Contribution to the International Communist Seminar
‘Economic Crises and Possibility of a Major World Crisis’
Brussels, 2-4 May 2002

www.icsbrussels.org , ics[at]icsbrussels.org

United Kingdom
Harpal Brar, Editor of Lalkar,

Economic Crisis of Imperialism on a World Scale

"Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence because they have produced too much of the means of subsistence, bankruptcy follows upon bankruptcy, execution upon execution."

Thus wrote Frederick Engels in 1876 in Socialism: Utopian and Scientific.

The world capitalist economy is facing a most serious crisis. How are we to explain this crisis? What is the way out of this crisis? Only Marxian analysis, contained in succinct form in the above-quoted words of Engels, offers the key to the understanding of this crisis, as well as the way out of it.

The words of Engels that we have quoted were written about England in 1876, but could just as well have been uttered in response to the shambles of the economies of East Asia, the chaos in Russia and the imminent crash on Wall Street.

Then as now Engels’ words contain the key to understanding the whole crisis: "the workers are in want of the means of subsistence BECAUSE THEY HAVE PRODUCED TOO MUCH OF THE MEANS OF SUBSISTENCE." In other words, these devastating economic crises are caused by Overproduction.

Bourgeois economic science offers little in the way of clear understanding in this regard, not because bourgeois economists are less intelligent, but because their outlook is hemmed in by their belief in the immortality of the capitalist system of production. They have sold themselves body and soul to the service of this parasitic, decadent and moribund system, namely, imperialism.

Thus even when they come pretty close to understanding the underlying cause of the crisis, they shy away from it, ending very often by confusing symptoms and their causes, and appearance and reality. One has to indulge in excavations, as it were, to dig and drag the truth out into the light of day.

Thus, in explaining the collapse in South Korea which followed on the heels of Thailand's currency collapse of 2 July 2002, John Burton of the Financial Times emphasises high debts and excess capacity, but the truth cannot help slipping out:

"Analysts … have warned for years that the country's rapid production expansion was unsustainable because the global market was becoming glutted" - i.e., there is overproduction.

Nor does John Burton point out the relationship between overproduction and the high debts, treating the high debts on a par with overproduction as a cause of the crisis. The debts, however, are only a problem as a result of overproduction, which makes it impossible for the debtors to sell sufficient of their products to pay the interest due on their debts. Before the markets became glutted the high debts were not a problem because sales generated more than enough to service them, but when overproduction rears its ugly head, then it's a different story.

Equally, in bourgeois terminology overproduction is normally coyly referred to as 'excess capacity'. Bourgeois commentators feel the need to shy away from the quesiton of what causes 'excess capacity'. Let us boldly ask the question that frightens them so much: what is the reason for 'excess capacity'? Why should manufacturers not use their capacity to the full but instead produce far less than they are capable of? Only because the markets are glutted and they therefore cannot sell the goods they have tooled themselves to produce and have to cut production quotas - and jobs! Excess capacity, therefore, presupposes overproduction.

As we shall see later, 'excess capacity' (which presupposes high investment on technology and low returns in relation to that investment because of inability to sell the expected quantities of products) is still rampant, accounting, for instance, for the collapse of the Nasdaq index.

The present crisis of overproduction started in 1997 in the Far East. It spread rapidly from Thailand to other 'tiger' economies. Throughout the region it caused big business failures, threw millions of workers out of their jobs and "laid waste what was once the most dynamic part of the world economy" (Financial Times, 2 January 1998, '1998 in the crystal ball'). In the 12 months following the outbreak of the crisis, $100 billion of foreign capital fled Asia as the currencies of the ‘tiger’ economies tumbled, stock markets crashed, and major banks came face to face with insolvency – with their shares falling from 50%-90%.

In dollar terms, compared with January 1997, equities fell by 85% in Indonesia, 83% in Malaysia and Thailand, 70% in the Philippines, 60% in South Korea, 50% in Hong Kong and 40% in Japan. In Asia as a whole, equities registered a precipitous fall of 60%. Within weeks of the outbreak of this crisis, the tiger currencies were in free fall. As against the dollar, the Thai baht suffered a devaluation of 50%, the Malaysian ringgit 40%, the Philippine peso 25%, the South Korean won 40%, the Singapore dollar 10%, the Taiwan dollar 15%, the Japanese yen 15% and the Indonesian rupiah fell from 2,434:$1 just before the crisis to an astronomical Rp 17,000:$1 on 22 January 1998, before rallying.

At the time the main concern of the western imperialist bourgeoisie was that the economic chaos should not spread outside Asia, which it would have done immediately had the IMF not rushed in with bail-out money to minimise the amount of default that banks, especially western banks, would have to bear. At the same time, it eagerly seized on the opportunity to buy up the assets of the bankrupt Far Eastern businesses at bargain basement prices. And in fact it was a year before the west began to exhibit the symptoms of being afflicted by this crisis.

Western stock markets soar

In the short term, the stock markets of western countries soared. In July 1998 they were 60% higher than in January 1997. For the most part this is to be explained by the flight of investment from the Far East to the west.

In view of the dire economic picture prevailing in the Far East at the time, with the economies of those countries reeling from the hammer blows of a deep recession, and the US trade deficit soaring to unprecedented heights, it may appear a little strange that the stock markets in the US and Europe should have gone from strength to strength. This, however, is only an apparent paradox – not a real one.

As Marx explained long ago, the fever of speculation is only a measure of the shortage of outlets for productive investment: the depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices.

The crisis of overproduction is a reflection of the over-accumulation of capital, which, unable to find profitable opportunities for productive investment, seeks a way out in stock market and other speculative activity in an endeavour to make a profit. The tendency for the mass of surplus value to increase at a slower rate, as Marx showed, than the total capital employed is expressed in the TENDENCY OF THE RATE OF PROFIT TO FALL, which only goes to show that production for profit is an inadequate basis for the consistent development of society’s material conditions of existence.

The demand for the products of industry was falling in one sector after another, from aircraft to cars, steel to oil, from the products of the engineering industry to semi-conductors – everywhere. Combined with this, the crisis in the Far East - Thailand, Indonesia, Malaysia, the Philippines and South Korea – resulted in a huge flight of capital from these countries to the imperialist heartlands. According to the Washington based Institute for International Finance, there was an adverse shift in net private capital flow to the tune of $109 billion (£65.2) billion) – representing more than 10 per cent of the pre-crisis aggregate GDP of these five countries.

All these massive sums, and more, since the Far East ceased to be a good source of profitable investment, were pumped into the US and European stock markets – which explains why these stock markets became so bullish and why they rose by an incredible 60 per cent between the start of 1997 and July 1998.

In the second half of 1997, a massive flight of capital from the far east went straight into the stock exchanges of the US and Europe, thereby temporarily pushing up their prices. According to the Financial Times of 6 August 1998, a total of $126.2 billion (£76.4 billion) flowed into equity funds in the first 6 months of 1998 – easily ahead of the $108.3 recorded in the first half of 1997.

Since the buoyancy on the stock market bore little relation to the productive base of the world capitalist economy, which continued to limp far behind, it was only a question of time before speculative bubble bust, as it did with a fall of 300 points in the Dow Jones Industrial average on 4 August 1998, signalling an end, even if temporary, for reasons we shall come to, of the ‘great bull run’, bringing to a grinding halt the so-called Goldilocks economy, whereby corporate earnings moved higher and higher without stoking the fires of inflation.

The chickens come home to roost

By the beginning of July 1998, however, the crisis had jumped continents, its first victim being Russia, which was propelled into the whirlpool of a crash thanks to the combined effects of the declining yen, a fall in the international oil price, fears of a Chinese devaluation and the soon-to-follow slide on Wall Street.

An attempt to prevent the Russian collapse through a $22.6 billion IMF rescue package proved no more effective than the proverbial attempt to empty the ocean with a bucket. On 17 August, Russia effectively defaulted. The Russian government devalued the rouble by a third, something that only three days previously Yeltsin had vowed not to do. It imposed a 90-day moratorium on some foreign debt repayments; and it decided to restructure the domestic debt market.

Far from stemming the crisis, these measures only served to exacerbate it. Not only did the foreign lenders to Russia lose their shirts, but the measures precipitated a run on the banks, a further plunge in the rouble and the Russian stock market. The rouble lost 60% of its value in one week and the Russian stock market fell 80%.

The convulsions that followed these shocks sent the stock markets over the next few weeks plunging into a frightening downward spiral. Shares in London suffered their biggest fall since the crash of 1987. In just three days the FTSE 100 index fell 405 points, or 7.2%. At its worst, on Friday 28 August 1998, it stood 1,000 points below its all-time high of 6,179 recorded a few weeks earlier. On 2 October it plunged to 4,750, 23% down from its peak in July. Even today, after great girations, it only stands around the 5,200 level.

The Dow Jones Industrial Average fell dramatically. From its peak of 9,337 on 17 July 1998, it plunged to 7,286 – approximately 20% below its mid-July level, losing all the gains it had made earlier in the year. Within less than 3 months of the outbreak of the Russian crisis, the S&P 500 Index dropped nearly 20%, the FTSE 25% and the European markets 35%. The Nikkei 225 average fell to a 12-year low.

Foreign investors in Russian bonds faced losses exceeding $33 billion (£20 billion) because of the Russian government’s default. No wonder, then, that shares suffered badly, as investors responded to fears over trading losses and loan provision – German banks in particular had heavy exposure to Russia. Following the Russian collapse, Deutsche Bank shares fell by DM 6.80, of 5.5%, to DM 115.80 ($66.33). Chase Manhattan closed down $6.125 at $58.12, while Citibank fell $10.50 to $122.50.

Technology stocks were some of the biggest casualties, with Dell Computers, whose shares had nearly tripled during the previous one year, losing 15%, Microsoft 9% and Intel nearly 8%.

Equity markets in dollar terms fell in all other parts of the world too – by 29% in Argentina, 36% in Singapore, 40% in Mexico, 60% in Indonesia and 80% in Russia.

Thus, what was described as a ‘summer correction’ turned into a full-blown rout.

Imperialist response

Fearing a potentially devastating market collapse, putting paid to US expansion, and with it the only prop to global growth, the US Treasury, egged on by the Clinton administration, sought to co-ordinate an international response to address market fears. In this, the Treasury needed, and secured, the willing co-operation of Mr Greenspan, the Chairman of the Federal Reserve, who signalled his willingness to cut interest rates and thus help to sustain artificially high equity prices, which in turn kept US growth and the world capitalist economy afloat – pro tem.

In parallel with the developments at the Fed, the G7 issued on September 14, 1998, a statement to the effect that "the balance of risk in the world economy [has] shifted" away from inflation towards much slower growth. In the words of the Financial Times:

"The strategy then was in place – the Fed was signalling interest rate cuts in the offing. The rest of the world had signed on to a promise to promote growth; markets were showing early signs of stabilising." (‘Cooling the global markets’, Gerard Baker, Financial Times, 30 December 1998).

Meanwhile, on 23 September, New York Fed President William McDonough sat round a table in complete secrecy with some of the biggest sharks in Wall Street, haggling over the terms of a deal to rescue LTCM, brought to the brink of collapse by the Russian crisis – with exposures of more than $200 billion.

Under the deal, some of the largest players on Wall Street agreed to contribute $3.6 billion to avert LTCM’s collapse, which would have threatened horrendous global financial turbulence and ushered in a world-wide recession in the autumn of 1998.

Following the LTCM rescue, the Fed, beginning with September 1998, made three interest rate cuts of 0.25% in quick succession. Following the first interest rate reduction in the US, according to reports, central banks in 22 countries, including Germany, France, Italy, Britain and several other European countries, cut interest rates, in an unprecedented set of 55 steps. 13 October 1998 - the date of the second cut in interest rates – was the turning point in the temporary economic fortunes of world capitalism. The Dow rose 300 points in the remaining 45 minutes of trading and continued to soar the following week as traders became confident that the Fed stood ready to man the pump of monetary stimulus and far less worried that the Central Bank’s emergency measure must be indicative of the situation being really grave.

Dow Jones back on track

All this co-ordinated activity on the part of the US Treasury, the Fed, and their counterparts in other countries, had the intended effect of first arresting and then reversing the slide in equities in the US and across Europe and other parts of the globe. By 25 November 1998, the Dow Jones Index had returned to its 1998 high levels. Stock exchanges across Europe, including London, quickly recovered the ground lost during the previous three months.

The Dow Jones surged further ahead. On 16 March 1999 it broke through the 10,000 barrier. The FTSE 100 also clocked up significant, but, as we shall see, equally unsustainable rises.

The Japanese and other Asian economies are also showed signs of a fragile recovery. The South Korean economy, which shrank 6% in 1998, accompanied by a 10% contraction in consumer spending and a 29% drop in investment, grew by 10% in 1999. The Malaysian economy, having shrunk 6.7%, grew 5%. Hong Kong grew 2.9%, compared with a contraction of 5% the previous year. The Indonesian economy grew by 0.2% following the previous year’s plunge of 13.7%. Thailand’s economy grew 4.1% in 1999, following a decline of 10.4%. And the Japanese economy, after a decline of 3% in 1998, grew by 1%.

A crash waiting to happen

Normally one might have expected a cut in interest rates in the US to weaken the dollar as investors went elsewhere to obtain better investment opportunities. However, because of exceptional circumstances, the Fed realised that this result was unlikely to follow: in view of the flight to safety from the Far East and Eastern Europe into US bonds, there was not much danger of capital fight from the US consequent upon interest rate reductions, for there was nowhere for it to go.

Furthermore, the huge inflows of capital into the US strengthened to dollar, thus negativing any loss suffered by foreign investors in US bonds following interest rate cuts.

Third, the willingness of many a European country to agree with the US to a co-ordinated policy of interest reductions, partly because, having already met the EU’s convergence criteria for Monetary Union, they were in a position to loosen monetary policy, and partly because they too were convinced of the need for such action to avert a meltdown on the stock exchanges.

Lastly, the collapse in commodity prices, resulting from a steep decline in growth in East Asia and Japan, with its disinflationary effect, persuaded the Fed not to worry unduly about fuelling inflation through reductions in interest rates. At the end of 1998, Brent Crude oil fell below $10 a barrel and non-oil commodities cost 70% less in real terms compared with two decades earlier. Between the middle of 1997 and the end of 1998 alone, copper prices collapsed by 40% and wheat prices by a quarter during 1998. While revenues declined in the oil and other primary commodity producing countries, huge amounts of extra wealth was transferred to imperialist countries through low prices, further widening the gap between the rich and poor nations of the world.

If the sluggish growth in the Eurozone, the Japanese recession and the crisis in the Tiger economies had not exercised downward pressure on prices, the surge in US demand (which grew by 5% in 1998 – up from 4.25% in 1997, accounting for half of the increase in total demand) would certainly have been inflationary enough to oblige the Federal Reserve to raise interest rates and thus put a brake on growth and knocked the stuffing out of the inflated equity valuations into the bargain.

This combination of anti-inflationary factors is, however, precarious and will not continue forever. What will happen to the US economy then?

Stock market – driving force behind the US boom

Over the past few years, since the outbreak of the present crisis in the summer of 1997 in particular, the strength of the dollar has enabled the US to play the dual role of an engine of global growth and an importer of last resort for the world economy. US consumers, buoyed by cascading paper wealth, have been able to indulge in a spending binge without any need to save since foreigners have been willing to step in with the necessary capital for US investment.

Besides financing the huge US trade deficit, "These strong capital inflows have helped finance a stock market and corporate investment boom at a time when US households are spending in excess of their income. So the economy has continued to grow despite a growing current account deficit that reflects the shortfall of domestic savings against investment" (‘The wobbliest month’, John Plender, Financial Times, 13 August 1999).

The unprecedentedly high stock market valuations have been the driving force behind buoyant US spending, for households owning shares feel richer as the prices of the shares they own go up, and they save less. This assumes great significance in view of the fact that the number of households that own mutual funds in the US has risen from 10 million at the beginning of the bull market to 50 million today. "The average American household," according to Richard Waters, "has more than a quarter of its wealth on the stock market; more than half of its financial assets are in the form of shares. Fifteen years ago, with the stock market suffering the after-effects of 1970s stagflation, equities only made up 8 per cent of household assets." (‘Stock market odyssey’, Financial Times, 17 March 1999). Likewise corporations, finding their capitalised values increasing, build new facilities.

Thus, while rising equity prices led to buoyant spending, the latter in turn, in the short term to be sure, drove equity prices up further still. Equities in the US have done exceptionally well. During the four years – 1996 to 1999 – alone, the annual price appreciation was 28%. While US corporate earnings had expanded at about 7% a year over the previous 17 years (and for that matter, since the end of the Second World War), this accounts for a mere third of the S&P’s gains, the remainder coming from an expanded price/earning (PE) multiple, which rose from single digits to a peak of 38:1.

Imbalance between earnings and the price of shares

Since 1982, while the US economy has grown 2.5 times in nominal terms, its equity market has risen by a factor of 10. Even bourgeois economists concede that share prices - and the corporate earnings which underpin them - cannot rise faster than the economy as a whole. The extent to which the equity market has been racing ahead of the real economy can be gauged from the fact that whereas in 1982 equity prices were equivalent to 25% of US GDP, in 1999 they were 150% of GDP - a level without precedent. Between April 1994 and July 1997, the Dow Jones Industrial Average rose by 160%. In view of this increase of stock market capitalisation as a percentage of GDP, it is not surprising that the rise in share prices in the US created, in just three and a half years (between early 1995 and the second quarter of 1998), $6,000 bn of extra wealth for US investors. In the US, 50 million households, by and large middle class, own shares - twice the number who did so in the 1980s. As the bull run on the stock market has been at the bottom of the consumer boom in the US, it is self-evident that a stock market crash would serve to destroy middle class prosperity and constitute a most serious threat to social stability.

What applies to the US also applies to other western imperialist countries. In Britain shares went up in 1997 alone by 25%. A plunge in the British stock market would put paid to the consumer boom and would, furthermore, have a devastating effect on savings and pensions.

Additional factors behind the phenomenal rise in equities

In addition to the huge amounts of foreign capital flowing into the US (in 1997 alone, $60 billion of foreign capital poured into US stocks – more than the previous 9 years combined), three other factors contributed to the phenomenal rise in equity valuations. First, there are the take-overs and mergers, which offer companies the opportunity of cost cutting, improved market gains and achieving economies of scale. As investors recognise this trend, blue chip shares have outperformed small companies – thus providing added incentive for companies to grow even bigger by acquisition – characteristic of the Dow’s rise since the latest bull market is the domination by a handful of companies. Since 1982, while corporations such as Coca-Cola, Merck and Walt Disney have risen 40-fold, others have done far less well.

Second, the practice of share buy-backs, which has been gaining strength over the past decade, has an even larger effect in driving share prices up. Companies, instead of hoarding surplus cash, which is productive of low return in the current economic conditions, return it to shareholders in the form of buy-backs. The rather low cost of borrowing presently, combined with the fact that debt is tax-deductible, only encourages companies in this practice – to the extent of persuading them to borrow money for the purposes of buying back their own shares. It is hardly surprising, then, that over the four quarters to September 1998, the US corporate sector accumulated some $359 billion of debts – the highest ever figure for any 12-month period (see Philip Coggan, Financial Times, 13 March 1999).

Not only were there very few new issues of shares, in the four quarters to the end of September 1999 in the US there was net retirement of about $158 billion, while in Britain there was a reduction in the supply of equity to the tune of £30 billion in 1998. With more and more large investors chasing fewer and fewer blue chip shares, it is hardly surprising that their prices have been pushed up beyond belief.

The third factor contributing to the high valuations on Wall Street has been the so-called moral hazard, the belief that the Federal Reserve is putting a safety net under the market following the 0.75% cut in interest rates last year - that the Fed will not allow the stock market correction to go so far as to push the US economy into recession, that it will come to the market’s rescue by opening monetary sluice gates – as it did in the autumn of 1988 and, even earlier, 1987 after the collapse of US equity markets in October of that year.

US imbalances unsustainable

Mr Greenspan, the Chairman of the Fed, admitted with great candour in December 1996 that "Irrational exuberance" on the stock market has been the price of an activist monetary policy aimed at "maximum sustainable growth of the US economy." The result of such an interventionist policy has been, as was to be expected, to send the wrong signals, resulting in inflated asset prices and, to use the apposite terminology of Hans Tietmeyer, the former President of the Bundesbank, to "move the financial markets in the direction of casino capitalism," which are threatening to cause a systemic failure and bring the markets to a scandalous collapse. Doubtless "…a policy of responding directly to sudden falls in asset prices, and to the consequent drying up of liquidity, provides a degree of central bank insurance to investors against the risk of being trapped in a collapsing market. If so, central banks may help to create the bubbles whose destabilising consequences they so justly fear." (Martin Wolf, ‘Bubble trouble’, Financial Times, 24 September 1999).

The very factors which have sustained the bull market have created their own problems. The US current account deficit has risen from £183 billion (£115 billion) in 1995 to $450 billion in 2001 – the equivalent of nearly 5% of the US GDP. So far the US trade deficit has played an important role in preventing the world capitalist economy from taking the plunge into recession. Thus the deterioration in the US trade deficit to the tune of $76 billion in 1997 and 1998 accounted for two-thirds of the total improvement totalling $120 billion, in the balance of payments of the Asian newly-industrialised countries’ economies ($53 billion), the Asian developing countries ($33 billion) and Japan ($34 billion).

Encouraged by booming stock markets, US consumers have been spending like there is no tomorrow, and their savings rate is negative. The private sector deficit (the gap between savings and investment) stands at a huge 6% of GDP. So far this deficit has been financed partly by capital inflows (and partly by the budget surplus), which in turn have strengthened the dollar and kept inflation and interest rates low.

Even bourgeois economic experts are of the view that the US imbalances are unsustainable. "The US stock market," writes Martin Wolf, "will not remain at historically unprecedented valuations indefinitely; the private sector cannot be a vast net dis-saver; and the US will not run a very large trade deficit permanently." (‘Cauldron bubble, Financial Times, 23 December 1998).

It is the fear of the best of bourgeois economists and policy makers that the Fed’s easing of monetary policy merely served to exacerbate the gaping imbalances now dominating the US economy.

"By pumping up stock prices, it helped inflate an asset price bubble that now poses the largest threat to global stability … By allowing domestic spending to surge, it widened the already vast current account deficit to more than $300 billion this year … And by accelerating demand it let the genie of inflation out of the bottle." (‘Plus marks for policy-makers’, Gerard Baker, Financial Times, 24 September 1999). Suffice it to say that today the $300 billion current account deficit has soared to $450 billion in less than three years!

With remorseless logic, Mr Baker drove the point home that, far from being the cure, monetary easing could actually end up producing a world-wide recession in the not too distant future, and it has. Here are Mr Baker's predictions:

"The Fed, of course, has already taken back two of the three-quarter point rate cuts of last year. But the gloomy view is that it is too late to stop the imbalances ending in a smash. The current account deficit is undermining the dollar; once investors leave the US currency in droves, inflation will pick up speed and the stock market will collapse. That would provide a new round of global financial instability, significantly damage domestic US demand, and perhaps even precipitate the world recession the G7 worked so hard to avoid a year ago" (ibid.). This prediction came true a mere 18 months later.

The US trade deficit brought about a progressive increase in its net external indebtedness. The rate of US net liabilities to GDP rose from 10% in 1994 to 20% in 2000 and is on course to reach 30% by 2004 and 50% by 2010. "The willingness of the rest of the world to hold claims on the US is not inexhaustible," says the Financial Times of 28 April 1999, adding that "the worry is that any refusal to hold more US assets will come in the usual panic-stricken rush." – characteristic of capitalism, we might add.

That this ‘worrying’ scenario was already on the way becomes clear with each passing month. The Financial Times of 3 August 1999 reported that "Foreigners may finally have had their fill of Uncle Sam’s IOUs," and that the US "finds itself in the unfamiliar position of having to compete harder for foreign capital," adding that "dollar assets in general seem less attractive to the world’s investors than they once did." (Foreign investors lose taste for US treasuries’, Richard Walters).

Economies in Europe, Asia and elsewhere are dependent on the US to keep the forward movement of world growth, and the US economy in turn is dependent on a continuously rising stock market to continue the growth in consumer demand. As early as January 2000, John Plender correctly pointed out that:

"In the US the stock market is now a crucial determinant of growth in the real economy. The decisions of American consumers, who are also the chief locomotive for global demand, are driven by wealth effects: unrealised capital gains provide the confidence and collateral for borrowing and spending. It follows that US equities cannot stand still; they have to go on rising if the US economy is not to stall. Any stalling would rebound on the markets" (‘New world disorder’, Financial Times, 6 January 1999).

External indebtedness

The stock of net US liabilities to the rest of the world (the net international position of the US) at the end of 2000 was MINUS $2,187 billion - just over a fifth of the gap. Add to this the current account deficit of $450 billion in 2001 and we get a figure of approximately $2,600 billion at the end of 2001 - all this during a slowdown which set in during March 2001. By 2006, this stock of net US liabilities is forecast to rise to $5,800 billion, which is the equivalent of 46% of US GDP, or 15% of the global gap.

In other words, the whole crazy boom will come to a sudden and grinding halt if the US equities were to tumble. No wonder, then, that thinking bourgeois ideologues find the state of the US stock market and the wider US economy "frighteningly reminiscent of the political economy of the Japanese bubble of the late 1980s, on a global scale" (Leading article, Financial Times, 19 December 1998). It is also "frighteningly reminiscent" of the scenario immediately preceding the Great Crash of 1929 and, the subsequent Great Depression.

The US economy has been witnessing its longest ever peacetime growth, and has since the second quarter of 1991 expanded by an average of 3 per cent a year. During the same period, corporate profits have grown by a compound rate of over 10% a year (though some analysts put the growth of corporate profits at 7%), yet share prices until 1999 rose by 17% a year. To believe in the continuation of these trends is to believe "that company earnings will eat up an ever-larger share of the economic pie, and that investors will attribute an ever-higher value to those earnings …" (Richard Waters, ‘Stock market odyssey’, Financial Times, 17 March 1999).

On 5 December 1996, Alan Greenspan, the chairman of the Federal Reserve, asked the question, which has since gained notoriety, thanks to the meltdown of the markets in 1998: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged corrections?…" At the time Greenspan asked his question, the Dow Jones industrial average had reached 6,500. Today it stands at over 10,000.

To start with, the rise in the Dow Jones, which in March 1999 hit the 10,000 mark, does not tell the whole story. The Financial Times of 17 March 1999 explained the phenomenal rise of the US stock market, and the psychology behind it, in the following terms:

"This psychology perhaps explains two of the most striking aspects of the recent spurt. An ever smaller group of companies is leading the market higher, and more investors are betting that, because these companies’ shares have outperformed, they will continue to do so. Largely forgotten in the celebrations on Wall Street yesterday were the many companies whose shares have not been setting records. In fact more than half the shares in the S&P500 are at least 10 per cent below their records. Small companies, represented by the Russell 2000 index, have missed the party altogether. That index is over 40 per cent below its peak.

"In this narrowing stock market, it has paid to back the winners. Investors have placed their bets on an ever shrinking group of big names. This so-called momentum investing, the stock market equivalent of jumping on a bandwagon, has become the most widely practised investment technique of the day.

"With the bull still in full charge, it seems difficult to call an end. But it is worth remembering that after the crash of 1929, it took the Dow Jones Industrial Average another 25 years to return to its earlier peak."

There is also an uncomfortable parallel between the situation in the US today and that of Japan just before its troubles started in the late 1980s. One has only to cast a glance back at the Japanese economy in the late 1980s to realise the close parallel between the Japanese economy then and the US economy now. Back then the Japanese authorities too encouraged an aggressive monetary expansion that fuelled an asset price bubble.

Not only is the US growth of broad money comparable to that of Japan’s during the latter’s bubble days, the ratio of the US stock market value to the gross domestic product, which today accounts for 150% of US GDP, is nearly as high as in Japan in early 1990 (when the Japanese stock market stood at 140% of Japan’s GDP, as opposed to today’s 25% of GDP) – just before the crash. In the four years up to the end of 1989, Tokyo's stock market index rose by an average of 29% a year. In the US, from 1995 to 1999, the S&P 500 grew at annual rate of 26%. There are even parallels between the two economies as regards inflation. If the US bubble has coincided with low inflation, so did the Japanese bubble.

The meteoric rise in the prices of Japanese assets in the second half of the 1980s was accompanied by fairly modest inflation, which never went above 4%. The Japanese too appeared to be masters at manipulation of the market and, for a time, the rigging of the market did work. But eventually the bubble did, as it was bound to, burst, plunging the Japanese economy into a protracted period of economic stagnation and recession, and it is now in its third recession.

The Japanese monetary expansion was driven, just like that of the US today, by the priority given to boosting domestic demand. The resultant explosion in asset prices was regarded as a solution, instead of a problem. And, temporarily, it worked. The Japanese economy became the wonder of the world. Just as until only the other day, in the words of Mr Andrew Smith, "America appears to have invented a kind of economic perpetual-motion machine in which share gains fuel consumer spending and business investment, and these in turn fuel market gains." (Sunday Times, 21 March 1999).

Prayers for a benign slowdown

It was the hope and prayer of bourgeois economic pundits and the managers of the principal imperialist economies that any Wall Street crash would wait until growth in the economies of Japan, Euro-zone countries and the emerging economies had picked up sufficient strength to enable these to take over from the US the task of being the locomotives of world economic growth. These prayers, however, have not materialised and were never likely to.

Japan too seemed back then to have hit upon the formula of the Goldilocks economy – seemingly ever-rising asset prices, accompanied by increased consumer spending, increased business investment, low inflation, low unemployment and an expanding economy. But something had to give – and it did give – leaving Japan "with horrible withdrawal symptoms", as the Financial Times’ leading article of 19 December 1998 put it. In America’s case too, pointed out respectable economics commentators, something would have to give as the trade deficit reached unprecedented levels. The "Federal Reserve has to supply the fix. But it too must worry about the ultimate fate of the junky." (ibid.)

Because the world capitalist economy is suffering incurably from a crisis of overproduction; because "… The world has too much industrial capacity, a situation worsened by Asia’s crisis, and it will take years of savage rationalisation [i.e., recession] to bring capacity into line with demand" (Andrew Smith, The Times, 14 February 1999, ‘Deflation is a debt trap’); Martin Wolf, having analysed the state of the US economy at the end of 1998 and correctly concluded that the US’s economic position was unsustainable, equally correctly went on to say that Japan’s position was "as unsustainable as that of the US". In substantiation, he referred to a "frightening report" from the Japan Centre for Economic Research (JCER), according to which "Japanese business has invested far too much, and that the logical course would be to drastically reduce investment.

"But, argues the report, without strong recovery in domestic demand, there remains far more capital than the country needs." In plain language, Japan is suffering from a crisis of overproduction.

In order to bring Japanese capacity into line with the (smaller) demand, it will take years of savage rationalisation, whereby private investment in plant will have to drop at an average annual rate of 7% until 2003 and its share in the GDP reduce from 15.6% in 1997 to 10.6%, with the resultant shrinkage of the economy to the tune of 0.7% per year. Alternative to this would be a fiscal and monetary stimulus, which is hardly likely to happen, given the government fiscal deficit which is already running at 10%. Hence there is absolutely no hope of Japan coming to the rescue of a collapsed US economy.

Overwhelmed by the pessimism staring him from every direction – from the US to the Japanese economic landscape – Mr Wolf resorts to quoting Shakespeare and concludes with the following correct, if pessimistic, assessment:

"As the witches told Macbeth, ‘Double, double toil and trouble; Fire burn and cauldron bubble.’ The market has been bubbling and has also caused a great deal of trouble. But 1998 could have been still worse if the US had not bubbled as much as it did. Optimists now predict global recovery. But pessimists can easily see why things could become worse: neither US private dissaving, nor Japanese private investment looks sustainable; emerging market economies remain vulnerable; and stock markets are as irrationally exuberant as ever. The world needed a good deal of luck to struggle through 1998. It will need just as much in 1999" (Martin Wolf, ‘Cauldron bubble,’ Financial Times, 23 December 1998).

As it happens, its luck did hold out in 1999 but ran out, as it was eventually bound to, in March 2001.

Undoubtedly, along with the sober and thoughtful analysts, many of whose observations we have referred to in this rather lengthy presentation, the bourgeois financial press is replete with fools (call them optimists if it pleases you), who talk about the Dow Jones rising to 20,000 or 100,000, just as their forebears in the 1920s prattled on about an era of never-ending prosperity. The foolhardy of today merely need to remember that between 1924 and 1929 the rise in the Dow was little different from its rise between 1994 and today.

There are others who assert that the stock markets – in particular Wall Street – cannot decline in our time because they are "sustained by private investors saving for retirement". This assertion evoked the following response from Tony Jackson, writing in the Financial Times of 12 June 1999:

"The management theorist Peter Drucker recounts how he published a prize-winning paper in 1929, weeks before the great crash, explaining why Wall Street could never fall. His argument, he recalls, was the same: the market had seen the advent of a new class of private investor – so-called Aunt Sallies – who would not sell whatever happened.

"And, he adds, nor did they. The market fell 80 per cent just the same."

Most of the serious bourgeois commentators on the economy are of the view that the stock markets cannot avoid a crash for too long. According to Mr Stephen King of the HSBC, "virtually all the indicators on the bubbles checklist are flashing red for the US … when such bubbles burst soft landings never seem to be within reach". (Quoted in Samuel Brittan, ‘Bubbles do burst’, Financial Times, 22 July 1999).

And bubbles do burst, for like negative savings ratios or fast deteriorating trade deficits, they cannot go on forever. And when the present bubble bursts, then, in the words of Gerard Baker of the Financial Times, "the downside of casino capitalism will become obvious: consumption will collapse and the US success of the past few years will prove to have been as illusory as that of Japan in the 1980s." (26 February 1999).

"Capitalism is [indeed] a bumpy ride" (‘Balance in a bumpy world’, Financial Times leader, 19 June 1999).

At the height of the crisis in the autumn of 1998, when stock markets went into a free fall, the US financier, George Soros, in his testimony to the US Congress on 15 September 1998, sated: "The global capitalist system that has been responsible for our remarkable prosperity is coming apart at the seams." A year later it was still coming apart at the seams.

The situation today reminds one of the following words of Paul Claudel, the French ambassador and poet, addressed in the summer of 1931 to an upbeat audience of diplomats in Washington:

"Gentlemen, in the little moment that remains to us between the crisis and the catastrophe, we may as well drink a glass of champagne." (quoted in Robert Chote’s article, ‘Wake-up call for Greenspan’, Financial Times, 15 August 1998).

Unlike many in his audience, Claudel could see that far from turning the corner after the stock market crash of 1929, the capitalist world was plunging into an unprecedented economic depression and a period of dangerous political instability on a global scale.

Today too, far from turning the corner after the violent convulsions of the past four years, the world capitalist economy is headed for a descent into an economic depression of hitherto unknown proportions and a prolonged period of dangerous political convulsion, to the accompaniment of a most acute growth of inter-imperialist contradictions, leading to inter-imperialist conflicts of horrific proportions and bare-knuckle fights to corner the shrinking markets, sources of raw materials and avenues for investment and export of capital.

And it cannot be otherwise, for whatever its manifestation and superficial appearance, the crisis engulfing the world capitalist economy is a crisis of overproduction, brought about by the contradiction between social production and private appropriation. During each such crisis, including the current one, this contradiction comes to a violent explosion. This has been the case since 1825, the year of the first general crisis of capitalism, since when these crises have broken out periodically and during which production and exchange suffer violent dislocation. In the words of Engels:

"In these crises the contradiction between social production and capitalist appropriation comes to a violent explosion. The circulation of commodities is for the moment reduced to nothing; the means of circulation, money, becomes an obstacle to circulation; all the laws of commodity production and commodity circulation are turned upside down. The economic collision has reached its culminating point: The mode of production rebels against the mode of exchange." (Engels, Anti-Dühring).

The fact is "that the social organisation of production has developed to the point at which it has become incompatible with the anarchy of production in society which exists alongside it and above it"; that during crises, the entire "mechanism of the capitalist mode of production breaks down under the pressure of the productive forces"; that during these crises, capitalism is no longer able "to transform the whole of this mass of the means of production into capital."

And this for the reason that in capitalist society "the means of production cannot function unless they first have been converted into capital, into the means for the exploitation of human labour power. The necessity for the means of production and subsistence to take on the form of capital stands like a ghost between them and the workers, it alone prevents the coming together of the material and personal levers of production, it alone forbids the means of production to function, the workers to work and live." (ibid, p.379).

The tendency towards an unlimited expansion of production is inherent in capitalism, but this tendency comes up against a barrier, that of a limited market because of the impoverishment of the masses – a reflection of the basic contradiction between social production and private appropriation. Pending the removal of this contradiction through proletarian revolution, and society taking over the means of social production and using them consciously for the benefit of its members, capitalist crises cannot but continue periodically to wreak havoc with a vengeance.

In the words of Lenin, "Gigantic crashes have become possible and inevitable only because powerful social productive forces have become subordinated to a gang of rich men, whose only concern is to make profits."

The deliverance of the expansive force of the means of production from the bonds imposed on it by the capitalist mode of production is the precondition for getting rid of the crises of overproduction which bring society "face to face with the absurd contradiction that the producers have nothing to consume, because consumers are wanting. Their deliverance is the one precondition for an unbroken, constantly accelerated development of the productive forces, and therewith for a practically unlimited increase of production itself." (ibid, p. 387).

It is the job of Marxist-Leninists to imbue the proletariat with the knowledge and understanding contained in the above-quoted observations of Engels’, to convince it that only a proletarian revolution can end this filthy system, which starves and degrades, which subjects it to unemployment, homelessness, destitution, brutalisation and war.

The first global recession of the 21^st century

The capitalist world did get that luck for a brief period but ran out of it, as it was bound to, a mere 15 months later. Wheels began to fall off with the Nasdaq's plunge from its peak of more than 5,000 in the spring of 2000: on 20 December it had slid to 2332. Since then it has maintained its downward march to stand at 1,725 on 12 April 2002. The Neuer Market in Germany is down 90% from its peak and the London Techmark has fallen by three quarters. By 22 March 2001, the Dow had fallen by nearly 20% from its peak in 2000. FTSE was down by 22%, German Dax by 33%, the French CAC by 30% and Japanese Nikkei by nearly 40%. As a result, $7 trillion were wiped off the global stock market valuations since their peak in 2000 - Nasdaq alone accounting for $4 trillion of stock market losses.

Only a few months before the Nasdaq's free fall, the global equity markets were on Cloud 9, with investors convinced that the world economy, especially the US, would grow at an ever-faster rate, accompanied by low inflation and low unemployment, thanks to the technological miracle. They were further convinced that company profits could increase by 20% a year irrespective of the state of the economy. But, as the Financial Times of 2 January 2001 put it, "there's a problem with living on Cloud 9: it's a long down if you fall off." The story of the two years since the spring of 2000 has been a prolonged, painful descent for most equity investors.

Five months later, the Financial Times correctly remarked:

"New-economy icons have been falling for months in the US, like revolutionary statues after a coup. The rubble from billion-dollar dot coms, million-dollar apartments and thousand-dollar suits continues to pile up in the streets as the business cycle asserts its tyranny over those who thought they had liberated themselves from the laws of [capitalist] economics" (8 June 2001).

The Financial Times of 23 June 2001 observed that the Fed's interest-rate cuts had failed to solve the problem underlying the economy, for consumers remained heavily indebted and companies continued to grapple with unsold inventory notwithstanding huge write-offs by technology companies, adding that "Business inventories of unsold goods are larger than at any time over the past two years" and the share of US production capacity lying idle (25% in June 2001, as opposed to 16% 3 years earlier) has risen to its highest since 1991, and company profits had peaked. Optimism about a quick recovery alone had stood in the way of a worse rout in equity markets, remarked the Financial Times.

Suddenly gone were the easy investment conditions, as were the painless capital gains for investors. Suddenly, too, companies embarked on aggressive cuts in jobs. In October 2001, the US manufacturing output was 7% below its peak in June 2000. And with this, gone were the hopes that the US economy could keep growing forever by 4% or 5% a year, hand-in-hand with low unemployment and inflation, thus retrospectively calling into question the investment decisions made in earlier happy times.

Faced with harsh economic reality, the Economist, in its issue of 25 August 2001, was finally obliged to admit the arrival of the first economic recession of the 21^st century, stating that the sharp slowdown of the US economy had already caused a recession in Mexico, Singapore and many other countries of Asia, which is in effect the factory floor to US IT companies, manufacturing everything from chips to peripherals - roughly a third of South Korean and Taiwanese exports consist of electronic goods, Nothing that output was stalling in many countries, it went on to say that the global output "probably fell" in the second quarter of 2001 for the first time in two decades and that new from around the world was "getting gloomier"; that in the second quarter the German economy stagnated, while the growth in the euro area was probably barely above zero; that the Japanese economy went into a "steep decline" and the economies of many a country in East Asia and Latin America were in a state of alarming slump. Emphasising that the world was experiencing a crisis of overproduction (The Economist for obvious reasons avoids this precise Marxist term and prefers to call it an "investment-led downturn"), the Economist added:

"Global industrial produciton fell at an annual rate of 6 per cent in the first half of 2001.

"The picture may soon look even worse.

"Early estimates suggest that gross world product as a whole may have contracted in the second quarter, for possibly the first time in two decades.

"Welcome to the first global recession of the 21^st century".

Two weeks later, that most authoritative representative of British finance capital, the Financial Times, dealt with the current crisis of overproduction with specific reference to the telecoms crash, stating that a "…$1,000 billion (£700 billion) bonfire of wealth has brought the world to the brink of recession". According to the Financial Times' calculations, expenditure on telecoms in Europe and the US totalled more than $4,000 billion and, between 1996 and 2001, while banks loaned $890 billion in syndicated loans, another $415 billion of debt was supplied by the bond markets, and $500 billion raised from private equity and stock market issues. Further sums came from blue chip companies that "drove themselves to the brink of bankruptcy or beyond in the belief that an explosive expansion of internet use would create almost infinite demand for telecoms capacity". About 50% of European bank lending in 1999, says the Financial Times, was to telecoms companies, as were 80% of all the high yield or junk bonds issued in the US at the height of the boom. Five of the ten largest mergers or acquisitions were concerned with telecoms companies during the boom. The result was a glut of 'bandwidth' of such proportions that if the 6 billion inhabitants of the world "were to talk solidly on the telephone for the next year their words could be transmitted over the potential capacity within a few hours".

Mobile telephone operators committed $200 billion in Europe alone to boost the bandwidth of their wireless internet services with no evidence that the technology would work or that there would be customers in sufficient numbers to use it.

No wonder, then, that the telecoms equipment manufacturers shed 300,000 jobs in the first quarter of 2001, with perhaps an additional 200,000 being shed by components suppliers and associated industries. Not surprisingly, the stock market value of all the telecoms manufacturers and operators fell by a huge $3,800 billion since its peak in March 2000. To put this huge sum in context, the combined losses on all the Asian stock exchanges during the 'financial' crisis of 1997-1998 were only $813 billion (see Financial Times, 5 September 2001).

The following day, the Financial Times returned to the subject with this observation:

"Hewlett-Packard's planned takeover of Compaq is the most dramatic sign yet of how hard the most brutal downturn for 20 years is hitting the information technology industries. In personal computers, semiconductors and telecommunications, companies worldwide that had taken explosive growth for granted suddenly face saturated markets, chronic excess capacity and a faltering global economy.

"If IT industries are to resume profitable growth, they must first sharply contract. More plant closures, bankruptcies, job cuts and losses for banks and investors that financed the boom seem inevitable, threatening political discomfort for governments. But there is nothing they can usefully do to stop the process. Instead, they must ensure it speedily runs its course" (6 September 2001).

A day later, in an editorial entitled 'The line goes dead', the Financial Times returned yet again to the frenzy in the telecommunications industry, which let to "…a greater increase in telecoms debt over the past three years than the UK government accumulated over two centuries." It noted that most of this investment had failed or would fail as overcapacity stood at 98%; market capitalisation of companies still in business had fallen by 60%; and the second-hand market for telecoms equipment had been marked by a collapse. The Financial Times, blaming this "extraordinary popular delusion" on a gigantic overestimate of demand for communications bandwidth hand-in-hand with a gross underestimate of the ability of technology to squeeze data down existing pipes, went on to add:

"As such, this bubble more closely resembles the tulip mania than the railways. In both cases investors lost their money - but rail travel at least left an infrastructure that changed society fundamentally. An incremental improvement in communication technology simply does not compare with the ability to travel."

The slide in telecoms has by no means halted. On 2 April 2002, IBM shares fell 10% after a profits warning of a 12% decline in the first quarter and speculation that the US Securities Exchange Commission had been investigating its accounts. IBM is not alone. Rumours about dodgy accounting practices at General Electric, the largest corporation in the world by market capitalisation, hit its share price, with GE shares falling 9.3% in one day on April 11. Xerox was badly mauled.

Similar winds blew in Europe where shares in mobile phone companies plummeted as investors no longer chose to believe corporate messages suggesting that these companies were growth stocks. Vodafone slumped to a 4-year low and £15 billion were wiped off the value of its empire. Since March 2000, when its market capitalisation stood at £230 billion, it has lost £153 billion of its market value. After high-profile bankruptcies of ITV Digital and KirschMedia, shares in Vivendi Universal, the former French high flyer, hit a four-and-a-half-year low amid concerns about the company's transparency. Ericsson's share price plunged 24% on 22 April 2002, when it announced a larger-than-expected first-quarter loss and plans to cut 7,000 jobs. All this is taking place owing to overcapacity - lack of subscriber growth as a means of driving up revenues - as mobile phone penetration in Europe is running at almost 80%, which is dangerously close to saturation.

Investors have lost trust. Increasingly, the investors, with good reason, are questioning the trustworthiness not only of many individuals and organisations, but also of the supposedly established facts. Worrying for the capitalist establishment, "companies' accounts are no longer seen as accurate - and not just in the case of Enron. There is evidence that US profits have been systematically overstated. US profits measured using tax returns peaked as a share of the national income in 1997, but reported earnings per share in quoted company accounts appeared to grow rapidly in 1998 and 1999" (Financial Times, 12 April 2002).

Companies are facing massive write-offs while their chief executives have enriched themselves. The Financial Times continues: "Supposedly independent analysis have been shown to provide advice to suit their employers' needs rather than the clients'. Trust in their reputation was already damaged. But it was in ruins this week after the revelation that analysts at Merrill Lynch recommended clients to buy stocks they privately regarded as 'a piece of shit'".

The Financial Times concludes that evidence is mounting that any possible recovery cannot be relied upon to deliver rising equity prices.

Although the 1990s are portrayed as the wonder years for the world, especially the US, capitalist economy, the reality is quite different. The growth of the world economy was 3% in the 1990s, as opposed to 3.5% in the 1980s, 4.5% in the 1970s, and higher still in the 1960s. As for the US, its economy grew by 3.2% in the 1970s, 2.7% in the 1980s, and 3.1 in the 1990s. The growth in the 1990s, while higher than that of the 1980s, was lower than that of the 1970s and still lower than that of the 1960s. In fact, the higher growth was registered only in the second half of the decade between 1996 and 1999, when the US economy grew at the rate of 4% a year. In 2000, it grew by a huge 5.2%, which deluded many bourgeois commentators into talking nonsense about a new economy, a new paradigm, which had managed to eliminate the business cycle - just as the wheels were about to fall off.

Equally, although a great fuss is made about the allegedly miraculous productivity growth in the US, serious bourgeois commentators are fully aware that the truth is completely at variance with this assertion. Productivity in the US grew by 2.6% a year between 1953 and 1973 and by 1.3% a year between 1973 and the second quarter of 1999. Be it said in passing, throughout the second half of the 20^th century, productivity growth in the US was consistently lower than in almost all the other imperialist economies; and between 1973 and 1995 it was low even by its own historical standards. However, it was claimed that in the 3 years up to May 1999, productivity in the US grew by 4.5%, compared with 1% in the early 1990s. Since then these figures have come under close scrutiny and have been revised down to 2.5% a year since 1996. Thus the mild improvement in productivity in the US since 1991 is no more than a reversal of the post-1973 productivity collapse. To describe this growth in productivity as 'new' is merely to distort the meaning of the expression beyond stretching point (see Financial Times, 18 August 2001).

Computers and telecommunications are by no means the most revolutionary of technological developments to date. Electricity, internal combustion, chemicals, communications and entertainments (radio, television and flying) were far greater and far more basic sources of improvement in productivity across the economy as a whole. If one looks at the whole business cycle of the 1990s, rather than half the cycle since the end of 1995, the average rate of growth in productivity in the US has been smaller than that claimed by the proponents of the 'new' era, who have simply used the allegedly 'new paradigm' to justify the stratospheric levels of Wall Street and to perpetrate a huge and unsustainable swindle on a gullible investing population.

"Our most prestigious investment houses have invented bogus mathematical formulas to justify stratospherical stock prices and have fed the inexhaustible appetite of … investors for internet businesses that are little more than concepts dressed up as companies", wrote Ron Chernow, author of Titan: the life of John D Rockefeller in the New York Times in mid-April 2000 (quoted in the Sunday Times, 23 April 2000).

The telecoms sector was not alone in suffering from too much capacity. Overproduction overwhelmed one sector after another, forcing companies to cut production and hasten the onset of recession. Ranging from the Technology, Media and Telecommunications companies (TMTs) to the old economy sectors - chemicals, engineering - from services to manufacturing, the news is bad. As a result, in October 2001, in the US the output of manufacturing was 7% below its peak in June 2000; production in the OECD, composed of the 30 richest countries international he world, grew by a meagre 1% in 2001, while the world economy as a whole grew, too, by just 1% (as opposed to 4.2% in 2000) - notwithstanding massive cuts in interest rates by the Federal Reserve, from 6.5% to 1.75% in less than 12 months. Production in the eurozone grew 2% - in Germany less than 1% although the EU cut interest rates from 4.75% at the beginning of 2001 to 3.25% in November. German manufacturing output actually declined by 1.5%.

The UK economy, which is supposed to have done better than the eurozone and, if we are to believe Chancellor Brown, has lifted itself above the boom and bust which characterises every capitalist economy, is actually in a mess. The UK is running a current account deficit of £17 billion a year, while the deficit on traded goods is running at £30 billion a year. Consumer spending is rising while the export sector languishes; services are flourishing while manufacturing is in the doldrums. While the UK GDP grew by 2.2% in 2001, manufacturing output slid by 3% in the same year, with agriculture, forestry and fishing declining by an unparalleled 11.4% (obviously foot and mouth disease contributed to this precipitate decline). Boom now co-exists with bust. There is an explosion of consumer debt, rising fast than real GDP by a very substantial amount since 1995, aided by lower interest rates and lower inflation, which have reduced the cost of debt servicing. Household debt in Britain stands at £724 billion (110% of the annual household disposable income) and rising by nearly £7 billion a year. It has doubled in 10 years. People in Britain could spend all their income over the next 13-14 months just repaying their debts. Apart from the fact that they have to live on something, there is a small inconvenience of interest payments on these huge borrowings.

The position in some of the other imperialist countries is no better. In Japan, household debt stands at 130% of GDP, in the US 106%, and even in frugal and prudent Germany at 115%. Only in France and Italy is it much lower, where it stands at 71% and 43% respectively.

As for Japan, it finds itself in the third recession in ten years. What we are confronted with is a synchronised recession in all the three major centres of capitalism - the US, Japan and Europe. Most forecasts for 2002 are equally bleak. The US economy is expected to grow by 1.4%, the German by 0.7%, the eurozone by 1.5%, with the Japanese economy declining by 0.7%. With the collapse of the dotcom (these days referred to as the dotcon) bubble, the plunge in the Nasdaq and in the Neuer market, the state of the Dow and other indices which are simply marking time going nowhere and where every rally peters out no sooner than it has started, those who not so long ago talked about having put an end to the business cycle have suddenly discovered that the stock market and the capitalist economy are again, as ever, "subject to gravitational pulls it seemed to have defied for half a decade" (Financial Times, 11 January 2001).

The IMF says that the normal forces of recovery, combined with the above cuts in interest rates, ought to produce a growth of 2.5% for the US and 2% for the G7 from the fourth quarter of 2001 to the fourth quarter of 2002. The problem with this optimistic IMF forecast is that it fails to take into account the existing massive spare capacity and over-investment as well as the negligible household savings in the US, on which, in the absence of a Japanese and European recover, the rest of the world relies as a buyer of last resort.

Far from signs of recovery, there is news of doom and gloom from every quarter and from every direction. Unemployment in the US, as in Japan, is increasing. In the US, in October 2001 alone, businesses slashed payrolls by 415,000 - the largest one month drop in more than 20 years. In the two months of October-November 2001, the increase in the number of unemployed in the US totalled 800,000, taking the increase for the year 2001 as a whole to 2.2 million - the biggest annual increase in the jobless total to date. Engineering companies in Europe have slashed their workforces. ABB, one of the world's biggest engineering groups, has cut 12,000 jobs. Invensys, the UK-based engineering group, has shed nearly 10,000 jobs. These figures compelled the Financial Times of 3 November 2001 to state that the "…classic ingredients of recession - an extended period of declining employment, output and income - are all in place." On top of this, household savings have declined as a percentage of disposable income, from 10.6% in 1984 to an estimated 0.3% in 2001. The current account deficit is unprecedentedly high at $450 billion (4.5% of GDP). The stock market valuations are, notwithstanding recent troubles, too high in historical terms, with the price/earnings ratio on the Standard & Poore's Index close to 40. The worst case scenarios, based on solid facts, visualise a Wall Street crash, a steep fall in the dollar and a slump in consumer spending, with utterly ruinous consequences for the US and the rest of the capitalist world.

Japan, the second biggest economy, is suffering from falling trade, rising unemployment (now 5.3% of the workforce), high public debts to the tune of 130% of its GDP, an extremely fragile banking system, chronic over-investment in the past has saddled large sectors of the economy with excess capacity and an unwillingness to invest any further, a very high domestic savings rate (30% of income) accompanied by the consumers' unwillingness to spend. Over the past decade, Japan has introduced ten stimulus packages, pumping $1,070 billion of public money into the economy in an attempt to restart growth, but this massive injection of funds ahs had little effect other than to send the government's debt soaring to unprecedented heights. Personal consumption, which accounts for 50% of Japan's economic activity, is flat and capital investment continues to fall. According to the Bank of Japan's Tankan Survey, published at the beginning of April this year (2002), Japanese companies plan to cut capital investment by 8.4% this year as they continue to reduce excess capacity.

Lending by Japanese banks fell by 4.5% in March, year-on-year, the 51^st consecutive month of decline. The Japanese economy has been in three consecutive quarters of recession, while prices have been falling for three years at the rate of almost 2% a year (see the Financial Times of 11 April 2002), contracting by 1.1% in 1998, registering a meagre 0.8% growth in 1999 and a relatively healthy 2% in 2000, the Japanese economy finds itself in the midst of yet another recession. During the whole decade of the 1990s, the growth rate of the Japanese economy has been an abysmal 1.7%.

As for its banking system, it is believed by experts to be 'technically insolvent', though still liquid. The world's second biggest banking system is close to being bust, with problem loans probably far exceeding the equity of the banking system. Most Japanese banks, according to reliable estimates, will fail to meet the Basle capital adequacy criteria. Some will have negative capital. This does not bode well for, as Martin Taylor, who used to write the Financial Times' 'Lex' column before becoming chief executive of Barclays Bank, once correctly remarked that "poorly capitalised banks are like haemophiliacs on an assault course" (Financial Times, 2 October 1995).

Notwithstanding the fact that the banks have written off 72,000 billion yen of bad loans, and the government created a 70,000 billion yen support package, Japanese banks still hold in their portfolios several trillion yen (estimated to be 43 trillion yen, or 8% of the country GDP) of problem loans. The collapse in the last week of December 2001 of the regional Ishikawa Bank under a pile of loans is an eloquent reminder of deflation in a debt-laden financial system. To make matters worse, the fall in the Nikkei, which today stands at just above a quarter of its peak at the beginning of 1989, when it stood at just a few points below 40,000 (in April 1989, the Nikkei began its long, tumultuous decline from the giddy heights of bubbledom), has eroded the capital base of Japanese banks, since they have been traditionally permitted to count part of their equity portfolios as 'capital'. Continuing deflation makes it harder still to deal with corporate debt, made worse by problem loans uncovered by the collapse of the 1980s asset (land and stocks & shares) price bubble.

To make matters worse for the global capitalist economy, world trade grew by 0% in 2001, as compared with 13.4% in 2000.

The 1929 crash

During the last two decades the US (and for that matter many another) stock market has witnessed a phenomenal rise. In the US, the Dow Jones Index has risen from 1,000 in 1982 to the present 10,000, having briefly risen to 11,700 - a whopping ten-fold rise during a period when the US national output has risen only 2.6 times. From 1994 to 1999 alone, the Dow rose by more than 200% while corporate profits rose by less than 60%. In just the three years between early 1995 and the second quarter of 1998, equity markets added roughly $6,500 billion to the total US household wealth. Only a third of the increase in the prices of US equities since 1982 is accounted for by the rise in US corporate profits, with the remaining two-thirds coming from a rise in price/earnings ratios, which investors have been willing to attach to those profits. If in 1982 prices of shares stood at 8.5 times their earning, by 1999 they had jumped to 34 times earnings.

The seemingly inexorable rise of equity prices in the US has an uncanny parallel with a similar rise in the US in the years preceding the crash of October 1929. The Dow, which stood at 106 in May 1924, rose to 245 by the end of 1927, reaching the dizzy heights of 449 on the last day of August 1929 - a rate of increase even faster than that witnessed by the Dow during the last six years.

Less than two months after hitting the 449 mark, the Dow began its precipitous decline, reaching the rock bottom figure of 58 on 8 July 1932. It was to take 10 years and a deep recession before the Dow recovered to the figure of 100. Here briefly is the story of the crash of 1929.

Everything appeared to be rosy in the US garden in 1928. On 4 December 1928, President Coolidge sent his last message on the state of the Union to the reconvening Congress. In it he said: "No Congress of the United States ever assembled … has met with a more pleasing prospect than that which appears at the present", adding that the legislators and the country might "regard the present with satisfaction and anticipate the future with optimism" (quoted in J K Galbraith, The Great Crash 1929, p.30).

Echoing imperialist statesmen and basing themselves on the partial post-first world war temporary stabilisation of capitalism, traitors to the working class from the Social Democratic camp were preaching the theory of organised capitalism - a variant of Kautsky's opportunist theory of ultra-imperialism. The most prominent purveyor of this theory was Hilferding. According to this theory, the growth of monopoly puts an end to the blind forces of the market, and thus to competition, anarchy of production and capitalist crises, making way for organised capitalism in which planned and conscious organisation predominates. Further, according to this theory, monopoly peacefully grows into planned socialist economy, thus obviating the need for the working class to overthrow capitalism. Addressing his Party's Congress in 1927, Hilferding told the delegates that capitalism had in the main overcome the blind laws of the market and made way for an organised economy.

Partial stabilisation of capitalism might have led a superficial observer to believe that capitalism's problems were over and done with. Any serious thinker, who followed the developments of world economy and politics, however, would have been of the opposite opinion. None of the contradictions between the principal imperialist countries, over which they had fought the first world war, had been resolved. Capitalist overproduction and the paucity of opportunities for profitable investment remained a recurrent problem, leading to trade disputes and a furious struggle for markets, resources, avenues of investment and export of capital. In addition, huge sums of money, fuelled by credit expansion, were thrown, as we shall see, on to the stock exchange as a way of averting a collapse in profits. The sums of money loaned to speculators climbed from $1 billion in the early 1920s to $6 billion in 1928. These could only provide a partial and temporary relief. When the inevitable crash came, it brought in its wake protectionism, fascism and a war of unprecedented proportions, in which the major capitalist powers fought a life-and-death struggle as the only way of safeguarding their respective interests.

Although Galbraith tells a fascinating story and charts the crash of 1929 accurately, he is unable to provide any scientific explanation for the crash, instead resorting to psychological theories such as mania and irrationality. This is all the more surprising in view of the fact that he himself cites impeccable figures indicating clearly that the US was gripped by a crisis of overproduction which, to begin with, like all such crises, manifested itself in the form of a financial crisis and a stock exchange meltdown.

Between 1925 and 1929, he say, manufacturing establishments increased from 183,900 to 206,700, with the value of their output rising from $60 billion to $68 billion. The Federal Reserve index of industrial production, which had averaged only 67 in 1921 (1923-25 = 100) had risen to 110 by July 1928 and 126 in June 1929. Business earnings were rising rapidly. However, by the autumn of 1929 the economy was well into a depression. By October 1929, the index of industrial production had declined to 117 - from 126 only four months earlier. Unsold stocks accumulated. This could not fail to find its reflection in the stock market, which it did very soon indeed. The crisis of overproduction and difficulties of realisation of commodities produces mass defaults resulting in the withdrawal and drying up of credit. It is impossible to expand credit without limit, for the debts have to be repaid, failing which credit is withdrawn instantly. When this happens on a mass scale, it produces a credit crunch, which in turn produces a rush to sell shares at prices far lower than the sums of money borrowed to purchase them - resulting in a crash on the stock exchange.

When on Monday 21 October share prices fell, Professor Irving Fisher stated that the decline represented only a "shaking out of the lunatic fringe" before going on to explain that the stock prices during the 1920s boom had not caught up with their real value and would go higher still for, inter alia, the market had not until then reflected the beneficent effects of prohibition (the equivalent, one must presume, of the present-day wonders of technology), which had moulded the American worker into being "more productive and dependable" (Galbraith, p.119).

Ignoring Professor Irving's wishful thinking, it only took three days before the Black Thursday, 24 October, arrived - the first day of real panic, characterised by disorder, fright and confusion. Nearly 13 million shares changed hands at prices which shattered the hopes and dreams of their owners. By 11 o'clock the market had "degenerated into a wild, mad scramble to sell", often with no buyers available to buy. Sunday, 27 October, witnessed sermons suggesting that the happenings of the previous week on Wall Street had been a much-deserved retribution visited on the Republic and on a people who, in the single-minded pursuit of mammon, had forgotten all virtue. Everyone believed that, with the "heavenly knuckle-rapping" over, speculation could now resume anew. But to no avail.

"Outside the Exchange on Broad Street a weird roar could be heard. A crowd gathered. Police Commissioner Grover Whalen … dispatched a special police detail to Wall Street to ensure the peace… A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump" (ibid. p.121-2).

The decline in share prices was remorseless - hour after hour, day after day, week after week. Shares, which only a few weeks earlier were selling at $15 or $20, could be had for almost nothing. The rumour swept Wall Street that the Chicago and Buffalo Exchanges had shut. In quick succession 11 well-known speculators committed suicide. Any number of meetings of the most powerful financiers and statesmen, held for the purpose of supporting the market, proved utterly futile. Unable to make any sense of the "creative destruction" emanating from Wall Street, Simeon D Fess, the chairman of the Republican National Committee, made bold to say that the whole thing was a conspiracy to discredit the Republican Administration through the utilisation of the stock market. "Every time," he said, "an Administration official gives out an optimistic statement about business conditions, the market immediately drops" (quoted in Galbraith, p.162).

James Walker, Mayor of New York, exhorted motion picture exhibitors to "show pictures which will restore courage and hope in the hearts of the people".

Nothing could reassure the market. Tuesday 29 October was the most devastating day. With the volume of trading exceeding that on Black Thursday (24 October), it was accompanied by uncertainty, alarm and a perpendicular fall in prices. 16.5 million shares were traded and the index went down by 43 points, wiping out the gains of the preceding 12 months. If the first week of the crash had witnessed the slaughter of the innocents, in the second week it was the wealthy "who were being subjected to a levelling process comparable in magnitude and suddenness to that presided over a decade before by Lenin" (ibid. p.135).

The remarkable phenomenon of the Coolidge bull market was matched by the equally remarkable phenomenon of the "ruthlessness of its liquidation". Calm had given place to panic, universal trust to universal suspicion, and fact to rumour.

"On La Salle Street in Chicago a boy exploded a firecracker. Like wildfire the rumour spread that gangsters whose margin accounts had been closed were shooting up the street. Several squads of police arrived to make them take their losses like honest men. In New York the body of a commission merchant was fished out of the Hudson. The pockets contained $9.40 in change and some margin calls" (ibid. p.141).

Five star hotels, from being the hunting grounds of the pleasure-seeking rich, were all of a sudden transformed into venues for ending their lives by the high-flown rollers proletarianised through the devastating blows administered by the stock exchange.

"Clerks in downtown hotels were said to be asking guests whether they wished the room for sleeping or jumping. Two men jumped hand-in-hand from a high window in the Ritz. They had a joint account" (ibid. p. 146).

On Wednesday 13 November 1929, the industrials index closed at 224. On July 8, 1932, it closed at 58. "No one any longer suggested that business was sound, fundamentally or otherwise. During the week of 8 July 1932, Iron Age announced that steel operations had reached 12% of capacity. Pig-iron output was the lowest since 1896" (ibid. p.161).

The Great Crash gave way to the Great Depression, which lasted, with varying degrees of intensity, 10 years. In 1933, the US GDP had shrunk by a third in comparison with 19929. It was not until 1937 that the physical volume of production reached the levels of 1929 - only to slide again. Until 1941 the dollar value of production remained below the level of 1929. In the ten years between 1930-1940, only once (in 1937) did the average number of jobless during the year drop below 8 million. In 1933, close to 13 million - about one in every four in the labour force - were out of work. As late as 1938, one person in five was still out of work.

It was not the US alone which was in the grip of an unprecedented depression. The Great Crash and the subsequent Great Depression swept in its wake the entire capitalist world. In comparison with the doom and gloom, despair and despondency, engulfing the entire capitalist world, the USSR, the land of socialism, alone stood as a shining beacon of rising production, rising employment and working class power, beckoning the world proletariat, by its sheer existence, to overthrow capitalism. As the capitalist crisis wreaked havoc on the economies of all the major capitalist countries, year by year the USSR registered world historic increases in industrial production. If industrial production be taken as 100 in the year 1929, the position of the countries under consideration was as follows in the year 1933:

Figures taken from Stalin's Report to the 17^th Party Congress, January 1934.

By 1932, unemployment in Germany had reached 5 million (40% of the workforce); in Britain 3 million workers - just under a quarter of the labour force - were out of work. In the capitalist world as a whole, anywhere between 40-50 million workers were jobless. Several millions more worked only part time. In Europe the utilisation of industry had dropped to 40% of capacity.

In view of the above bleak economic picture, imperialist countries, not surprisingly, resorted to protectionism. During 1929-32, trade turnover, without which the capitalist economy cannot exist, declined by an unprecedented 65%.

Banks accumulated vast amounts of bad debts as their business clients found themselves unable to service their loans. In the US alone, the number of banks declined from 25,000 to 18,000 between 1929 and 1933.

German monopoly capitalism, terrified of the rising support for the communist party, hand in hand with the declining fortunes of the Social-Democratic Party, and fearing a proletarian revolution, took the fateful decision to back the Nazi party as the only way to save German capitalism. The Hitlerites, who in 1928 had only half a dozen members in the German parliament, bolstered by the financial, political and military support of German imperialism, secured 13 million votes and won 230 seats to parliament in 1932.

In the end, imperialism could find no way out of the crisis other than through the horrors of the Second World War, which brought untold material destruction and cost the lives of 50 million workers and peasants.

When it comes to explaining the real cause of the crisis, Professor Galbraith, one of the best of the bourgeois intelligentsia, is able to point to all kinds of peripheral causes, but not the one that really matters, namely, overproduction. If Galbraith, writing in the 20^th century and a whole seven decades after the publication of Marx's Capital, cannot provide the reader with a clue as to the cause of the 1929 Crash and the Great Depression which followed it, it would be futile to expect a proper explanation from Sir Isaac Newton, who began selling his £7,000 holding of South Sea shares in 1720. Sir Isaac, then the Master of the Mint, on being asked the direction of the market, replied "I can calculate the motions of the heavenly bodies, but not the madness of the people" (cited in Devil take the hindmost by Edward Chancellor, 1999, p.69). In trying to explain the Great Crash in terms of irrationality, mania and psychology, Galbraith seems to have advanced little beyond Newton. Undoubtedly psychology plays its part but, far from explaining the irrational exuberance, it itself has to be explained by reference to material reality. Undoubtedly, Galbraith makes a correct point in approvingly citing from the New York Times of 9 September 1929 the following sentnece:

"It is a well-known characteristic of 'boom times' that the idea of their being terminated in the old, unpleasant way is rarely recognised as possible" (op. cit. p.110). Although correct, this statement explains nothing except that in a rising stock market participants in it get carried away in their feverish activity and produce widespread and irrational exuberance.

Instead of seeking explanations of the social phenomena in material reality, even the best of bourgeois writers are forever inclined to search for explanations of reality in the realm of ideas. And this, so long after Marx scientifically demonstrated that speculative activity is merely an expression of the over-accumulation of capital and the drying up of opportunities for profitable investment in the productive sectors of the economy. The depressed state of industry consequent upon the fall in the rate of profit, forces the capitalists to resort to the export of this excess capital or to deploy it along the "adventurous road of speculation" on the stock exchange in a desperate attempt to prevent a collapse of profits. Hence the froth on the stock exchange, the frenzy of bidding up prices in the hope of finding a fool who will buy these stocks, who in turn hopes to find an even bigger fool in the shape of a prospective buyer - until the whole process comes to a scandalous halt and bankrupts those left with these shares.

It is not the mad and irrational exuberance that summons gargantuan sums of capital to the stock market but, on the contrary, it is the over-accumulation of capital, the inability of the capitalist system of production to use profitably the mass of accumulated surplus value, which in the first place call forth the deployment of vast amounts of capital on to the stock exchange, which in turn, at a certain stage, leads to irraitonal exuberance and the mad rush to buy. A crash in turn brings the speculators to earth with a horrible bump and in the process reveals, at least to those who are willing to face reality, that it is not that the stock market crash ahs shattered production but the bubble preceding it merely served to conceal the failure within the relations of production characteristic of capitalism.

The tendency towards limitless expansion of production, which is characteristic of capitalism, comes up against the barrier of a market limited by the impoverishment of the masses.

"The real barrier of capitalist production," said Marx, "is capital itself. It is that capital and its self-expansion appear as the starting and closing point, the motive and purpose of production; that production is only production of capital, and not vice versa, the means of production are not means of production for a constant expansion of the living process of the society of producers… The means - unconditional development of the productive forces of society - comes continually into conflict with the limited purpose, the self-expansion of the existing capital" (Marx, Capital Vol III, p.250, Progress Publishers, Moscow, 1966).

Hence the periodic crises under capitalism.

"The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium."

Conclusion

The three principal centres of imperialist capitalism find themselves in a synchronised recession. While the US and eurozone economies have registered meagre growth, this has been accompanied by a decline in the stock market and the yen, with a rise in corporate bankruptcies, deflation, problem loans and an ominous fiscal deficit.

But the worst is still to come.

Although the US is trying its best to avert disaster through a series of measures, ranging from interest rate cuts (during the last year, it has cut interest rates 11 times to the present unsustainable level of 1.75%), tax cuts and a dramatic increase in military spending, it cannot for too long delay the corrections to its unsustainable current account deficit (CAD), negative private savings, excess corporate investment, the huge stock of net liabilities to the rest of the world and overpriced equities.

The US CAD, amounting to 4.5% of its GDP, means that it is spending to the tune of 4.5% in excess of its income. In other words, while the CAD persists at this level, the rest of the world must be persuaded to provide the US with a net capital inflow to the tune of 4.5% of US GDP. This capital inflow may assume the form of asset sales to foreigners, loans from them or the sale of stakes in US businesses. The result is a build-up of claims by foreigners on the US (see the Financial Times of 27 February 2002).

And this at a time when the US stock of net liabilities to the rest of the world (the net international position of the US) already ahs risen to a fifth of America's GDP. At the end of 200, the US's net liabilities stood at $2,187 billion. If we add to this the CAD of $450 billion in 2001, we get the sum of $2,600 billion. If the CAD rises further, as it is forecast to do, so will the US' net liabilities to foreigners.

Hitherto the foreigners, principally Japan, newly industrialised Asian countries and oil exporting countries and the EU (Especially through the spate of Mergers and Acquisitions activity during the last few years) have been willing to plug the gap left by the US trade deficit. For the last 6 years the strength of the dollar masked this process as its strength appeared to feed on itself, almost like a giant pyramid selling scheme. Strong overseas demand for US assets served to strengthen the dollar, thus increasing the returns received by the foreigners on dollar-based assets and fuelling further demand for the US currency. The truly weak aspects of the US economy - CAD and negative savings - simply took a back seat.

Things have, however, changed now. In the words of the Financial Times:

"Expectations of permanently high returns on US assets have been dashed, and not only by the fall in the stock market. Company profitability has been shown to be much lower than thought. Revisions to official figures show that profits have been falling as a share of national income since 1997. And productivity growth figures have also been revised down to the less than miraculous figure of 2.5% a year since 1996.

"In short, it is now much harder to argue that consistently high productivity growth will make US workers so efficient that the country can eliminate its current account deficit without a dollar depreciation. The International Monetary Fund is certainly sceptical. This week, it argued that the current account deficit of $450 billion was 'not sustainable in the longer term'" (18 August 2001).

Last weekend (27 April 2002), the Financial Times returned to the question with the statement that the dollar was overvalued and therefore certain to fall, because the US spends more than it earns. There is no historical precedent to suggest that a country faced with an increase in foreign claims on its assets of the proportions faced by the US can continue to do so without a significant depreciation of its currency. "It is even harder for the world's economy, sucking in more than $500 bn or close to 10% of the global gross savings every year. If the US attracted any less than this at the prevailing rate, the dollar would fall automatically."

The Financial Times adds that the foreigners investing in the US have many reasons to be cautious - these being the underperformance of US equities this year in comparison with those of other imperialist countries, the fragility of US corporate profits and the unprecedentedly high stock prices. If sufficient capital flows are not forthcoming, as is only too likely in view of the above concerns, the dollar will not only decline, but its decline will be "far from limited or orderly". The consequences of such a decline would be catastrophic for the US and the entire capitalist world, for if the foreigners were to withdraw their funds from the US, it would be like a gun pointed a the world's biggest and most important financial market.

Then there is the question of negative savings. The wealth held in the US stock market increased by $12,000 billion between 1994 and 2000. This is equal to more than 6 years of normal gross savings in the economy. US citizens have stopped bothering to save when the stock market does it painlessly for them. The US private sector financial deficit stands now at a record 6% of GDP, as opposed to a historical surplus of 2-3% of GDP. This cannot continue forever. If this trend were to reverse, a serious recession would be unavoidable - not only in the US but in the rest of the world, for as US households cut consumption and build their balance sheets, they will be importing far less from the outside world and thus exporting recession to the latter. This is especially so as the US economy is the largest and has acted as a buyer of last resort and an engine of world capitalist growth.

There has been a rapid rise in US domestic spending. Since the mid-90s it has risen by over 5% a year, while real growth has been below that figure. The result has been a rise in the CAD. This is only possible because people believe their wealth is increasing through rising stock markets. Wall Street prices do not need to plunge; they merely need to continue to mark time, as they have been doing for the last two years, for retrenchment in private spending to take place. No wonder, then, that the Fed is terrified of a Wall Street crash followed by a devastating depression.

Such a crash and depression would destroy many a large fortune and eliminate some of the household names of the corporate world. In addition, it would devastate the lives of hundreds of millions of workers and peasants in the world, as well as destroying middle class prosperity, which is the bedrock of political and social stability in the imperialist countries.

In his book Irrational exuberance, Rober Shiller deals with a question that is of close concern to millions of people, namely, pensions and social security. Just as in Britain people can opt out of state pensions, US citizens are allowed to contribute to pension schemes known as Individual Retirement Accounts and company-sponsored schemes referred to as 401(K)s. The writer is worried that these and similar schemes for retirement security are encouraging ordinary people "to mimic the portfolio strategies long pursued by the wealthy", while ignoring the fact that the wealthy, because of their riches, "have less reason to worry about losing substantial amounts in a market decline" (p.217).

He is alarmed at the fact that in 1996 "more than two-thirds of 401(K) pension plan balances were [invested] in the stock market". He adds: "If the trend toward favouring the stock market for 410(K) investments has continued since 1996, the fraction of plan balances in the market today will be even higher. Many participants no doubt put virtually all of their pension funds into the stock market.

"Because so large a proportion of 401(K) investments is in the stock market, a sharp decline would have important consequences for many retirees. A decline of the stock market to less than half its recent value is not improbable. Given the meagreness of most social security benefits, and given that most retirees have little more than their pension plan, their house, and their social security benefits, these declines would indeed be noticed" (p.218).

As if this were not enough, a number of proposals have been advanced in the US to invest a portion of the Social Security Trust Fund in the stock market. In his 1999 State of the Union Address, President Clinton proposed that a quarter of this fund be invested in the stock exchange over a period of 15 years. George W Bush went further still by advocating a scheme that would allow people to opt out of social security tax obligations altogether and invest them personally.

50 million households in the US shares directly or through mutual funds. The prosperity of these by and large middle class families is maintained through the rising equity prices. Something akin to it is happening in many other imperialist countries. With the increasing attempts at privatisation of social welfare in all the imperialist countries, the prosperous life of the middle class cannot be maintained except on the crest of a rising stock market. A stock market crash would thrust millions of such people into the ranks of the proletariat and thus undermine the very basis of social peace in the centres of imperialism. This mass of declassed petty-bourgeois, unless harnessed by the party of the revolutionary proletariat, could become easy prey to the demagogy of fascism. It would be an urgent task for the proletariat to win over to its side the newly-impoverished millions - not an easy task in view of the contempt it has for the working class - a contempt born out of fear of being trust into the ranks of the despised class.

The weak global economic growth and a slowdown in world trade has, not surprisingly, given rise to growing protectionism and rising tensions between the US and its main trade partners - especially over Washington's decision to levy tariffs of up to 30% on imports of steel into the US. The EU and Japan are threatening to retaliate in kind. Each side, while swearing by the rules of the WTO (World Trade Organisation), is principally concerned with the defence of its own industry and commerce; each accuses the other of acting contrary to the provisions of the WTO.

Last year (2001) saw a record number of anti-dumping and safeguards investigations into imports. 348 anti-dumping investigations were initiated last year, compared with 251 in 2000 and an annual average of 232 in the 1990s. Safeguards cases (these are temporary trade barriers, put up in the face of sudden increases in imports) worldwide more than doubled, from 26 in 2000 to 53 last year.

As the crisis develops and deepens further, the various imperialist powers would resort, without doubt, to a full-fledged trade war which, unless prevented by proletarian revolution, cannot but in the end lead to a war of horrific proportions between imperialist groups. Thus it can be seen that imperialism faces the proletariat and the oppressed peoples with the simple choice: either submit to the dictates of capital, eke out a miserable existence and sink lower and lower, or pick up the glorious banner of Marxism-Leninism and overthrow imperialism.

Socialism - the only way out

In view of this, it is of the utmost importance to explain to the working class and the petty-bourgeois strata that crises cannot be eliminated while capitalism lasts, that the "solution can only consist in the practical recognition of the social nature of the modern forces of production, and therefore in the harmonising of the modes of production, appropriation and exchange with the socialised character of the means of production. And this can only come about by society openly and directly taking possession of the productive forces which have outgrown all control except that of society as a whole. The social character of the means of production and of the products today reacts against the producers, periodically disrupts all production and exchange, acts only like a law of Nature working blindly, forcibly, destructively. But with the taking over by society of the productive forces, the social character of the means of production and of the products will be utilised by the producers with a perfect understanding of its nature, and instead of being a source of disturbance and periodical collapse, will become the most powerful lever of production itself."

Further it is necessary to explain that "the capitalist mode of production more and more completely transforms the great majority of the population into proletarians, it creates the power which, under penalty of its own destruction, is forced to accomplish this revolution" (Engels).

Rather than allow ourselves to be destroyed by monopoly capitalism, the proletarians of the world must march along the only route that leads to their salvation - the road of the October Revolution.