Written by Alejandro Iturbe
Tuesday, 11 March 2014 03:52
Recently, the head of the IMF, Christine Lagarde, said: “This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous in another way—the year in which the “seven weak years”, economically speaking, slide into “seven strong years.”
With the same tone, the Spanish prime-minister Mariano Rajoy said in his meeting with Barack Obama that “the worst is over” and that the country’s economy entered a period of recovery.
In other words, the international economic crisis that started in 2007 had already passed the worst. From now on, “it will only get better.” We ask: are these correct predictions?
A highly contradictory situation
Our answer is “no”. On the one hand, we believe that we are still in the shock wave of the crisis opened in 2007 and that the current situation is part of it. This happened in the 1929 crisis, whose impact lasted until the 1940s, when there was finally a real recovery. The imperialist bourgeoisie can only get out of this downward long wave of crisis achieving a higher and deeper leap on the levels of exploitation of the world working class and especially of their countries’.
Eventually, the imperialism is escaping the recession, especially in the U.S. In this country, there is a real recovery, although not spectacular. At the same time, Europe has technically emerged from recession, it presents growth rates slightly above zero. But the Chinese economy slows down, as well as the “emerging countries” (which in previous years could flee the crisis). Now they begin to have serious monetary and financial problems.
In short, the overall world economy is not approaching a new recession. At the same time, we are very far from having left behind the wave of impacts of the crisis and from entering the “fat cows” cycle.
U.S. economy improves but without large investments
The U.S. economy remains at the top of the world (21.4% of world GDP in 2012). It is the hegemonic imperialism. After having been the epicenter of the 2007/2009 crisis, the country today is much better than Europe and out of a recession. This dynamic seems to be confirmed in 2013. The BEA (Bureau of Economic Analysis) of the U.S. government estimates a growth of between 2.5 and 3% in 2013 and a continuation of this growth trend. These figures are behind the world average, but ahead the “anemic growth” which Nouriel Roubini stated. Is it a sustained recovery or will it slowdown later and finally fall? But it’s undeniable that there is a recovery. Let’s look at the elements that drive it:
a) There was an increase in the rate of exploitation and surplus value. Over the past five years, productivity grew 20%. The bourgeoisie uses the crisis to increase the rate of exploitation: “productivity increased 0.9 % in the first quarter of 2014, with a 0.1% drop in the unit labor costs,” said the BEA. The profit rate has reached the pre-crisis levels.
b ) There is some expansion of the service sector and a true recovery in construction. Unemployment decreased in relation to the most acute moment of the crisis: almost 10% to 7.6% in June 2013.
c ) There is a significant and positive change in the situation of energy balance (production and consumption of fuels) due to the extraction of super-heavy oil and an exponential increase in the exploitation of the so-called shale gas.
d ) There is a steady increase in the production of value-added technology.
e) There is a recovery in the construction and real estate sector, which grew 3.2% in 2012 and a growth forecast of 13% in 2013.
Reduction of the budget deficit and rising national debt
The budget deficit (the gap between taxes and spending) slipped to 4% of GDP in 2013 (US$ 642 billion) from 7% (US$ 1.1 trillion) recorded in 2012. The national debt, on the other hand, increased. In the U.S., both internal and foreign debt are recorded in a single account (treasury bonds). The national debt in 2013 exceeded US$ 17 trillion (about 105 % of GDP and almost twice 2002 debt). In the historical sequence, this national debt/GDP ratio was surpassed only in 1940 by the “war effort” of World War II.
What will be the monetary policy?
Both governments of Bush and Obama applied different monetary policies facing the crisis. First, they let the process run, which led to the bankruptcy of Lehman Brothers. Then, an expansive monetary policy was applied, which injected a large amount of capital at very low interest rates in the markets.
This was changed to a policy of controlled expansion by Obama. The Federal Reserve injected US$ 85 billion monthly by purchasing their own treasuries. At the same time, the budget expenditures were reduced. Now, the money supply is decreasing (a reduction of US$ 10 billion in monthly bond purchases at the beginning of the year and another ten billion at the end of January) and the FED interest rate is increasing, which impacts the entire global financial dynamics. At the same time, although the balance of trade has decreased its deficit (thanks to a better energy balance) it remains highly deficient (about US$ 470 billion in 2013).
The growth conditions of investments
The BEA argues that investments are growing. Yet it’s true, it starts from a historically very low level. A Fed’s report states that “the ratio ‘Funds available/effective investment’ in fixed assets is the lowest since 1935.” 1935 is regarded as a reference year of very low investment due to the effect of the 1929 crisis.
Is it a turning point in the dynamics of investments or just ups and downs of the U.S. economy in recent years? It is something that will only become clear in a longer period. Anyway, it is necessary to analyze why it reached this low point. The answer is a combination of several factors.
The most important one is the political: the imperialism failed to reverse the unfavorable relationship of forces after the result of the wars in Iraq and Afghanistan. This undermines the “confidence in investments” of the American bourgeoisie.
The second aspect is that, in recent decades, the U.S. economy is becoming increasingly speculative and parasitic: predominantly in the financial and service sectors and much less industrialized. The industry share of GDP declined from 38% in 1965 to 12% in 2004.
At the same time, only a small portion of the money supply for the financial market turns into a real investment. That’s because most is used by banks to recover from their bad situation. This means that, unlike 2002-2007, when the expansion of the speculative sector indirectly drove the economy as a whole, its effect is much smaller now.
The fourth aspect has to do with the difficulty of boosting sustainable consumption, something very important in the current economic structure of the U.S., to achieve an increase in investment. In terms of economic growth, the adjustments that lead to the reduction of public expenditure have a negative (or neutral) effect on the growing dynamics of GDP. Alternatively, U.S. investments abroad grow in a sustainable manner: 40% between 2008 and 2012.
“Are emerging countries falling one after another?”
That’s the question raised by the French daily Le Monde. Simultaneously, several “emerging countries” (some of them considered as models) suffer serious monetary and financial problems. The British specialized magazine The Economist talks about the “end of the party” in Venezuela and Argentina. In both countries the situation of the economy is characterized by very high inflation, parallel exchange market, capital flight, etc.
What The Economist (which has always been critical to the governments of Chavez-Maduro, in Venezuela, and Cristina Kirchner, in Argentina) fails to mention is that these are not isolated cases. The situation looks increasingly similar in many other emerging countries in the world.
There are serious economic problems and currency crises, in the context of political and economic crises, in Turkey, South Africa and India. Brazil, apparently, seems headed in that dynamic. In Turkey, the currency was depreciated by 30% and the financial markets weakened because of the end of the foreign investment cycle. The Rand and Rupee [currencies from South Africa and India, respectively] live similar situations.
According to international analysts, although the existence of elements of speculative attacks, there are economic and political basis for this occurrence. In several cases, as we have seen, the financial situation of these countries has been heavily hit by the fall of commodity prices, due to the slowdown of the Chinese economy and the European crisis.
In this scenario, the prices most affected by the “end of cycle” are the metals: in the last two years the price of copper fell by 35%, iron by 40% and gold by 36%. Although to a lesser extent, food prices also suffer a downtrend: soybean prices fell from US$ 610 in July 2012 to US$ 520 today, the wheat (which was US$ 360) fell to US$ 320 and the corn is US$ 40 down to US$ 300 in the same period.
Secondly, the change of the U.S. fiscal policy (increase of interest rate) also causes a decline in investments abroad and the return of american capital from these countries. The economic problems combine, in many cases, with situations of political instability in countries like Turkey, Argentina, South Africa and Brazil.
The conclusion of the analysts is that the growth rates of these countries have been reduced to “European levels” in the last few years and this, in turn, may have a negative impact on the global economic situation as a whole.
Translation: Marcos Margarido
Escrito por Alejandro Iturbe
Viernes 21 de Febrero de 2014 21:33