Stock markets have fallen sharply during May, undoing all the gains for the year to date. And stocks took another dive in June as the fear that the capitalist economic recovery was in jeopardy and the top 20 capitalist countries could slip back into a new or ‘double-dip’ recession.
What worries the stock market is the relatively weak nature of the economic recovery in the US. It’s true that the US economy is now growing at about 3% a year. That sounds good, but usually in any recovery after a significant economic slump (and the Great Recession of 2008-9, as we know, was the deepest and longest since the Great Depression), the jump back is much larger, at around 5-6% for the first year of recovery.
Even more worrying is whether any economic recovery can be sustainable. That depends on getting much of the ‘reserve army of labour’ (as Marx called those made unemployed in capitalist slumps) back into work and buying the goods and services produced by capitalist companies. The latest jobs figures out of the US put that in doubt. In May, the US economy added 431,000 jobs. Again that sounds good, but that was 100,000 below what was expected and, more important, over 390,00 jobs were for hiring temporary staff by the government to do the ten-year population census. Strip out those and US capitalism only managed to increase private sector jobs by 41,000. And it is reckoned that it needs to increase jobs every month by about 250,000 to start to reduce the unemployment rate. The official rate by the way is 9.7%, but when you add in all those who would want to work but don’t even bother trying to find a job, the rate is closer to 17% (see my post, US unemployment, % February 2010)!
American households remain deep in debt and unable to start spending in any big way. The American government has transferred huge amounts of money into private hands and spent huge amounts itself. But this activity is largely artificial (or ‘fictitious’ as Marx called it). There are about 15 million homeowners are under water, with mortgage balances larger than the current value of their homes. For about 9 million, the gap equals 20% or more, and at least 5 million of these homeowners have stopped making mortgage payments and are essentially awaiting foreclosure. More than 650,000 US households have not paid any mortgage for the last 18 months.
And of course, now the public sector has taken over and added to the huge overhang of debt in most of the large capitalist economies (see my post, The overhang of debt, 1 March 2010). Most capitalist countries will have public sector debt equivalent to 90-100% of annual output by the end of next year and interest payments on his debt are set to rise. The UK is the most indebted country on earth with a private plus public debt ratio of close to 470% of GDP.
What is not noticed in the US is that 29 states are running unconstitutional budget deficits. Unlike the Federal government, they must act now to rein in spending. The first wave of state, local and municipal government redundancies are now at hand. One estimate is that all branches of non-Federal government will have to shed three million workers this year in order to balance the books. That means even more unemployment.
The public debt issue in Europe is concentrating the minds of the stock and bond market investors. Following the crisis in Greece, investors are now worried that the many governments of the weaker Eurozone capitalist countries will not be able to honour their debt payments and will tell the bond holders (the big banks, pension funds, insurance companies and hedge funds) that they will have to take a ‘haircut’ in any repayment.
If governments default on their payments, Europe’s banks will face huge losses. According to the European Central Bank, European banks still have to write of about E250bn in more losses for the credit crisis and housing slump of 2008, on top of the E500bn they have already incurred. If they have to take losses from governments defaulting on their debt, they will need yet another bailout from the taxpayers.
This means piling debt upon debt for the capitalist economies. No wonder the economic strategists of capital are divided. The Keynesian wing demands more spending by government and more credit from the central banks to get the unemployed back to work and keep the economic recovery going. The neoclassical/monetarist wing says this won’t work and will just create another huge recession down the road. Both are right and both are wrong.
The capitalist economy needs to grow to restore employment and prosperity, but that cannot happen (at least not sustainably) by artificially boosting spending. Capitalism only grows if profitability picks up. Capitalist companies will then invest more. Investing more means that capitalists buy goods and services from other capitalists. That creates employment in the capital goods and services sector. In turn, that will spread demand into the wider consumer sectors.
Profits have recovered sharply in most capitalist economies as companies have slashed their costs of production by closing down plant and sacking workers. But profitability is only just recovering towards pre-crisis levels of 2007. Companies are still reluctant to invest big time. Take Japan. The annualised growth rate in capital spending is no more than 1%. Like most of the developed capitalist world, Japanese producers are not spending to build capacity. That reflects pessimism about the future and the sustainability of the current recovery.
The optimists of capitalism had hoped that the economic recovery would have been V-shaped. They expected that the sharp fall in global output and profits would be mirrored in reverse by a sharp recovery. This is the ‘natural’ sort of recovery under capitalism and was experienced, for example, after the big slump of 1974-5, after which followed five years of strong economic growth before capitalism dropped into an even deeper slump in 1980. It was also the experience after the shallow recession of 2001, which was followed by the strong boom of 2002-07. But it may not happen this time.
In the natural recovery, the recession reduces the cost of production and devalues capital sufficiently to drive up profitability for those capitalist enterprises still standing. Unemployment drives down labour costs, while bankruptcies and takeovers reduce capital costs. Businesses then gradually start to increase production again, and eventually begin to invest in new capital and rehire those in the ‘reserve army of labour’ without a job. This boosts demand for investment goods and eventually workers start buying more consumer goods and recovery get under way.
But such is the overhang of spare capacity in industry and construction this time and such is level still of debt owed by businesses, government and households alike that this recovery may be stunted. After all, every major capitalist economy now finds that it has more than 30% more capacity than it needs to meet demand. That is a record high of overcapacity in industry.
So the economic recovery could take the form of a U-shape: what is called a ‘jobless recovery’ as we saw after the recession of 1991-2. In the early 1990s, businesses renewed investment slowly and held back from rehiring workers for several years. So economic growth was slow in resuming.
It could even become W-shaped. There would be a double-dip. The weight of overcapacity and debt would be too much to allow the revival of consumer spending and investment, so the economic recovery would be short-lived and the major capitalist economies would slip back in recession. That is what happened in 1980-82. It took two recessions then to get things going again.
Even worse, the recovery could take an L-shape. As in Japan after the collapse of the great credit bubble there in 1989, the economy remained in the doldrums for a whole decade. Huge debt has piled up in the banks and rather than write these off and cause major bankruptcies and a banking crisis, the Japanese government used taxpayer’s money to bail the banks out with loans and guarantees. The banks in turn sat on their debts, but did not lend money for new investment. This sounds similar to current environment.
But probably, the recovery will be more like a square root sign (see my book, The Great Recession, chapter 43). The big fall in output is over. Now there will be an upturn. But it will fall short of restoring the rate of economic growth achieved before the Great Recession. Instead of 3-4% a year, output in the major economies will be closer to 1-2% a year. That will not be good enough to restore profitability to previous levels. The capitalist system will thus face the risk of a new slump further down the road.