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Shattering confidence in world economy
Earlier this year, capitalist leaders were boasting of record growth in the world economy, around 5% a year for over five years. But the mood has completely changed. The big financiers, the 'masters of the universe' who believed that derivatives and other exotic financial instruments could eliminate risk and produce infinite profits, have been shaken to their core.
More broadly, the financial crisis has shattered confidence in the workings of capitalism. Once again, the chaotic, helter-skelter nature of the system has been exposed.
The credit crisis has developed alongside several other factors which are pushing the world economy in the direction of downturn and crisis. The US housing bubble has burst, leading to a slowdown in consumer spending, the main driving force of US growth.
House prices are also beginning to fall in Britain and other European countries, with the European Central Bank now warning of an economic slowdown in Europe, with even worse risks on the horizon.
At the same time, inflation is beginning to rise, especially with fuel and food, cutting into consumer spending on other goods and services. Worldwide food price rises reflect increasing demand from fast-growing economies like China and India. The increasing switch from food crops to production of biofuels is also pushing up prices. The prices of iron ore, steel, aluminium and other industrial raw materials, are escalating. This has provoked an orgy of speculation in the metal markets, with vicious takeover battles between the giant corporations involved.
But it is especially the oil price that has hit the roof, nearly hitting $100 a barrel in the last week or so. Again, this reflects increased demand from China, India and other rapidly growing economies.
At the same time, it is becoming more difficult to find new reserves, and oil supplies have been disrupted by hurricanes and wars. The giant oil companies have made record profits in recent years, but they have preferred to hand out cash to their shareholders rather than plough investment into new developments, especially in the field of alternative energy production.
The price of oil is set in dollars, and the recent price rise partially reflects the fall of the dollar. But even in inflation-adjusted terms, the oil price has nearly reached its previous peak of $101.7. That was in April 1980 following the Iranian revolution, which cut off supplies to the west.
The US economy, which still dominates the world economy, has been slowing down, and the Federal Reserve warns of worse to come. The huge indebtedness of US capitalism, with its persistent balance of payments deficit, has now resulted in a sharp fall in the value of the dollar. Since its 2002 peak, the dollar has fallen 41.2% against the euro and 32.8% against the pound.
At some point, probably not so far away, the countries and big investors who have been pumping money into the US will turn from the dollar. For instance, China holds over $1,000 billion of US treasury bonds and other dollar assets, which it has bought in order to support the US economy, a vital market for Chinese goods. But China's leaders have already warned that they will turn more to the euro and other currencies if the dollar is further devalued.
The fall of the dollar pushes up the value of the euro and the pound. This makes exports from Britain and the eurozone more expensive on world markets, and this too will undermine growth. Sooner or later, the relatively gradual fall of the dollar will turn into a precipitous fall. That would inevitably provoke turmoil in world financial markets, and a major convulsion in the world money system.
Can China save global capitalism? China has been growing consistently at over 10% a year, with massive investment in new productive capacity and infrastructure. Clearly, there is huge scope for the development of Chinese society. But the Chinese economy does not operate in isolation from the world economy. It is decisively dependent on export markets for its goods in the US and Europe.
However, China's huge demand for raw materials has pushed up commodity prices, which has begun to undermine growth in the US and Europe. Scope for opening up a domestic market in China is currently limited by the glaring inequalities and the meagre living standards of large sections of workers and rural poor.
Instability built in
Key Chinese cities, moreover, like Shanghai, are experiencing a frenzied property boom, with prestige office buildings and luxury apartments. More recently, there has been an ever growing bubble on China's stock exchange, with the frenzied buying of shares in Chinese companies. This is unsustainable and will lead to a financial crash.
A slowdown in the advanced capitalist economies, together with financial turmoil in China, is likely to produce a downturn in China.
Capitalism has never been able to guarantee continuous uninterrupted growth, let alone prosperity for the majority of society. The system inevitably means inequality, between rich and poor countries, and within both rich and poor countries. This has never been more glaring than it is today.
Capitalism has always been marked by booms followed by slumps. The ups and downs of recent years have refuted the absurd idea that the capitalist 'business cycle' had been abolished.
Financial crises and economic turmoil will inevitably be accompanied by deep political crises, with renewed movements by the working class and the rural poor to protect themselves against the ravages of capitalism. Conscious, organised sections of the working class, however, will see the need to go further and change society.
It is only the ideas and programme of socialism which offer a real alternative to capitalism: a planned economy to replace the anarchy and inequality of the market; workers' democracy to run society in the interests of the vast majority; and an internationalist approach to overcome the limits and divisions of the capitalist nation state and organise global development in the interests of humankind.
In The Socialist 14 November 2007:
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