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Economic Notes The stock crash of October 1987 alarmed the governments bankers of the seven top capitalist (G7) countries. They feared a recession in the real economy would follow. So banks and governments pumped money into the world economy through West German and Japanese funding of the US trade deficit which propped up the US dollar and allowed interest rates to fall. Japan and West Germany ran up budget deficits to boost demand. This led to a sharp rise in investment, production, employment and trade during 1988.
However, this expansion of fictitious capital ie credit has far outstretched any resulting rise in production and investment. Consequently, it has led to an inflation of prices which threatens to return the capitalist economies to the sharp fluctuations and instability of the 1970s. Inflation is 5.2% in the USA, 8.3% in the UK, 3.6% in France, 3% in Japan, and is still That is why Alan Greenspan, the chairman of the US Federal Reserve Board, the equivalent of the governor of the Bank of England has been trying to use his control of interest rates in US money markets to bring about what he calls a 'soft landing' for the US economy where 'unstable inflationary pressures are contained without simultaneously throwing the economy into recession.' Greenspan's restrictive monetary policies have met opposition from the Bush administration who fear that the US economy may tumble into a slump or 'hard landing'. There are some indications that this is happening. US GNP growth has declined from 3.5% in 1988 to an annual rate as of July 1989 of only 1.7%. The auto mobile industry - a key indicator in the USA - has suffered a seven A hard or soft landing?
per cent fall in sales, despite bargain offers. There has been a sharp drop in demand for nickel which is a key ingredient in manufacturing industry's main raw material, stainless steel, whose production is also falling.
In the last two months, Greenspan allowed interest rates to fall a little. Even more importantly, despite some 'cosmetic' cuts, the US government has failed to cut sig nificantly the huge budget deficit ($146bn in 1989 plus $20bn to be added to bail the bankrupt US banks). Consequently, continued government spending, particularly on arms, has buoyed up consumer demand. So it may be that the US economy will maintain growth for the rest of 1989 and even into 1990, but accompanied by continued inflation. The same contradictory picture exists for the world economy as a whole. In the last 12 months Italy, Japan and West Germany have been growing at around or over 4%, and growth is accelerating in West Germany, France and Italy. Similarly smaller economies like Sweden and Australia are still growing fast. On the other hand, growth is slowing down in the USA, Japan and particularly in the UK. In addition, industrial production, the motor force of any advanced capitalist economy, is falling back fast in West Germany, Italy, Japan and the UK. So it is not clear whether the present long boom of the 1980s, extended after the shock of the | Alan Greenspan stock crash two years ago, is finally coming to an end. There are several factors which suggest that recession or even a slump may be just around the corner.
Firstly, there has been no fundamental change in the underlying factors which created the conditions for a recession in late 1987 and which prompted panic in capitalist stock markets. In many ways the situation is now worse: inflation has accelerated and corporate debt has spiralled, with the expansion of mergers and leverag ed buy-outs which makes stock markets even more unstable and vulnerable. Economic | management using interest rates is that much more difficult.
Profit rates have clearly reached their peak in all the major cap. italist economies. According to the latest OECD report (Economic Outlook June 1989), gross profitability (ie before tax and interest deductions) for the top seven G? economies has peaked (at an average 21 per cent of investment) and is expected to taper off from now on Also, the utilisation of existing plant and equipment capacity for the G7 countries has peaked at just over 84 percent and is moving downwards, particularly in the MIR O41
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MIR
Autumn 1989
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420 Autur Econe Notes
USA.
Secondly, none of the imbalances between the major economies in the world, a product of the uneven development of a profit oriented market economy, have been corrected in the last two years.
To finance their budget deficit the US Treasury borrowed heavily from abroad. In order to attract Japanese and German investors interest rates have been kept high. This has meant that the US dollar in relation to other currencies was high, making US exports expensive and imports into the USA cheap. The result was an unprecedented trade deficit. Despite a 40 per cent dollar devaluation from 1985-7. the trade deficit was still over $130bn in 1988, and during the last year as interest rates have risen again, the dollar has climbed back in value, threatening to raise the deficit again.
In a recent study* , a leading expert on international trade argues that the US dollar must be devalued by an average of 10-15 per cent, and by an even larger extent against Japanese and West German currencies, in order to correct the huge imbalances of trade and payments. Otherwise there could be a world recession induced by high interest rates choking off growth.
On the other hand there are some indicators which suggest that the boom may continue for some time yet. World trade continues to expand at a faster rate than the overall growth of produc-
tion in the major capitalist econ-
omies. The post-war integration of
the major capitalist economies
allows them to stimulate each
other's economies. Also it appears
that world raw material prices are
falling back again, at the expense
of the Third World. This will help
to moderate inflation for the in-
dustrialised economies and hold
up profit levels. Finally, while the
West German and Japanese econ-
omies perform well, they may
continue to pay for US prosperity,
by financing their budget and
trade deficits and propping up the
dollar.
But there will be a limit to the
willingness of the West German
and Japanese capitalists to finance
US imperialism. Eventually, the
expansion of world trade will give
way to the pressures of protec-
tionism as each capitalist nation
state tries to protect its own int-
A weak boom
Whatever the timing of the end of the present boom, it is also clear that the world capitalist economy has entered a new epoch. The long world economic upswing of 1949-73, where the business cycle was characterised by strong upturns in production and trade and short and relatively imperceptible downturns, gave way to the instability and fluctuations of the late 1970s and early 1980s. Some capitalist economists have tried to claim that the latest boom demonstrates a new found resurgence in the health of capitalism. But the figures do not justify that claim.
GNP growth in the OECD countries for the business cycle 1968-73 was 4.6 per cent yearly. For the 1974-9 cycle it was 4 per cent annually. But during the relatively longer cycle of 1980- 88, it was only 2.6 per cent each year, including the post-crash boom of last year.
Productivity in this boom has been much weaker than in previous upswings. The OECD report finds that for all the advanced capitalist countries production rose per unit ofinputof raw materials, machinery and labour power by an average of
2.8 per cent per year before
1973. It grew by only 0.7 per
cent per annum from 1974-9.
From 1980-6 it remained pitiful at 0.6 per year and only in the last two years has it picked up to
1.2 percentyearly - stillonly40
per cent of the productivity inc-
reases achieved in the long
post-war boom.
The peak of profitability in
1988 was similar to that of 1978
(20 per cent) but lower than the
peak of 1973 (22.5 per cent) and
considerably lower than the
erests. Protectionism is already intensifying: the USA has introduc ed new 'super' trade restrictions; the EEC nations are preparing a "Fortress Europe" against Japanese and US imports for 1992; and Japan shows no sign of loosening its trade controls.
Once profits.
the effects of declining higher interest rates and
peaks of the mid-1960s. (OECD Report p45).
Another feature of this present business cycle is the much higher rate of interest that manufacturing capitalists must pay to borrow money to invest. This eats into the profitability of industry and so further reduces the level of new investments. After deduction for interest rates, the G7 economies averaged 10.1 per cent gross profitability on investment from 1971-80; only 4.7 per cent between 1981-5, rising slightly to 6.7 per cent for the last few years.
Capacity utilisation fluctuates from boom to slump. It fell as low as 70 per cent in the two world recessions of 1974-5 and 1980-1. But even now it is still below the 88 per centutilisation achieved at the peak of the boom in 1973 and at the same level as that achieved in 1979. (OECD Report p43)
The lower profit rates in this last business cycle have led to a much lower rate of capital investment. From 1968-73 the investmentin fixed capital roseby an average 6.6 per cent per year for all the capitalist economies; by only 1.5 per cent per year between 1974-9; while the present cycle from 1980-7 has seen just a 2.1 per cent growth rate.
Unemployment rates remain much higher than in earlier
business cycles. From 1968-73
the rate for all OECD countries
was 3.3 per cent on average;
from 1974-9 it rose to a 4.9 per
cent average; and during the
latest cycle from 1980-8 it has
averaged 7.5 per cent and there
are now 30 million unemp-
loyed in the OECD area as this
present boom peaks.
tighter world markets begin to bite, then there will be a new recession even more severe than that of 1974-5 or 1979-81 - precisely because of the artificial extension of the boom of the 1980s.
* William Cline - Managing the trade adjustment Institute ofInternational Economics Paper March 1989.
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The environment