What we think

The first rush of the storm

IT WAS almost inevitable that as the International Monetary Fund (IMF) gathered in Washington to issue its upbeat forecast for the world economy, the biggest stock market panic since 1987 followed.

Capitalism, the IMF claimed, had ridden the rough waters of the past few years and the US ‘powerhouse’, based on the new economy of high-tech internet shares, was the salvation of world capitalism. That, at least, was how they perceived matters before last week.

Once more the masses’ faith in capitalism to deliver growth and prosperity has taken a severe knock. The Socialist has warned for some time that the economic bubble would burst. Eventually, some of capitalism’s more sober analysts caught up with the potential catastrophe looming in the world economy.

But salutary warnings about “irrational exuberance” from the chairman of the US Federal Reserve, Alan Greenspan, did little to dent the hyper-optimism. Even now capitalism’s economic gurus say complacently that this is only a necessary correction that’s been waiting to happen.

To justify their position they cite the fact the US stock market, the Dow Jones, fell by only 5.6% on Friday 14 April compared to 22% on Black Monday in October 1987. Still, £1,250 million was lost in Wall Street in one day – the equivalent of German economic output – hardly insignificant given the underlying fragility of the world economy.

LAST WEEK’S IMF warning about high share prices followed by higher than expected US inflation figures make it almost inevitable that the Fed will raise interest rates. This is combined with fears about whether the strength of the current boom can be sustained, especially given the recent rise in oil prices, which has yet to fully work its way into higher costs and lower profit margins for companies.

Capitalism could face a very deep recession or slump now. Most of the escape routes they followed in 1987 or 1995 after the South-East Asian currency crisis are blocked off.

If US interest rates rise – possibly substantially – other countries will raise interest rates and this will have a deflationary effect in the world economy, depressing consumer and business demand.

This, combined with a volatile dollar, could provoke further speculative runs on currencies, and massive worldwide financial instability.

The spectre of a repeat of the 1929-33 economic disaster looms large as business confidence dwindles. But even if the stock markets stabilise for now, a big correction is still required in share prices, particularly of the dot.com companies, which are fast becoming dot.bomb companies.

Some like Greenspan, US Treasury Secretary Larry Summers and Eddie George, Governor of the Bank of England, argue stock market falls will have little effect on the real economy. Others are justifiably less confident.

The Observer’s William Keegan warned that much of the current world economic growth is highly dependent on ‘booming’ US high-tech shares, which has fuelled a US consumer boom keeping the rest of the world afloat.

He shows that the USA accounts for half of the G7’s total economic output. But in the past three years the US has accounted for more than three-quarters of the growth in the G7’s real demand. Current forecasts estimate the US should still account for about two-thirds of real demand growth within the G7 this year.

In reality, all bets about this continuing are now off. The IMF admits it cannot accurately predict developments in the world economy.

The Socialist also cannot predict exactly when and how deep capitalism’s downturn could be. A big downturn could, at first, stun the working class.

But we can confidently predict that world capitalism’s days of growth cannot continue much longer. As the world economy contracts, Britain, with its reliance on inward investment and rundown of its manufacturing base, will be harder hit than most.

In turn this could scupper New Labour’s electoral prospects and will speed up the process of those wanting to establish a new anti-capitalist mass working-class party to find a socialist solution to capitalism’s economic carnage.