[page 18]
It is only a matterof time
It is now just eight months since the stock market crash of October 1987. In referring to that collapse in the last Issue of the MIR, we predicted that "the Great Crash of 1987 Is making way for the most serious decline in capitalism since the early 1930s... (whlch) will surpass anything experlenced In the post-war perlod, with significiant absolute falls in production and investment."
And yet this dire warning for the future of the world capitalist economy, echoed also by many supporters of the capitalist system, has not yet been confirmed. The major capitalist nations continue to experlence growth in output, particularly in the USA and the UK. On the surface It seems that the governments and banks of the leading economic powers have achieved a degree of stability in currency rates, especially for the dollar, through their agreements to cooperate in monetary and fiscal policies.
So complacent have some financlal leaders become that British Chancellor, Nigel Lawson, when meeting with his opposite numbers at G7 (the meeting of the top seven capitalist economles) was prompted to say: "It now appears that we have shrugged off the stock market crash". In September 1987 Lawson had been equally confident about the world economy. Then in a speech to the IMF, he boldly remarked that the Louvre Accord (the agreement made in February 1987 to support the dollar) was a 'great success' Within a month, the dollar slumped another 10% against other currencles and the consequent threat of rising interest rates triggered off the stock market crash In Wall Street and worldwide.
With 'perfect timing', son's comments at the C7 meatino anincided
Law- April with
the news that the US trade deficit for February 1988 was $13.8bn, only slightly less than the terrible figures which contributed to the stock crash last October. It meant that the US deficit for the previous three months was $38.4bn, the worst quarterly figures since the Louvre Accord. No wonder that Wall Street promptly plunged 100 points and the central banks of the G7 countries were forced to buy billions of dollars to shore up its rate against other currencies.
The reality is that nothing has really changed for the better for world capitalism since the October crash and the basic problems that provoked that fall remain. That is why, with the exception of Tokyo, the stock markets of the world have failed to recover even a major part of the losses suffered in the crash.
Imbalances
The small cut in the US budget spending made by Reagan for the last financial year was supposed to restore 'confidence'. . But it has hardly dented the overall deficit, because Reagan has refused to raise taxes. And despite a nearly 50% devaluation of the dollar against other currencies since 1986, the US trade deficit remains stubbornly high at an annual rate of $150bn, because the US budget deficit continues to fuel a consumer boom. At the same time the $1000bn foreign debt of the Third World nations has not been reduced or resolved, so the danger of widespread default on repayments and a consequent world financlal crlsis remains on the agenda.
Ironically, because these Imbalances have not been corrected, the world boom in production and trade has staggered on. A recession or slump may now be postponed until after the US elections in November_
Reagan wants to leave the painful decisions about spending cuts and tax rises to his successor. But 'market forces' will eventually exert themselves.
If the US dollar is to be supported at present levels, without cutting the US budget drastically, then world interest rates will have to rise, driving manufacturing production and investment (already relatively weak) down. Alternatively, if the US budget shortfall is reduced by spending cuts or tax rises, this will lower consumer spending and business profits in the USA and push the economy downwards.
It is not possible for Japan and Europe to compensate for a slump in the US market as some capitalist commentators hope. Even If Japan and Europe were to try and stimulate their economies through Keynesian deficit budgets, as the Americans have been demanding, it would not be enough to hold up world markets. Any decline in the US market would damage profitability and production for the other capitalist economies, so increased domestic government spending would only fuel inflation rather than production. As Clayton Yeutter, the US trade representative, recently warned: "countries that depend heavily on the US market to fuel their economic growth (that means everybody else -RM) will be hardest hit when that adjustment occurs"
A decline in the US market would also spell disaster for the Third World economies. Again Yeutter has provided evidence: the USA imports 65% of ail Third World manufacturing
exports, while Europe only takes 22% and Japan just 7%. If the USA cuts back on the purchase of these goods, then Europe and Japan will not be able to take up the slack
US Trade Secretary Baker.
Alternatively, if the US government decides not to cut the budget deficit significantly, or allow interest rates to rise, then the US dollar will fall sharply in order to make US goods more competitive. This will reduce Europe and Japan's share of world markets, provoking competitive devaluations or protectionist measures, rising interest rates, or all three -driving the world economy into recession. This is the great fear of US Trade Secretary Baker, and it is what he threatens the other G7 nations with unless they bow to American policies.
Slump
In 1929 the US economy was already heading into recession when the October Crash came. But Europe did not descend into slump until the summer of 1930, In the case of some countries even later. This time the stock crash has come before a production downturn In the USA, although it affected all economies simultaneously. All the ingredients for a significant absolute fall in production and trade-the definition of a slump-have not disappeared since last October. it is m only a matter of time-probably by the end of this year, or into next year-but it is coming.