Translated from ”Lutte de Classe” #226 September-October 2022, the journal of our French sister organisation, Lutte Ouvrière.
This summer, barely twelve months after the world economy emerged from Covid-induced paralysis, there were signs of a further slowdown. In the wake of rising commodity prices and the war in Ukraine, growth has fallen back in many national economies. In the US and Britain gross domestic product (GDP) fell in the second quarter of 2022 - and some economists consider that Britain is already in recession (in theory, GDP must register a fall in two consecutive quarters).
GDP growth was already negative in the first quarter in the US and France. According to the calculations of the International Monetary Fund (IMF), for what they are worth, the entire world GDP shrank in the second quarter of 2022.
Heading for the wall
But this could be just a small taste of the crisis to come. The IMF’s chief economist said on 26 July: “We may well be on the verge of a global recession”. Last October, the IMF’s growth forecast for the world economy was 5.9% growth for 2022, but today it is only 3.2%. And for 2023, the IMF’s central scenario (i.e. the average estimate, not the worst) forecasts growth of 1% in the United States and 1.2% in the euro zone, i.e. very low rates.
The IMF notes that inflation is becoming more widespread, and it approves of central banks that have changed their policies in recent months to try to slow it down. The main way they try to counter inflation is to increase their key rates, which guide interest rates on the financial markets, or follow them, depending on the period. According to the theory behind central bank action, if interest rates rise in the markets, businesses and households will borrow less, so demand for consumer goods and investment falls and therefore prices fall.
The question on the minds of central bankers is how much they can or should raise rates. Their stated priority is to curb inflation by tightening credit conditions for households and businesses, but the risk is that they will cool down the capitalist machine to the point of paralysis. They are looking for a “soft-landing”, as they say, and not a repeat of the situation of the early 1980s.
In 1980 and 1981, after years of inflation, the US central bank (the Fed) raised its key interest rates from 11% to over 20%. The effect was immediate: access to credit was curtailed, the money supply in circulation fell, inflation fell, but the US economy, and the world economy in general, stalled. In 1982 and 1983, production in all industrialised countries fell sharply, as it had at the beginning of the crisis in 1975. A new wave of lay-offs hit the working class and austerity was the new rule.
Today, from the point of view of the interests of the capitalist class, the leaders of the central banks have to choose between curbing inflation or supporting economic activity. From the point of view of the working class and ordinary people, this boils down to choosing one of two evils: more unemployment if activity is reduced, or reduced incomes if inflation continues. That is all the capitalist system has to offer.
The reason the central banks have finally decided to raise interest rates is that inflation that remains persistently high, poses problems for the capitalist class as a whole. Of course, this class makes the working class and the petty bourgeoisie bear the brunt of the price rise. But as each capitalist is both a seller and a buyer, a borrower and a lender, price instability slows down business, makes it more uncertain and less profitable, as in the 1970s. Today, the oil and gas and commodity trusts, in fact all those with monopoly positions or who can collude with each other, are making record profits. But rising prices are causing many problems for others.
For example, the metallurgical processing industries, zinc and aluminium producers, which are major consumers of electricity, have shut down their least profitable plants in recent weeks. And as they are also anticipating the coming recession, according to Les Echos (the French equivalent of the Financial Times) of 20 August, a total of 50% of European production capacity has been shut down. While some companies, such as ArcelorMittal, have managed to compensate for the drop in production by selling at higher prices, and even announcing record profits, this is not the case for all.
The surge in electricity prices also reflects the crisis in the energy sector, which did not start with the war in Ukraine, but is aggravated considerably by the rise in gas prices. If Putin cuts off Germany’s gas supply completely, its economy will largely grind to a halt. This is part of the worst case scenario envisaged by the IMF.
But if the war is making things so much worse, it’s also because the energy sector everywhere is on the verge of exhaustion, against a backdrop of generalised under-investment, as witnessed in France by failing nuclear power stations, many of which are at the end of their useful life and many of which have been shut down.
Central banks in the fog
The rise in key interest rates is the subject of debate among central bankers, economists and journalists. They argue over whether it is too much, or too little. In reality, no one has much control over inflation. A year ago, everyone was betting that the price rise was transitory and that there was no need to intervene. A year later, it turns out that it is not a transitory phenomenon linked to the post-Covid economic recovery, but a lasting one. Economists attribute this phenomenon to an “overheating” of the economy, an excessive demand for consumer and investment goods.
But which overheating are they talking about? The growth indicators they give are at their lowest. Real wages are falling due to price inflation in all the industrialised countries, forcing consumers to dip into their savings. And of course China has only partially emerged from its necessary Covid paralysis. Companies are postponing investment…
In reality, they are acting as if the economy is overheating, because rising prices have forced themselves upon them. Inflation comes down primarily to the ability of a handful of corporations to safeguard their margins, or even increase them, by imposing significant price increases despite, or thanks to, a decline in their production. In other words, they are pursuing a Malthusian policy, particularly in the case of the oil and gas trusts. Under these conditions, how effective can the current rise in interest rates be against inflation? What is certain, however, is that the bill is being presented to the working class.
Behind the rise in interest rates, there is a reason other than the declared will to fight inflation. It is a question of central banks giving themselves the means to act in the face of the coming crisis. This is even an indication of what central bankers think would happen to the economy in the short term.
In order to limit the consequences of crises, governments and central banks have made a habit of pouring ever greater amounts of money into the financial circuit, offering capitalists liquidity to survive the crisis. Lowering rates played this role. Low interest rates mean lending money for free, or almost free. As soon as crises broke out in 2001, 2008, 2020, rates were reduced to almost zero. In 2008, the rate cut was not enough. The central banks had to invent other mechanisms to inject hundreds of billions into the financial circuits. Since 2020 for the Fed and since 2014 for the European Central Bank (ECB), rates had remained at their lowest point ever. It therefore seems urgent for central bankers to raise them, before the storm arrives, at the risk of triggering it.
From currency crisis to debt crisis?
For the United States, the rise in interest rates has resulted in an increase in the dollar’s value against other currencies, particularly the euro, which, as an aggravating factor, has to deal with the war in Ukraine and the rise in gas prices. The value of the pound has plunged too, and for additional reasons.
The rise of the dollar allows American capitalists to lower the cost of imports and to strengthen their margins. The fall in the euro makes it easier for European manufacturers to export, but it makes dollar imports more expensive, especially energy, oil and gas, which are at the heart of the current inflation.
In Europe, the ECB followed the Fed’s rate hike after a short delay, in July. This delay can be explained by the fact that in Europe, due to the lack of political unity, the ECB has to deal with the debt tensions of several countries at once.
In December 2021, the German government could borrow on the financial markets over ten years at negative rates of -0.38%. The Italian government was borrowing at the same time at +1.04%. While those who lent to Germany were willing to pay for it, Italy was already paying high interest on every loan. The rise in ten-year rates seen on the markets since the beginning of 2022 - a sign that speculators are betting on a worsening economy and persistent inflation – has amplified this divergence: in July, Germany was borrowing at 1.08% for ten years while Italy was doing so at 3.36%. Italy’s debt burden has thus more than tripled in a few months.
However, the fact that Italy’s debt ratio is already very high, raises the possibility of a surge in debt speculation, as happened in 2011. One suspects that the ECB’s interest rate hike at the end of July, which will push market rates even higher, must have been met with mixed reactions by the German and Italian governments. To try to avoid the unleashing of speculation, which would threaten the euro zone, the ECB had to invent an “anti-fragmentation” instrument, promising European solidarity to States in difficulty on the financial markets, under the condition of “budgetary discipline”. This led Les Echos to say that the scope of the device is limited and that the tensions within the euro zone are not about to end.
The coming recession could therefore be combined with a debt crisis. The US economist, Nouriel Roubini, stated in Les Echos on 14 July: “As private and public debt levels have risen from 200% in 1999 to 350% as a share of global GDP, a rapid normalisation of monetary policy and a rise in interest rates will push highly indebted and already troubled households, companies, financial institutions and governments towards bankruptcy and default”. He believes that the looming crisis will combine stagflation (stagnation and inflation) and debt crisis, preventing states from using additional fiscal measures to support the capitalist economy.
Nor will the world economy be able to rely on China, as it did in 2008, benefiting from massive Chinese state investment in real estate and infrastructure. In China, the central bank has just lowered its rates a little, considering that the Chinese economy is already in crisis and needs to be revived. In particular, beyond the repeated lockdowns, the real estate crisis persists, which can be seen in the fall in steel prices on the international markets. According to the IMF, this crisis, combined with the sluggish global economy, which deprives Chinese companies of many of its outlets, will lead the country to its weakest level of growth for forty years, excluding 2020.
The war in Ukraine is also weighing on Russia’s withdrawal from the world market and the economic crisis that is spreading there. More and more poor countries are asking the IMF for help; help that their people will pay dearly for. The latest is Bangladesh, which has asked for $4.5 billion. Sri Lanka is in default, Tunisia is negotiating an aid package, Ghana has just formally requeshted help, and Pakistan and Laos are also in trouble. The economic recovery from Covid lasted only a few months for the industrialised countries. And it was non-existent for many others, which went straight from a health crisis to famine and economic collapse.
Capitalism, which regulates human activity through profit and markets, is once again demonstrating, with the cost of peoples lives, let alone their livelihoods, what a dead end it represents for humanity.
Jobs, inflation, wages
To justify the Fed’s latest limited rate hike, Fed Chairman Jerome Powell claimed that, although GDP was falling, the US was not in recession. He pointed to the large number of jobs created by the US economy and the fact that it is close to full employment, as evidence. In the US, full employment is only a reality in the statistics: 99.8 million people over the age of 16 are excluded from the unemployment statistics, 5 million more than on the eve of the health crisis and considered as a “non-labour” force. In fact, the employment rate in the US, at 60.2%, is gradually reaching the level of early 2020.
In the US, France, Germany, Spain and Italy, the capitalist economy is gradually catching up with the level of employment before the health crisis. But wages are not rising, they are even falling. According to the latest figures from the “Dares” (a statistical service that depends on the French Ministry of Labour), the average basic wage in France has lost 3% of its real value over one year.
In the United States, hourly wages rose in July by 5.2% over one year, while annual inflation was 8.8%; the decline in real hourly wages (excluding agriculture-related hourly wages) was 1.7% over one year. Whatever economics professors and journalists say, if unemployment is falling, but wages are also falling, their theories do not hold. This is because in reality, there is no automatic link between the number of jobs and wages, nor is there one between wages and inflation, despite all the talk about a “wage-price spiral”!
Apart from monopoly situations, the prices of goods represent the amount of labour socially necessary for their production. The distribution of this value between wages and profits depends on the balance of forces between the social classes, in particular on the capacity of workers to oppose the capitalists in order to impose higher wages. It is this balance of forces that determines the rate of exploitation, i.e. the proportion of the quantity of labour that the capitalists are able to steal from the workers. The fall in unemployment is therefore not a necessary and sufficient condition for the rise in wages, all the more so, as the number of official and unofficial jobseekers, the industrial reserve army, remains very high, which puts this “fall in unemployment” into perspective. This is all the more true as governments are taking it upon themselves to pressure the unemployed to accept the wages that employers are prepared to pay, as evidenced by the unemployment reforms that are tightening up the conditions for compensation.
There is no more automatic link between employment and inflation than between inflation and wages. Once again, “the matter resolves itself into a question of the respective powers of the combatants”, as Marx wrote [1]. The class struggle today is all the more tense because it takes place in a context where labour productivity is growing ever more slowly. The jobs created in the rich countries are in the tertiary sector, in sectors where this increase in labour productivity is less, in particular in social and business services. And they are being created with ever lower real wages. Low wages are becoming the condition for jobs. This is a fundamental trend. In this capitalist world where markets have remained globally saturated since the end of the 1960s, where capital is diverted from production to finance, the slowdown in the growth of labour productivity is a constant. In these conditions, the capitalist class can only maintain its profits by being permanently on the offensive against workers, by putting pressure on wages, but also by increasing its monopoly of wealth, in all the sectors that still escape it.
This is why, while fighting for wages and jobs, workers “ought not to forget that they are fighting against the effects, but not against the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, but not curing the illness.
They ought, therefore, not to be absorbed exclusively in the inevitable guerilla fights which are constantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with the miseries it imposes upon them, the present system is at the same time creating the material conditions and social forms necessary for the economic transformation of society.
Instead of the reformist slogan: ‘A fair wage for a fair day’s work!’, they ought to inscribe on their banner the revolutionary watchword: ‘Abolition of the wages system!’”. [2]
6 September 2022
1 - Karl Marx: Value, Price and Profit, 1865.
2 - Ibid.