War and Austerity: Capitalism in the 21st Century

By Doug Lorimer

[The general line of this report was adopted by the 19th DSP Congress, held in Sydney, January 3-7, 2001. In addition to this and other reports adopted by the congress, two draft resolutions were adopted — "The Role of Australian Imperialism in the Asia-Pacific Region" and "The Cuban Revolution in the epoch of Neo-Liberal Globalisation".]

Comrades, a spectre is haunting Europe — and Australia, Asia, Africa and Latin America — the spectre of a US-led global economic recession. The end of year mood of the capital owning class was summed up in the headline on an article in the "Money & Business" section of the December 30 Sydney Morning Herald. It read: "After the cold snap, the big breeze".

The SMH’s Wall Street correspondent, Brian Hale, began his article with the following comments: "America is bidding goodbye to a chilly year with an icy winter that will be felt around the world... It will be known as the year the bubble burst... A year that let in the daylight on the magic that was supposed to be e-tailing, the brave new world of the ‘new media’ and the wonderfully expensive next-generation plans of telecom giants."

"The price for all this", Hale added, "was paid on US sharemarkets, particularly Nasdaq, long the technology poster-boy for the world. And, as the year freezes over, the ultimate price is being passed onto the US economy and thus the world economy".

Of course, what has rattled Wall Street’s confidence is not simply its discovery that emporer.com has no clothes. This was certainly a psychological blow to its "excessive exuberance", and was reflected in a 10% fall in the Nasdaq Composite Index of stock prices on April 17.

The biggest shock was the news at the beginning of November that in the September quarter US gross domestic product had slowed from an annualised growth rate of 5.6% to 2.7%. As more data came in during November showing that the US economy was beginning to turn from boom to bust, anxiety began to grow on Wall Street.

In early December, after a rash of announcements by big corporations that their profit results in 2001 will be significantly lower than they were last year, anxiety began to turn into fear. "December earnings revisions", said ABN Amro’s equities strategist Douglas Orr, "were the worst in terms of negative revisions the market has seen for eight years ... Things haven’t been as bad since the 1990-91 recession".

US Federal Reserve Board chief Alan Greenspan tried to avert a panic, declaring that the Fed was switching its interest rate policy setting from "tightening" to "easing". The financial press editorialists seized on Greenspan’s announcement in an effort to calm investors’ fears. An editorial in the US Business Week magazine, reprinted in the December 9 Australian Financial Review, was typical. "Relax, Chicken Little: no less than Federal Reserve chairman Alan Greenspan says that the sky is not falling."

"For nervous Wall Street", the editorial continued "all but frozen by its fears that the economy was headed to hell in a handbasket, Greenspan’s recent speech on business conditions was a welcome dose of reality. Greenspan made it clear that the economy’s current circumstances are ‘in no way comparable to those of 1998’."

Elaborating on what Greenspan meant by this, the editorial declared: "Yes, credit conditions are tighter, as investors re-evaluate the risks associated with handing over their money. But unlike the systemic risks posed by 1998’s financial near-meltdown, Greenspan said today’s credit tightening is ‘the expected by-product’ of the economy’s transition to a more sustainable pace of growth, compared to the previous boom."

However, when Greenspan’s "soothing" words were not followed up by an actual announcement by the US central bank of a cut in interest rates, fears of a recession again began to haunt Wall Street. "While the Fed says the building is not burning down, investors can smell smoke", said Art Cashin, a broker for the UBS Warburg investment bank.

Cashin’s remark was quoted in an article by Aaron Patrick printed in the December 22-26 Financial Review, which reported: "US share prices are likely to post their worst performance in a decade, with fears rising on Wall Street that the country’s central bank may be unable to avert a recession."

According to the earlier Business Week editorial, Wall Street’s fears of a recession were first raised by data released in late November showing a rise in unemployment relief claims. "The increase in jobless claims", the editorial noted, "reflects layoffs — especially in the auto industry as Detroit cuts output to pare inventories that have become out of line with sales".

What the editorial did not recall is that every one of the previous eight recessions in the US since World War II has been triggered by an overproduction crisis in the automotive industry, and that the Big Three auto makers in the US — General Motors, Ford and DiamlerChrysler — are already planning to cut back vehicle production by 11%, from an annual output of 18 million units to 16 million. What it did note was that "orders in the 89 per cent of manufacturing that excludes computers, peripherals, communications equipment and electronic components have not grown since the start" of 2000, and that the "index of leading [economic] indicators ... . fell 0.2 per cent in October, and it has been trending downward since March".

"Meanwhile", the editorial reassured its readers, "the composite index of tech orders, the remaining 11 per cent, shows only a little easing,"

However, Aaron Patrick’s report in the December 22-26 Financial Review noted, "Expectations of a large cut in US business spending on computer systems are undermining confidence in the Nasdaq Stock Market, which was down 54 per cent from its March high after gaining 86 per cent last year, marking one of the most spectacular investment bubbles this century".

In a back-page article of the same issue of the Financial Review, Alan Kohler forecast that there "is a fair chance of a cut in US [interest] rates of 25 basis points on January 31, followed by a ‘relief rally’ in equity prices around the world". However, he also warned that "in February and March the profit reporting season for the first half of 2000-01 will be an absolute shocker and stocks will be sold off again as investors focus once more on the effect of the slowdowns in earnings".

A big collapse in credit-inflated stock prices, of course, always carries with it the risk of snowballing into a banking crash, which in turn, by paralysing the flow of bank credits to businesses and consumers, can transform a routine cyclical economic contraction — nowadays called a recession — into a big-time collapse like the depressions that began in 1873 and 1929. However, this is unlikely to occur since — despite all their neo-liberal rhetoric about the virtues of "free markets"— all of the central banks in the imperialist countries will act to prevent a major banking crash by nationalising any major bank’s unsustainable bad debts and cutting official interest rates — if necessary even making them negative in real terms. Of course, as the experience of the Japanese economy has demonstrated since its credit-fuelled financial market bubble collapsed in 1989, if there is no sustained upturn in corporate profits, the price of avoiding a general economic collapse can be an indefinite period of stagnation in the economy as it oscillates between spurts of glacially slow growth in GDP and frequent mild contractions.