Frenzied speculators enter the deflationary spiral

IT WAS panic on the financial streets of London, New York, Tokyo, Paris and other world financial centres last week as stock markets went into simultaneous freefall.

Responding to the world's stock market jitters the US Federal Reserve cut interest rates by half a percent but it was not enough to reassure the frenzied financial markets.

Although 'bargain hunters' have temporarily rallied markets, the general pressure on share prices is downward.

At the same time Japan's central bank reduced interest rates to zero! This week the European Central bank is likely to follow suit and cut rates, all desperately designed to try and stimulate the ailing world economy.

Recession

Although capitalism's movers and shakers are still reluctant to admit it, the US recession has arrived on 'Main Street', as The Socialist warned it would earlier this year.

The facts and figures now describe the situation of a recession almost perfectly.

All the US stock markets are now in a Bear market - where share prices have fallen by 20% since their peak. In the case of the Nasdaq hi-tech shares market, the fall has been even greater.

This descent, which occurred relatively rapidly, has seen $10 trillion wiped off global share values - equivalent to the US's annual economic output and estimated to be five or six times as large as the losses suffered in the crash of 1987.

Nor is this just a destruction of paper money. Nearly 50% of US households had become dependant on share earnings to make up their growing income. Last year, because of the fall in share prices the net worth of US households fell for the first time in 55 years.

Also, US manufacturing output has fallen for five successive months. The technical definition of a recession is where there are two successive quarters of stagnant or falling economic output.

So-called emerging economies like Argentina and Turkey are lurching into deep crisis and Japan is enmeshed in a long-standing economic and political crisis.

The reason why last week's stock market panic escalated was because the evidence of how much closer a global economic plunge had become was now concrete.

The US and Japan, the world's two biggest economies, account for 46% of world output. If both are in recession simultaneously, this would be the first time it happened since 1974 - a year which saw the world economy enter a tailspin and provoked mass political upheavals in many parts of the world.

The US and Japan have suffered economic slowdowns since 1974 but while the US stagnated Japan 'boomed' and vice versa. One reason why the Japanese economy has not been engulfed in a deeper crisis in recent years was because the 'booming' US economy soaked up Japanese consumer goods. Now, neither country is likely to pull the other out of the mire.

Also, Europe is suffering a slowdown in growth. Even if it reached its projected economic growth of over 3% this year, that would have been insufficient to pull the US or Japan out of recession.

Indeed, the US boom was built on many of the same shaky foundations as the Japanese boom of the late-1980s which led to the country's decade-long stagnation, which now threatens to descend into slump. In both countries there seems to be a paralysis amongst the capitalist policy makers on how to avert a recession or slump.

In Japan so much public money has been spent to try and stimulate the economy that state debt now stands at over $6 trillion - 134% of economic output. Technically Japan is close to bankruptcy.

The idea that Europe is immune to US economic turbulence was disproved last week by the sharp drop in Europe's stock markets, This reflects the developing crisis in many of Europe's industries - especially the telecoms sector.

In turn, this can cause a massive contraction in government spending plans, such as Blair's limited post-election blueprint, and this will add a further twist to a deflationary spiral.

As in all economic crises, the world's capitalist classes attempt to make the workers pay. But workers did not enjoy the fruits of the 'joyless' boom of the 1990s and neither should we pay the price for the collapse of the bosses' failed economic system.

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In The Socialist 30 March 2001:

Foot And Mouth Crisis: Labour's Criminal Failings