On
the heels of a deficit-cutting deal signed by President Obama on Aug.
2, a new financial panic, the
most dramatic since September 2008, broke out in global markets
signaling a deepening of the economic crisis and more hardship for
the working class.
The
first week saw some $2.5
trillion wiped off global stock market values. “Having fallen in
nine of the last 10 sessions,” Reuters reported Aug. 5, “the
S&P 500 closed the week down 7.2 percent—its biggest percentage
drop since the third week of November 2008.” Investors also
pulled nearly $66
billion from money market funds in the week ending August 3, the
second-largest weekly net outflow on record. The high was set during
the week ending Sept. 17, 2008.
Stocks
continued their plunge on Aug. 8, with the Dow
falling more than 634 points and the S&P 500 down nearly 7
percent for the day. Bonds and gold, however, rose sharply as
investors turned to these traditional “safe haven” assets
to avoid further losses.
Feeble
‘recovery’ and ‘sovereign debt crisis’
The
feeble “recovery” in U.S. production and employment from
the 2007-2009 recession has slowed to a crawl and shows signs of
petering out altogether. A “sovereign debt crisis” has
spread from Greece and other countries in the “periphery”
of Europe to Italy and Spain.
The
European debt crisis has arisen as a result of the ongoing economic
crisis and governments bailing out the banks—taking on their toxic
debt assets much like the government bailed out the banks and major
corporations in the U.S.
Now
the creditworthiness of the United States itself is supposedly in
doubt as a result of the downgrading on
Aug. 5 of U.S. debt by Standard and Poors. However, the sharp rise in
the price of U.S. bonds and resulting fall in long-term interest
rates following the downgrade cast some doubt on the rationale for
this decision. The past record of S&P in rating mortgage-backed
junk securities as “investment grade” prompts further
skepticism.
The
European Central Bank announced
Aug. 7 its decision to fight the continent’s debt crisis by buying
Spanish and Italian bonds, in an attempt to push down the soaring
interest rates threatening those countries with financial disaster.
The ECB’s action is similar to the earlier decision by the U.S.
Federal Reserve in November
2008, as part of a huge government bailout, to spend $600 billion in
newly created money to buy mortgage-backed securities from the
biggest banks and mortgage lenders.
The
happy result for the banks was to have these “toxic assets”
of dubious value taken off their books and onto the Fed’s balance
sheet in return for cash in the form of greatly expanded reserves in
the banks’ Federal Reserve accounts. As a bonus, the
Fed announced on Oct. 6, 2008, that it would begin paying the banks
interest on their now bloated reserves.
The
U.S. central bank’s unprecedented action, called “quantitative
easing,” also included the purchase of hundreds of billions of
dollars’ worth of Treasury bonds, aimed at lowering long-term
interest rates and staving off deflation. In a further attempt to
stimulate the economy, a second round of quantitative easing, dubbed
QE2, involved the purchase by the Federal
Reserve of $600 billion in Treasury bonds beginning in late 2010 and
ending this past June, again with newly created dollars.
In
effect, the Federal Reserve has been financing a major part of the
current U.S. government deficit by “running the printing press.”
The Fed’s balance sheet, also called the “monetary base,”
expanded from
a little over $800 billion in 2008 to more than $2.7 trillion
currently. This caused a sharp devaluation of the dollar—reflected
in the dollar price of gold, which soared from $700 in October 2008
to over $1,700 at the recent peak—devaluing the dollar by more than
half.
As
a result of the dollar devaluation, the central banks of the major
trading partners of the United States were forced to devalue their
own currencies to retain their competitive positions. The net result
was a worldwide rise in prices, especially for food and energy, which
devastated living standards in many countries and helped spark mass
uprisings in the Middle East and elsewhere.
It
was in this complex and contradictory context that the Federal
Reserve Open Market Committee met on Aug. 9. In view of the sharp
rise in gold in the previous days, as well as the strength in the
bond market and the recent
jump in the “core” Consumer Price Index (excluding food and
energy), it was highly unlikely the Fed would announce another round
of quantitative easing—that is, QE3. That would accomplish little
or nothing except pour more gasoline on the flames of inflation.
On
the other hand, to enable any sort of “healthy” economic
recovery, the Fed needs to stabilize the dollar. But, as the
inflationary 1970s demonstrated, stabilizing the dollar would require
a steep hike in interest rates along the lines of what the Federal
Reserve under Paul Volcker implemented in 1979—the so-called
“Volcker shock.” That would plunge the economy into a much
deeper slump than has been seen so far—which, in view of the vastly
increased debt now weighing on the U.S. and world economies, could be
truly catastrophic in its impact.
Going
into this meeting there was little the Fed could do except revise its
statement with some soothing words in hopes of calming the markets,
which was the gist of its post-meeting statement. After painting a
gloomy picture of economic slowdown, all it could muster to encourage
the markets was this: “The
Committee currently anticipates that economic conditions … are
likely to warrant exceptionally low levels for the federal funds rate
at least through mid-2013.” Previously, the phrase had been “for
an extended period.”
It
is possible, of course, that the Fed has secretly been buying up
shares to curtail the stock market crash. That could account for the
rebound in share prices following the initial plunge, which was
followed by another drop. As can be seen, any such effort can have
only a temporary effect, however, and—like other forms of
“quantitative easing”—will not solve any of the
underlying economic problems. In general, these problems are not
affected by the short-term ups and downs of the stock market, which
could get more violent with a deepening crisis.
Sharpening
class confict
Economic
malaise combined with rising prices, ongoing imperialist wars of
aggression, and sharpening class conflict—from Egypt to Milwaukee,
from London to Madrid, from Libya to Yemen and many other places—have
exposed the bankruptcy, desperation and increasing political
dysfunction of capitalist ruling classes and their politicians.
The
political disarray and increasingly bizarre factionalism was
epitomized by the wrangling between Democrats and Republicans around
the contrived debt-ceiling crisis. The “compromise” deal
signed by President Obama was supposedly aimed at assuring the
financial markets that federal spending, especially social spending,
would soon be “brought under control.” Judging from the
recent strength of the bond market, it appears to have succeeded in
placating bond investors. At the same time, the recent plunge in
stocks and the price of oil point to renewed recession and a further
rise in unemployment and poverty as the probable outcome.
Talk
show host Tavis Smiley on Democracy Now Aug. 9 called the deal,
aptly, “a declaration of war on the poor.”
The
theatrics put on by the Democrats and Republicans partly consisted of
demagogic posturing directed at their respective bases, but also
reflected counterposed views of how best to overcome the economic
crisis and restore “capitalist prosperity.” Both sides
based their arguments on false theories—aimed at either justifying
capitalist inequality and injustice, or feeding the illusion that
these evils can be overcome within the framework of capitalism. Such
theories cannot provide a true understanding of the economic laws
governing this outmoded and moribund system.
One
thing on which both sides agreed, however—and this is the real
significance of the deal—is that poor and working-class people have
to sacrifice even more than we have already, despite the fact that it
was the capitalists who were responsible for the crisis in the first
place. Only if we give up gains in wages, pensions and social
benefits won in past struggles can the crisis be overcome, they
argue.
This
ruling-class consensus reflects the strategic need of U.S. capitalism
to reverse the severe industrial decline it has undergone since the
1970s, in order to preserve and expand its slipping global
domination. Besides buttressing, at huge expense, U.S. military
superiority, this means driving down the wages and living standards
of the U.S. working class—especially the better-paid, more
unionized, so-called “middle-class” sector—to enable U.S.
industry to effectively compete once again on the world market. In
fact, as is becoming clearer by the day, the more agggressive wing of
the ruling class, led by big industrial capitalists such as the Koch
brothers, is on an all-out drive to get rid of unions altogether.
Outsourcing
of jobs part of attack on unions
The
decline of U.S. industry is the reverse side of U.S. corporations
outsourcing production to low-wage countries. Apple Computer has
taken advantage of the low wages and poor working conditions of
Foxconn workers in China to assemble its iPhones and iPads and make
immense profits out of their labor. Many other U.S. corporations have
outsourced their production to China and reaped similar benefits. The
profits produced by Chinese workers and the workers of other
oppressed countries go a long way to explain why Apple’s profits and
the profits of other U.S. corporations have soared to record highs
while the domestic economy stagnates.
The
government of China, however, is not a client regime of the United
States, and there are no U.S. military bases in China. Therefore,
U.S. capitalists do not consider their investments in China to be
secure. The competitive as well as strategic threat to U.S.
imperialism represented by China’s rapid industrial development
continues to grow. And so China remains on the U.S. list of countries
targeted for regime change.
U.S.
workers, though, have separate and opposed interests to those of the
capitalists and should not view Chinese workers as our enemies but
rather as potential allies. U.S. workers benefit when Chinese workers
win wage increases, as indeed has been the outcome of recent militant
struggles.
Call
for action
The
AFL-CIO has issued a statement calling for actions in early October
in cities across the country to demand jobs. The U.S. labor
federation states: “In
partnership with our community allies at the local and national
levels, as well as our state federations and labor councils, we will
build to a National Week of Action in early October that focuses on
the demand for good jobs and demonstrates in communities all across
the country that America Wants to Work.”
In
view of the stepped-up attacks by capitalist employers and their
politicians on the working class in general and unionized workers in
particular, it is crucial that this call and supporting appeals
result in a major mobilization of labor and allied community
organizations. The Party for Socialism and Liberation will actively
support any such mobilization, demanding: Tax the rich to finance a
public works program to rebuild the country’s infrastructure and
provide jobs! No cuts to education and the social safety net! Hands
off Social Security, Medicare and Medicaid! Full rights for
immigrants! End the occupations of Iraq and Afghanistan! U.S./NATO
stop bombing Libya!
In
the face of the intensified assault on our living standards and
social programs that the rotten deficit-reduction deal passed by
Congress and signed by President Obama signifies, the working class
is challenged to step up its resistance and get organized to make
fundamental change—the only real answer to the ruling-class attack
now looming. It is more clear than ever that we have entered a new
era of imposed austerity and extreme crisis in which humanity’s fate
hangs in the balance.
