replay of the 1930s. The first obvious difference from the 1930s is that the world economy is now several times larger. The force needed to stop its expansion will have to be that much larger than it was around 1930-32. The momentum of the current system might allow it to keep from stalling while growing at a lower rate.

Connected to this increased in size is that the global order now has three principal centers, Europe, North America and East Asia, against three halves 80 years ago. In the last 15 years, the global economy has sometimes got by on a single engine until at least one of the others restarted.

Two points of similarity with the 1920s remain.

The first is that the Wall Street Crash of October 1929 was a symptom of the depression, not its cause. The flood of funds into the stock market had followed the drying up of opportunities to gain average rates of return from investing in the production of surplus value.

One instance of this over-supply today is that, were all the car plants in North America to close down, the auto factories in the rest of the world would be able to roll out more vehicles than there is credit to buy them (ie, “effective demand”).

Also like then, any tripwire will be in the financial sector because its bubbles have resulted from the latest bout of excess manufacturing capacity. The sub-prime crisis is not infecting the physical economy. That is where it started.

On top of these objective factors comes a psycho-sociological reason why the triggers for another depression will not replicate October 1929. Too many people are watching that possibility. Danger spots erupt wherever no one with the power to act is looking. The cliché that those who forget the past are condemned to repeat it forgets that those who are fixated on a version of the past are condemned to be run down because new things keep happening. That’s dialectics for you.

“19 October 1987”

The attention being lavished on bank failures and failing bailouts deflect attention from another fault line. The US economy remains dependent on the in-flow of funds to pay for its imports and to fund its three tiers of government.

Here, the parallel is not with October 1929 but with October 1987.

That plunge had its source in the redemption of the US economy through driving the less productive firms to the wall through an appreciation of the US currency. That policy made imports cheaper and exports harder to sell. Devastation created the rust-belt.

By the start of Reagan’s second term in 1985, the purge had done its work. US capital and its competitors both needed to wind back the value of the dollar. On 22 September 1985, at the New York Plaza Hotel, the “Plaza Accord”. The plan was to ease the dollar down by 10-12%. Instead, it fell by around 50% against the Yen and the Deutschmark.

A thought experiment helps us to understand what happened next. You are the Sumitomo Bank with investments in the US stocks and bonds. The dollar loses a quarter of its value against the Yen. Instead of owning 100 units, Sumitomo now owns 75 units. All indications are that the dollar will continue to slide. Do you leave money in New York and Washington in the hope that the exchange rate will eventually move in your favour? Or do you pull your investments out and taking the 25% drop rather than risking a 50% loss?

While Sumitomo is pondering what to do, so are all the other investment houses. They are watching the exchange rate and each other. If you are going to exit, you need to get out first to minimise the dangers from a run on the dollar driving down the value of your investments even more.

The flight from the dollar precipitated the plunge on Wall Street on “Black Monday”, 19 October 1987. Catastrophe was averted when the Bank of Japan and the Ministry of Finance instructed Japanese institutions to bear the unbearable by carrying the losses to preserve the global system.

One medium-term consequence of being burned was to encourage smaller investors to look closer to home, thereby feeding the real-estate and stock-market bubbles which went wild until the early 1990. Thereafter, Japanese capital entered into a deflationary cycle from which it still has not escaped, with an interest rate of 0.5%, an effective minus.

A longer-term outcome is that the Japanese were no longer in any position to rescue global capital. Moreover, they were no longer the ones pouring most savings into the USA. That place has been taken by the Mainland Chinese. And that should make us very afraid. China’s financial sector itself conceals an Everest of bad debt and has no guardians comparable to Japan’s in 1987 to marshall financial resources.

Against the tide the declines, the Greenback has been appreciating. So far, so good. The worst case will be a falling US dollar with a collapse of US stocks. That combination will encourage overseas investors to cut and run. One impediment to that solution will be finding a better hole in which to hide.

Buy gold!

read marx

The War of Wealth McQueen on the capitalist crisis