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From: The Socialist issue 526, 25 March 2008: Iraq: five year nightmare

Search site for keywords: US - Iraq - War - Capitalism - Imperialism - CWI - Economy - Invasion - Recession - Capitalist - Oil - Turkey - Subprime - Marx - Hugo Chávez

World events and their repercussions

The present world situation is characterised by the worst economic scenario for capitalism since the 1930s depression. In turn, this has aggravated the already weakened position of the dominant world power, US imperialism. Together with the fall-out from the Iraq war, this has laid the basis for political convulsions and a fundamental change in geopolitics.
Peter Taaffe speaking on world events at Socialist Party congress 2008, photo Paul Mattsson

Peter Taaffe speaking on world events at Socialist Party congress 2008, photo Paul Mattsson

Below are two extracts from a summary of the present world situation and world relations, written by Peter Taaffe for a meeting taking place this month of representatives from European sections of the Committee for a Workers' International (CWI).
The full text is on

Economic tsunami descends

The Committee for a Workers' International (CWI), in broad outline, foreshadowed the present economic situation. It charted the recent developments of world capitalism and the inevitability of a crisis, which would strike firstly in the financial sector, with big repercussions in the so-called 'real economy'. The very factors which helped to boost the economic upswing, capitalist globalisation and the growth of world trade, have now turned into their opposites in internationalising the crisis.

Given the unplanned character of capitalism, nobody - not even the most farsighted Marxists - can predict the timing or the depths of crises in advance. However, the CWI maintained, in the face of extreme scepticism, that the looming crisis would be deeper and would last longer than anything experienced in the period since 1945.

The onset of recession in the US has already confirmed this prognosis. US economic indicators have plummeted not just in the financial sector but in manufacturing as well. States which make up one fifth of the US economy are mired in recession and, according to the capitalist economist Nouriel Roubini, this could quite easily tip over into a depression.

The estimated cost of the subprime crisis, together with the developing monoline bailout, as well as losses in car loans, commercial loans, credit cards, etc, could, he says, be anything from $1 trillion to almost $3 trillion!

Possible fallout

There are an abundance of facts and figures in CWI journals and on our websites but the detail Roubini provides of the possible fallout is enough to keep the capitalists awake at night. He wrote on 5 February:

"To understand the risks that the financial system is facing today I present the 'nightmare' or 'catastrophic' scenario that the Fed and financial officials around the world are now worried about. Such a scenario - however extreme - has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

"...First, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitisation the ongoing credit bust will lead to a severe credit crunch; third, US households - whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted".

The fear of such a situation has motivated the US Federal Reserve, in conjunction with other central banks, to intervene on three occasions in the last six months.

The latest proposes a lending line of $436 billion in a desperate attempt to unblock the credit system - the arteries of modern finance capitalism - which threatens, in the words of Marx, to "jam" the whole system.

We are only in the first stages of this crisis as far as Europe and the rest of the world is concerned (the US is now in its 18th month of the subprime crisis).

This is an economic tsunami and like the natural phenomenon of 2004, which took time to travel across the Indian Ocean to Sri Lanka and India, so there is a time lag between the US and the rest of the world. The delayed effect will not be measured in hours, naturally, as with the physical tsunami, but in months and, in some areas of the world, possibly a year before the full impact is felt.

Roubini's 'catastrophic' scenario is disputed by those such as Martin Wolf of the Financial Times. Yet even Wolf has advanced the likely scenario of a "small depression". Roubini answered his doubts:

"Martin Wolf says that a fiscal bill of 7% of GDP is modest and affordable. But ... the fiscal bill of bailing out a banking and financial system that suffers a systemic crisis would be at least 12% of GDP and as high as 19% of GDP. Even for a rich country like the US, 19% of GDP (or $2.7 trillion of additional public debt) is not spare change nor is a 'fiscal bagatelle'. And saddling every US household with an additional $30,000 of debt in perpetuity is not a small burden either.

"And all this is true even leaving aside the other $10 trillion plus of losses in the net worth of the US private sector (fall in the value of residential real estate and commercial real estate, and in the value of the stock market) that a severe recession and financial crisis would imply".

The collapse of the US investment bank Bear Stearns, further underlines the scale of the crisis. As with the Bank of England over Northern Rock, the US Federal Reserve has effectively nationalised this, the fifth largest US investment bank.

Wolf is at pains to say that the bailout of the financial system is not the same as the 'crony capitalism' shown in 'emerging economies' in the 1997 Asian financial crisis.

Roubini answers: "This is actually 'crony capitalism' of the worst kind, and as bad as the one that plagued emerging market economies and led to their severe financial crisis in the last decade".

The very fact that a public spat - albeit 'friendly' - can take place amongst the more serious capitalist economists over the prospects for their system is a measure of how severe this crisis is likely to be. There is no dispute as to whether a recession will take place, only its depth and time span.

However, this crisis is not likely to be of short duration but, on the contrary, will last longer, will be deeper and is likely to have a more severe effect than any of the previous recessions since the Second World War. Even if the economic contraction is only half what Roubini is estimating, it will still be severe enough to produce huge social and political convulsions.

Comparisons with Japan

Our comparison between the Japanese economy in the 1990s and the US today is now drawn on heavily by capitalist economic commentators. Japan was in a deflationary trap for 12 years, only managing to partially crawl out of the morass in the immediate period before the onset of this crisis.

The Japanese government resorted to a series of measures of a quasi-Keynesian character - even floating, at one stage, the so-called 'helicopter theory', the dropping of yen from the skies to the population - all to no avail.

Yet Japan was in a much more favourable position than the US today, with its accumulated savings which it could draw on to cushion the effects of its economic woes, while not being sufficient to break out of the financial Bermuda Triangle in which it was imprisoned. The US has no such advantages, it is in hock; it is a massive debtor to the rest of the world.

Moreover, foreign capitalists, particularly Asian capitalism led by China and Japan, have already bailed out the US economy by using their huge reserves to plug the yawning deficits of the US.

The US ruling class, while welcoming this lifeline, at the same time blocked Chinese and Middle East capital from swallowing whole chunks of failing US industry, for instance, vetoing the attempt of Dubai to buy US ports.

Forced now to rest even more on foreign capital, the US has been compelled to relax restrictions on US assets being taken over by 'foreigners', including the sovereign wealth funds of China and the Middle East, the latter powered by huge reserves of petro-dollars. Yet this serves to underline the colossal economic weakness of US imperialism and the contradictions that flow from this.

Moreover, looming events are likely to further undermine the position of the US. Just as in a boom, one economic factor acts on others in an upwards spiral effect, conversely, negative factors operate in the same fashion in reinforcing a downswing, recession or slump.

The subprime crisis has produced a banking crisis, which in turn has produced a credit crunch - including an interbank crisis - and now a 'credit collapse', in the words of the former chief economist of the IMF, Kenneth Rogoff.

This in turn has interacted with other sections of the financial sector, which is now reacting on the real economy in the US, and will do so even more in the next period.

So the scene is being set for an entirely different phase in the global economy. It will be one in which socialist and Marxist ideas will come back onto the agenda of an ever-widening layer of the world's population, as they search for an alternative to capitalist crisis.

The limits of US military might

The US neo-conservatives did a crude calculation before the invasion of Iraq and concluded that the country had at least $12 trillion of untapped oil reserves. Even if the war was to cost $1 trillion 'at the extreme', this would be a price 'worth paying'.

Cheap Iraqi oil would fertilise a world economic renaissance while also allowing the US and its allies to break the power of OPEC, they reasoned, by bringing down the price of oil to $10 or even $6 a barrel. Hugo Chávez in Venezuela would be brought down, with the additional bonus of the mullahs in Iran also 'biting the dust'.

However, to paraphrase the Scottish poet Robbie Burns: 'The best laid plans of mice and men have gone astray'. Oil prices are at a record high, $110 a barrel at the time of writing. There has also been a flight to gold, now at historic values of around $1,000 an ounce, as a safe store of value, as Marx argued.

The hike in oil prices compounds the economic problems of world capitalism. Every recession since 1945 has been preceded by an increase in the price of oil.

'Surge' not succeeded

Despite the claims of 'success' by Bush and his proconsul Petraeus, the troop 'surge' in Iraq has not succeeded in its objectives. American casualties decreased initially (they have risen again in the recent period) largely because the US financed Sunni militias, who previously supported and sustained al-Qaida, to turn on their erstwhile allies.

Iraq is, however, more divided than ever, with both the Sunni and Shia militias murderously unreconciled to each other and the US occupation.

When the US forces are compelled to withdraw, even to the regional bases that they have planned, the underlying ethnic divisions and tensions could break out into a Sunni-Shia civil war once more.

Even if Iraq does not completely break up, it could end up like Lebanon, a patchwork quilt of savagely competing ethnic spheres of influence and enclaves.

The Kurds were the only section of the Iraqi people who gave unqualified support to the US invasion.

The CWI warned at the time that the US would betray the Kurds when its vital interests are at stake. This has been demonstrated in Turkey's invasion of Kurdish northern Iraq, acquiesced to by the Bush regime.

Turkey is ultimately a more important prop for the US in the region than the Kurdish entity in the north of Iraq. Recep Erdogan's ruling party, Justice and Development (AKP), has sought to paint itself in the colours of an Islamic version of the German Christian democracy, linked to religion but presenting itself as 'democratic'.

It had even drawn increased support recently from the Kurdish minority in Turkey but that has been severely undermined by the invasion. The conflict with the Kurds will now probably intensify within Turkey and could spread to neighbouring states with sizeable Kurdish populations, Syria, Iran and the northern part of Iraq itself.

Moreover, the already catastrophic cost to the US of the military invasion of Iraq and its legacy has escalated exponentially as former World Bank chief economist Joseph Stiglitz has pointed out.

He has cogently argued in a recent book that the ultimate cost will be near $3 trillion, two or three times greater than even the 'doomsday scenario' balance sheet proposed at the time of the invasion.

Ten days of US expenditure in Iraq is equal to the total annual aid of the US to Africa! Given the underlying economic weakening of the US economy, how to sustain its bloated military spending presents a dilemma.

Comparisons have been drawn between the US and the Roman Empire. Following Fidel Castro and Hugo Chávez, many in the neo-colonial world now refer to the US simply as the 'empire'.

Even capitalist commentators, especially the US neocons, have been happy with this comparison as it previously implied a continuation of untrammelled military might, which would allow the US to impose its will on the rest of the world.

This was the prevailing view as the US appeared unstoppable in the aftermath of 9/11, firstly in Afghanistan and then in the 'shock and awe' of the initial phase of the Iraq invasion.

However, the war brought to the fore the inter-imperialist rivalries which festered in the previous period. We should remember that US imperialism managed to prevail upon its allies - notably Japan, Germany and Saudi Arabia - to pay for the first Gulf war at the beginning of the 1990s.

In an entirely different situation in the present world, with half the governments of Europe and the overwhelming majority of the population of the continent opposed to the Bush cabal and their war, the US was not in the same position to get others to foot the bill.

The consequent massive impost on the US economy has undoubtedly been an additional factor, as Stiglitz has argued, in compounding the economic problems of the US and thereby of world capitalism.


Irrespective of who becomes US president following the elections in November, US imperialism, as the major military power and still the strongest residual economic power as well, will be compelled to retreat from the unilateralist policy of the Bush era. The unipolar world of the neocons has disappeared to be replaced with a more 'consensual', 'multipolar' policy, which is likely to be adopted by whoever wins the presidency.

McCain, the Republican candidate, is a hawk on international issues - declaring he would remain in Iraq for a hundred years - and allegedly 'liberal' on domestic issues.

It is unlikely that he will win, given the economic catastrophe which is now firmly associated in the minds of the American people with the Bush regime.

Seventy-eight per cent of the US population believe that the US "is on the wrong track". Like the post-Thatcher Tories in Britain, the Republicans have the mark of Cain because of the disasters of Bush.

Therefore, the Democrats are likely to inherit both the domestic and the international mess he has left behind. Their policy internationally will be shaped by the setbacks for US imperialism of the last eight years.

They have no choice as the strongest military and economic power but to continue to intervene worldwide, but from a weakened position. So-called 'benevolent liberal imperialism' will become the new doctrine.

The US can still be compared to Rome, not in its rise - the 'heroic' period - but in the phase of stagnation and disintegration of its empire.

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