Michael Roberts on the next recession

The Great Recession is over but the next recession is only a few years away.  Here’s why.

The deepest and longest economic recession in the advanced capitalist economies since the 1930s is more or less over.  But it won’t be long before capitalism plunges into another.  That won’t happen in 2010, but there will be another economic slump before the new decade is out.

The Great Recession was great because it was very deep in the contraction that global capitalist production suffered for over 18 months from the beginning of 2008 to mid-2009.  Most of the top capitalist economies experienced a real fall in national output of between 5-7% over that period, while exports slumped by up to 25% and unemployment rose 60% (and is still rising).

The Great Recession was also great because it lasted the longest time (around 18-24 months) of any economic slump since the Great Depression of the 1930s.  And it was also great because it affected every part of the globe from the US to Europe to Asia and to all the so-called emerging capitalist economies of Latin America, Africa, Eastern Europe and the Middle East.  No country escaped – a far wider impact than even the Great Depression.

But now there are recovery signs everywhere.  In nearly all the advanced capitalist economies, namely the G7 countries of the US, Canada, Europe’s big four and Japan, there has been a rise in national output in autumn 2009 that has continued up to Christmas.  There is very likelihood that these economies will continue painfully to recover some life as we go through 2010 and beyond.

Only the UK is still mired in recession.  And that is no accident.  The UK is lagging the others because it is a rentier economy, heavily dependent on making its profits from earning interest, dividends and fees on money and capital deposited in the City of London by Middle Eastern oil states, European banks and corporations and Asian exporters.

The UK financial sector suffered a massive hit from the credit crunch when the huge speculative bubble in exotic financial scams, real estate and the stock market finally burst asunder in 2007, starting in the US and quickly spreading to the UK.  As we know, some of the biggest banks had to be bailed out by the government at huge cost, while others bit the dust.

The UK’s huge financial sector and its associated property and professional services provide up to 20% of annual GDP and over 40% of the profits of British capitalism.  The cost of bailing out the fat cats in the bank boardrooms has tripled the annual deficit that the government runs on its income (taxation) and spending.  And it has a doubled the debt that the public sector now must pay interest on to the holders of government bonds.

The British New Labour government allowed the financial sector to create a huge credit and property bubble.  And when it burst, they bailed out these financial sharks.  They did not take over the big banks, writing off the debts at the shareholders expense and sacking all bank management responsible.  On the contrary, the government recompensed the shareholders and kept most of the managers in place, while making token gestures on controlling their grotesque salaries and bonuses.  It has become business as usual for the banks now

The cost of this financial disaster has so far been funded by the government borrowing money by issuing bonds at good interest rates to the banks themselves or directly to the Bank of England, which in turn has just printed money to buy the bonds.

So the real cost has been put off – but eventually the piper must be paid.  Taxes are set to rise sharply in 2010 and beyond, while public sector workers (completely blameless for this credit crisis) are to have their wages frozen and their jobs cut.

The banks could have been taken over and run in public sector.  Shareholders would have taken the hit, bank management removed and the bonus culture ended, with new lending to small businesses started to help them through the crisis.  But that would have meant end of the profitability of UK’s financial sector – the key to British capitalism.  So it could not be.

The UK economy has still not bottomed as we go into 2010.  And its recovery next year is likely to be the weakest in the G7.  The UK economy contrasts with Australia, a capitalist economy that relies on sales of its huge mineral and food resources to Asia, particularly China.  With China continuing to grow, boosted by massive state spending on roads, bridges and other schemes, along with state-directed cheap bank loans to industry, that has increased the demand for Australia’s iron ore, coal and other minerals.  So Australian capitalism had a relatively mild recession compared to unproductive financially-driven British capitalism.

Some of the so-called emerging economies also experienced a shallower downturn, either because they depend less on world trade than others (India) or because their exports are mainly food where demand tends to hold up (Brazil).  But others took massive hits to their economies.  The ‘new’ capitalist economies of Eastern Europe saw falls of over 20% in national output, the biggest drops since the collapse of the Stalinist regimes just 20 years ago.  And next year will be very hard for the people of the Baltic states and south-eastern Europe in particular.

Everywhere, as we go into 2010, the capitalist world is saddled with new debt, mainly in the public sector, because governments have bailed out the capitalist sector with borrowed or printed money.  Also, governments have borrowed to provide handouts to businesses and households through tax cuts and special benefits to avoid capitalism dropping even further into a Great Depression.

Indeed, there is still a risk that the sheer burden of debt will cause a new economic slump, a double-dip recession as it is called.  There have been tremors in places as far a field as Dubai, with its property collapse; Austria with its banks going bust because of losses in Eastern Europe; and Greece, where the public sector debt burden has reached astronomical proportions.

Nevertheless, for now, the world economy is turning up.  But economic growth will be weaker than after the last mild economic slump of 2001.  The G7 economies will do well to achieve 2% real GDP growth in 2010, while the world as a whole may manage 5%.  That’s not enough to keep pace with new people coming onto the labour market looking for jobs.  So unemployment will continue to rise and stay at their highest levels since the 1970s.

At the same time, everywhere businesses are still left with huge amounts of excess capacity in the form of idle plant and machinery, stocks of raw materials and aging technology.  That won’t help boost profitability while it remains unused.

That is why we can expect a new capitalist slump not to be too far away.  We won’t have to wait another nine years for next contraction, as we did between 1982 and 1991 or between 1992 and 2001, or between 2001 and 2009.

We are in very weak period for capitalism, so profitability will stay low and eventually start to fall back again.  That will keep the accumulation of capital, or investment weak.  Excess capacity will have to be written off and or run down further for a really healthy period of growth to begin.  So another recession is necessary.

It is likely to be no more than three to four-year period of expansion up to 2014, as happened between 1975 after a worldwide economic slump and 1979, when the world descended into another slump that lasted between 1980-2.  Again, after the Great Depression of 1929-32, the world economy recovered for about four years to 1937, before dropping back again.

In the meantime, unemployment will stay the highest that it has been for over 25 years, work incomes will hardly grow, while public debt will be so high that taxation will rise and public services and employment will suffer.

Happy New year.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: