The Coming Global Slump -- A Speech by Prof. D. McNally

I'M GOING to start with what might seem like an overly cute formulation. I'll try to justify it, and if I don't, then you can throw various objects at me. But the formulation is: The crisis is over, the crisis continues. I say that because most the commentary we get about the crisis--which began in the summer of 2007 and then really erupted big time in the fall of 2008--focuses on a particular phase of the crisis and says, "Oh, that's over, therefore the crisis is over."

My argument to you, hence the title here, is that this is a mutating crisis. This is a crisis whose weak link keeps shifting, and as a result, we need to see it in all its dynamism--the way in which it keeps mutating and generating new kinds of illnesses within the system, so while it looks like the last one has been cured, in fact, all they've done is move the damage somewhere else.

That's really the essence of what I'm going to be developing for you--and hence the term for the book I've got forthcoming on this topic: global slump. I deliberately didn't say a single crisis, because in fact we're talking about a long-term slump within the system, which is a series of crises taking different forms.

I say the crisis is over and the crisis continues because for the moment, the banking and financial crisis of 2008-09 has been averted. The freefall was stopped, and the collapse of investment banks and meltdown of financial institutions around the world has been halted for now. I say for now, because there are a lot of unknowns down the road, starting with Europe's banks, and maybe I'll get a chance to say a bit more about that. But I want to remind you for a moment about the severity of that crisis and then talk about how it has shifted in form.

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YOU KNOW that you've been living through a very profound crisis in the system when a whole series of different cultural markers emerge that indicate this. Some of you may know that about a quarter million jobs were lost in the financial services industry, predominantly on Wall Street, in the course of 2008 as banks collapsed.

A number of gallows-humor jokes started to make the rounds in the investment community in New York City, and I'll share with you my favorite, from fall 2008: How do you start a small business? Buy a big one and wait. When that kind of joke is making the rounds through the investment banking community, you know things are bad. Another example of the gallows humor: How do you define an optimist? An investment banker who irons three shirts on Sunday night.

Those are some of the markers. The more serious ones: In March 2009, the Financial Times, arguably the most important English language financial newspaper in the world, started a series called "The Future of Capitalism"--as if this was now an issue.

Let me just quote you a couple passages from the editors of the Times as they launched this series: "The credit crunch has destroyed faith in the free market ideology that has dominated Western economic thinking for a decade, but what can and should replace it?" The next day, they wrote, "The world of the past three decades is gone." (By the way, I think they're right about that, and I'm going to speak to that as I proceed.) And then they proceeded to quote a Merrill Lynch banker, who said, "Our world is broken, and I honestly don't know what is going to replace it."

That gives you a sense of the fact that within the mainstream, the most serious financial analysts understood the gravity and the profundity of what was happening, and that there was a seismic shift--as if the tectonic plates of global capitalism were shifting, and they didn't know where we were going to be when that shifting stops.

But perhaps the one thing that sums up the ruling class panic best was the spoof front page of the Economist from September 2008, after the Lehman Brothers bank collapse. The Economist had a two-word front page: "Oh Fuck!" This was the largest corporate bankruptcy in world history. You thought Enron was big when it went under, owing about $60 billion. Lehman Brothers went under owing about $635 billion to its creditors around the world.

So that's the context, and what it generated was the most massive coordinated central bank intervention into the so-called free market system in the history of global capitalism. We don't know the exact amounts, but the conservative estimate for the size of the bailout packages that comes from the Bank of England is around $14 trillion. That's around the annual output of the American economy.

Once you then factor in the additional $1 trillion they decided to throw in for good measure a number of weeks ago in Europe, and you start factoring in the stimulus packages and so on, we're probably in the area of a $20 trillion intervention to bail out and stabilize the system. This was the scale of the ruling class panic and, as I say, it produced something unprecedented in the history of the system. Never before had world central banks coordinated an intervention like this and on this scale.

But what they did in the course of this was simply push the problem out of the private banks and into the public sector. They socialized the debt--they made taxpayers take on the burden of all the toxic waste that the banks had been selling and holding onto. (Sound familiar? Privatize profit, socialize debt -- Woody) But in doing that, they raised huge questions about the long-term viability of government debt. So we're now getting these so-called "sovereign debt crises," which has been particularly profound in Europe, with Greece at the forefront,

In other words, it isn't the case that the crisis disappeared--it simply transmuted. It changed forms, and we're looking at a different front. Every now and again, you get a serious mainstream description of what has happened that's worth holding onto. I say description, because the theory is rubbish. All the mainstream theory is totally useless at making sense of anything that's happening.

But probably the best description in the mainstream comes from a book called This Time is Different: Eight Centuries of Financial Folly, which makes fun of the idea that this crisis is different from the others. The coauthors Carmen Reinhart and Kenneth Rogoff write the following:

The global financial crisis of the late 2000s, whether measured by the depth, breadth, and (potential) duration of the accompanying recession or by its profound effect on asset markets, stands as the most serious global financial crisis since the Great Depression. The crisis has been a transformative moment in global economic history whose ultimate resolution will likely reshape politics and economics for at least a generation.

I think that's exactly right. We are talking about an epochal shift, an absolute redefinition of a whole political period. I want to give you a few markers for the analysis I'm going to develop in the rest of my time, just so you've got some sense of where I'm coming from.

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Systemic and Systematic

MY VIEW is that this is the first global and systemic crisis of the neoliberal phase of capitalism. When I say it's systemic, I mean that it's not just a crisis in one sector. It's not just a real estate or housing crisis. It's not just a banking crisis. It is a systemic crisis. Capitalism is struggling to reproduce itself on an expanding scale, which is the essence of the system--it must do that or perish, and it's struggling to do that as a system.

The second underlying premise is that such crises are the result of prolonged periods of growth within the system. I want to emphasize that because there has been a tendency for many commentators on the left to say that this is just the latest phase in a 40-year crisis.

I don't believe this. I think all the evidence shows that the two big recessions--1974-75 and 1980-82, though in some countries, there was actually a third along the way--and the ruling class offensive that they triggered did, in fact, shift the balance of class forces massively in favor of capital, so they were able to increase the rate of exploitation and launch a new wave of global accumulation, which ultimately became centered in east Asia, with China being the most important evidence of this.

This shouldn't be surprising. For those of us who take Marx seriously, the dynamism of capitalism--its very growth--produces profound crises. I don't accept the idea that for 40 or 50 years, the system had just been stagnating. Growth drove us into this crisis.

The first sign of this crisis really emerged in 1997, not surprisingly in East Asia, precisely where growth had been highest. You got the so-called Asian crisis, which was very profound and very deep. After that, there were a series of other crises: Russia, Argentina, Brazil, the collapse of one of the largest hedge funds in the U.S., and so on, after which central banks led by the Federal Reserve in the United States massively stimulated the system, driving down interest rates. That produced a great asset bubble, concentrated first in the dot-com sector, and later in housing and so on. And the bursting of one of these bubbles would be the trigger for the crisis that emerged in 2007.

But triggers aren't the same thing as the whole story. They influence the timing and the sector where a crisis emerges. It didn't have to be real estate. It could have ultimately happened somewhere else. But that's where the big bubble burst, and that's where all of the underlying weaknesses within the system got exposed.

As a result, we are--I agree with the commentators on this--in the second great contraction of modern capitalism.

But overall, these premises go against the grain of so many of the pundits on the business news channels and in mainstream newspapers, who are telling us that the crisis is over. So I just want to move through a few headlines from this moment and--if you'll pardon me using the slightly post-modernist term--deconstruct them for you. I do that because I think we need to map where we are with this crisis, and then I want to talk about how could the system is supposed to be able to get back on its feet right now. In other words if it's true that the crisis is over, where is this resolution coming from?

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Just the Facts, Ma'am

SO LET me give you a few headlines. This one appeared a few weeks ago, from Thomson-Reuters: "U.S. corporate profits up 206 percent in the fourth quarter of 2009." True. This is a factually correct statement. But what doesn't it tell us? It doesn't tell us that if we remove financial enterprises--banks, hedge funds and so on--profits are only up 18 percent, not 206 percent. And by the way, when you're a bank hovering on the verge of bankruptcy last year, being up 206 percent is not so astronomical.

The reality is that profits today are still below the peak of the last expansion, by a very considerable margin. There has not been, despite the attacks on the working class--the concessions that the United Auto Workers gave up, the big wage cuts that have come in one sector after another, the leaning of production throughout the course of this crisis and so on--a recovery of profits to their post-crisis level.

Here is a headline that I loved, only because I reside in Canada: "U.S. auto sales outpace Canada's." Now this was considered big news because Canadian capitalism was not hit as hard by this crisis as capitalism has been in other parts of the world. But now, U.S. auto sales were going more quickly than Canada's. This really was boom time stuff.

Okay, let's deconstruct. It was a true statement about April this year. But what they didn't tell us is that this great burst in U.S. auto sales took them to an annual level of about 11.5 million. Pre-crisis? 16-17 million was the annual average. In other words, automobile sales in the U.S. economy are about 5 million below their pre-crisis level. It's true that the corporations have wrung out sufficient concession from the unions that they're profitable again, but there's not auto-induced boom coming in the U.S. or anywhere else.

Here's another one of my favorites: "U.S. new home sales make huge jump." True, by the way. They did in April. But they were still 70 percent lower than July 2005. Seven million households in the U.S. are behind on their mortgage payments. Freddie Mac had to ask for an additional $10.5 billion in March to cover further real estate losses.

The number of people behind on their payments is rising at the moment--it's around 10 percent. And by the way, nearly 40 percent of the people who are delinquent are so-called prime borrowers, not sub-prime. These are people who qualified for high-end mortgages. That's what massive job loss does. Mortgage applications for new homes plunged 40 percent this spring in the U.S., and new home and apartment construction fell by 10 percent in May. In other words, the housing and real estate sector has not touched bottom yet.

And then, of course, the one that I think you'll know and appreciate the irony of: "U.S. economy adds 290,000 jobs in April." Again true. Of course, the unemployment rate rose with that announcement because 800,000 people who hadn't looked for jobs the previous month said, "There's jobs out there," and reentered the job market. And then new job losses claims jumped again.

To give you some perspective of what this means for the U.S. economy: Simply to restore the jobs lost in this recession would require 8.5 million or more, and those that would be required by ordinary population growth is another 2.5 million. To get those 11 million or so jobs would require job creation of 400,000 new jobs per month for three years in the U.S.--just to get back to where they were. Never mind all the people underemployed and so on. Don't hold your breath on those 400,000 a month for three years.

Here are a couple of facts that aren't being widely reported.

The U.S. money supply is contracting at the moment. This is terribly bad news for capitalism because what it tells you is that the amount of business borrowing is falling, which means that investment is falling. It tells you the amount of consumer borrowing is going down. The money supply ultimately reflects the growth, or lack thereof, of overall transactions happening in the economy--business spending, consumer spending and so on. When the money supply is going down, that's a recessionary indicator--even possibly a deflationary one, and I might get a chance to say a few words about that in a moment.

Another fact, this one about world shipping. Some of you will have heard about an obscure thing called the Baltic Dry Index. What it does is track the amount of stuff being shipped around the world--shipping on huge vessels is still the principle means of moving commodities around the world, whether it's steel or coffee. The Baltic Dry Index has fallen every day for the last three weeks--not good for the system. But this isn't making front page headlines.

Finally, a report came out from the Organization for Economic Cooperation and Development (OECD)--essentially the 30 largest Western economies. The OECD released a report last month warning of a "lost generation," with youth unemployment in those 30 countries officially at 19 percent. That's the official rate, and of course, as we know, it's much, much higher in many countries. For example, the official unemployment rate in Spain is 20 percent right now, with youth unemployment in the high 30s in Spain right now.