2011: Optimism or pessimism?

The year 2011 began with the customary toasts to health, happiness and success. As the bourgeois clinked their champagne glasses, it seemed as if their dreams were coming true. The collapse of financial markets that threatened to destroy the economic recovery in 2010 had failed to materialise. Global output has probably risen by almost 5%, a lot faster than forecasters were expecting 12 months ago.

He who laughs has not yet heard the bad news” (Brecht)

All was for the best in the best of all capitalist worlds. Yet black clouds are ever present, darkening the clear bright sky. Despite the recovery of growth in Germany, predicated on exports, the crisis of the euro zone remains unresolved. And the growth in German manufacturing depends on the very uncertain prospects for the global capitalist economy.

The Bible informs us that Faith can move Mountains. At the dawning of a new year the bourgeoisie has taken this text very much to heart. They are so relieved that the worst has been avoided (so far) that for the first time in some years they have allowed themselves to express optimistic sentiments about the prospects for the world economy.

The Biblical term Faith is translated into the language of bourgeois political economy as Confidence. Indeed, as a Category of Political Economy, Confidence is far superior to Faith. It can move not only mountains but – what is far more important – the Stock Exchange. Religion says that if only we have Faith, we will save our Immortal Soul. The economists tell us that if only we have confidence, we will save the world economy.

Behind every school of modern bourgeois philosophy is subjective idealism. The philosophical basis of bourgeois political economy is no exception to the rule. A recent editorial of The Economist confirms this. It tells us: “Confidence determines whether consumers spend, and so whether companies invest. ‘The power of positive thinking’, as Norman Vincent Peale pointed out, is enormous.”

Unfortunately, experience tells us that no matter how much a pauper is convinced that he is really a billionaire, he must remain a pauper in reality. No amount of “confidence” can fill an empty stomach in Bangladesh or find work for an unemployed worker in Michigan. Nor will the “power of positive thinking” help to fill the yawning abysm left in the public finances by the most serious crisis of capitalism since the Great Depression.

The material basis of optimism

For the past 400 years in the West bourgeois thinking was based on optimism, enlightenment and progress. Oliver Cromwell and his supporters thought that their Revolution had issued in the Kingdom of God on earth. The Founding Fathers of the United States were convinced the country they created would be better than any that had come before, offering citizens life, liberty and the pursuit of happiness.

During the Great French Revolution the bourgeoisie aroused the semi-proletarian masses of Paris to fight against feudal despotism under the flag of Liberty, Equality, Fraternity, and the Rule of Reason. Meanwhile in England, an even greater Revolution was beginning: an industrial revolution based on steam power, machinery and the factory system.

In those times the optimism of the bourgeoisie had a material basis, because capitalism, despite all its crimes and appalling brutality, nevertheless played a progressive role in overthrowing decayed and degenerate feudalism and developing the productive forces. In pursuit of profit, the capitalists developed industry, agriculture, science and technology to an unheard-of extent. In so doing, quite unconsciously, they also developed the material basis for a higher form of society – socialism, and the class that is destined to overthrow it – the proletariat.

The bourgeoisie shared (and still shares) the common illusion of every previous ruling class in history – from the Roman slave-owners to the feudal aristocracy – namely, that its socio-economic system represented the final and highest stage of human development. It fervently believed in the celebrated phrase of Leibniz, cruelly parodied by Voltaire in Candide, that “everything is for the best in the best of all possible worlds”.

Nowhere was that sense of optimism more deeply engrained than in England, the former “workshop of the world”, which dominated the world on the basis of its industrial might and wealth. This was the basis for the World Outlook of the British ruling class up to 1914. The philosophy of British Liberalism was derived from a superficial version of the theory of Evolution, in which today was always better than yesterday and tomorrow would be better than today. This in turn was merely an idealised reflection of material reality: the rapid development of the productive forces.

The comforting Utopia of bourgeois Liberalism was blown sky-high by the First World War. It has never really recovered. The history of the last century is the history of the convulsive revolt of the productive forces against the narrow confines of private property and the nation state. It is reflected in two devastating world wars and the catastrophic economic collapse between the wars. The notion that the human condition was susceptible to continual improvement was contradicted at every step by harsh reality.

Different historical periods

History does not move in a straight line. Nor does it move in a never-ending cycle of “long waves”, as imagined by Kondratiev. His theories have become fashionable with certain bourgeois economists who seek to derive some comfort from the thought that “what goes down must come up.” In this way the bourgeoisie tries to recover its lost optimism. However, this is no more possible than for what used to be called a “fallen lady” to recover her lost maidenhood.

What is certainly true is that there are definite periods in the development of capitalism, and every period tends to be different to every other period. If we study the history of capitalism over the last 150 years, we see, on the one hand, a constant series of booms and slumps (which bourgeois economists used to call “the business cycle”). This has a somewhat irregular pattern that can and does vary in different periods. In Marx’s day, the normal cycle was about ten years, although there is no definite rule about the regularity of the economic cycle, which can vary for considerable periods.

However, in addition to the normal boom-slump cycle, it is possible to detect broader tendencies that characterise different periods. This is true not only for capitalism but also for other socio-economic formations. The study of Roman history falls into two clearly distinguishable halves, divided by the turbulent period of class struggle that announced the end of the Republic and the beginnings of the Empire. Essentially this change reflected the beginnings of the end of the slave economy.

The period of the decline of slavery lasted for more than three centuries. During this long period of decline there were moments of recovery, even of brilliance, but the general line was downwards, leading eventually to collapse, the barbarian invasions and what we call the Dark Ages. The end result was the rise of a new socio-economic system we know as feudalism.

In the two centuries or so in which capitalism has existed, there was an initial period characterised by an explosive development of the productive forces. History has never known such a tremendous revolution in industry, agriculture, science and technology. This was precisely the material basis for the confidence of the bourgeoisie and its ideologists. The confidence of the bourgeoisie in the period of its ascent was only partly dented by the periodic crises of overproduction that commenced in the first half of the 19th century. Each crisis was followed by a new and even more tempestuous growth of trade and industry.

Today many tourists visiting London marvel at the spectacle of Tower Bridge, a mighty structure built over a century ago, which combines the aspect of a Gothic cathedral with the massive structures of the Industrial Revolution built with solid British iron, nuts and bolts. This is not just a bridge across a river. It is a statement, a manifesto, by which the British bourgeoisie declared to the rest of the world: “We are great. We are rich. We can do anything we want. And our power will endure for a thousand years.”

Before the First World War there was a long period of economic upswing. This permitted the bourgeoisie to give certain concessions to the working class, which began to realise its strength by forming mass trade unions and political organizations (the Social Democracy). In theory the mass parties of the Second (Socialist) International were based on Marxism (with the exception of the British Labour Party). But the practice of the European Social Democracy was increasingly reformist.

With the exception of Russia, in most European countries the class struggle was blunted by a long period of economic prosperity. This was the material basis for the rise of bureaucracy and reformism. In words, the leaders of the Social Democracy stood for class struggle and socialist revolution. But their whole psychology was shaped by decades of social peace and parliamentary activity. They shared the optimistic outlook of the Liberal bourgeoisie: today better than yesterday, tomorrow better than today.

All these peaceful, gradualist illusions were destroyed in the summer of 1914. The First World War marked the beginning of an entirely different period. The Russian Revolution of 1917 ushered in a period of colossal political and social instability. The inter-war years were of an entirely different character to the period before 1914. The speculative boom of the 1920s led to the biggest collapse in history. The 1929 Crash ended in the Great Depression of the 1930s that only ended with the Second World War.

This was a turbulent period of revolution and counterrevolution that placed a question mark over the existence of capitalism. But history shows that capitalism can get out of even the deepest crisis. As early as 1920, Lenin had explained to the ultra-lefts that there was no such thing as a “final crisis of capitalism.” Unless and until the proletariat overthrows it, the bourgeoisie can always find a way out. At what price for humanity is another question.

The post-war period

For reasons we have explained elsewhere (See Ted Grant, Will there be a Slump?), the period following the Second World War was different to the inter-war period. Contrary to what Trotsky had expected, capitalism succeeded in re-establishing a new equilibrium after the War.

From 1947 to 1973, there was an upswing in world capitalism. In this period the economic cycle was shorter, reflecting changing patterns of investment, but the recessions then were shallower and short and were barely perceptible. In the advanced capitalist countries (the so-called Third World was entirely different) there was full employment and rising living standards. For a whole period the class struggle in the USA and Europe was blunted. Even so, we must never forget that at the height of the post-war upswing, there was the biggest general strike in history, in France 1968.

This period came to an end with the first deep recession in 1973-74. The 1970s was a very different period to the 1950s and 1960s. Once again, revolution was on the order of the day in Portugal, Spain, Greece and Italy and big movements of the workers and youth in France, Britain and other European countries. On the other side of the world we had the revolutionary movement of the masses in Pakistan and Bangladesh. But these promising movements were in every case derailed by the leadership and ended in defeat.

The 1980s marked a new turn in the situation. The ruling class took advantage of the downturn in the movement to pass onto the counteroffensive. Under the banner of Monetarism, Thatcherism and Reaganism, the bourgeoisie reacted against the previous policies of Keynesianism. They wished to go back to the good old days of “laissez faire” capitalism, reducing state involvement to a minimum, and making everything dependent on “free market economics”.

The fall of the USSR and its satellites and the integration of China into the world market further encouraged this reactionary tendency. The entry of over 1,000 million people into the global capitalist economy provided new markets and highly profitable investments. The illusion was created that “all was for the best in the best of all worlds”. The engines of the world economy were roaring on all cylinders. Speculation soared to new and dizzying heights. The optimism of the bourgeois now experienced a miraculous rebirth. They even wrote about the “end of history”.

But like every other boom in history, it all ended in tears. The slump of 2008 was the most serious economic crisis, certainly since the Great Depression, and perhaps in the entire history of capitalism. Overnight the confidence of the bourgeois collapsed. The economists and politicians were obliged to swallow their words. The very same governments that had insisted that market forces alone should decide everything, now rushed with indecent haste to bail out the banks with trillions of dollars of public money.

The growing alarm of the ruling class was reflected in the succession of panic measures adopted by governments and central banks, which were no longer aimed at preventing recession but only of blunting its effects. But despite all these measures, the crisis is deepening and spreading all the time.

What we said

As in every real capitalist crisis the central problem is overproduction. This is expressed today as excess global capacity. To use an expression invented by the utopian socialist Fourier, we are faced with a crisis of plethora. There is too much steel, too much cement, too many cars, too many empty offices, too much oil…

Unless and until the excess production is liquidated, there is no possibility of a genuine recovery of the world economy. The bourgeois economists have no solution to the problem. They have engaged in the most astonishing somersaults. After decades of pursuing the Holy Grail of “supply-side economics”, they have suddenly reverted to the voodoo economics of Keynesianism.

The very same people who used to ritually denounce the evils of Keynesian deficit now advocate throwing billions at the banks. The only result has been to run up vast deficits that will take a whole generation to work off. None of these policies can solve the crisis. The policies of Brown and Bush were born out of desperation. They amounted to an attempt to reflate the bubble that caused the present mess in the first place.

In 2008 we wrote the following:

“The unprecedented expansion of credit in the last period served to maintain high levels of demand in the USA and other countries. But now this has reached its limits. The whole process is thrown into reverse. Now nobody wants to lend money and few wish to borrow. Society is seized with a parsimonious and miserly mood.

“The masses have no money to spend – only debts to repay. Those who previously lent money cheerfully are now calling in their debts. Those who took out mortgages to buy homes are unable to pay and find themselves evicted. Since the price of their homes has fallen, they are saddled with huge debts, which unlike house prices, do not fall.

“The bankers, who yesterday were anxious to lend money to anyone, are now anxious to hoard money and not to part with a cent. This miserly and distrustful attitude applies not only to private house owners and small businesses, but also to other banks. They are not prepared to lend money to other banks because they are not sure the money will ever be returned.

“Since credit is the life-blood of the capitalist system, the interruption of the supply of credit means that not only “bad” businesses will be made bankrupt but “good” ones also. The drying up of credit threatens the whole productive process of society with slow strangulation.

“[…] In effect the bourgeois are trapped. Whatever they do now will be wrong. If they do not intervene to pump money into the banks and failing businesses there will be a deep slump with massive unemployment as in the 1930s. But if they resort to Keynesian methods of deficit financing, they will create huge debts that will undermine any future recovery and act as a tremendous drag on productive investment, creating the conditions for a long period of cuts and austerity”.

Two years later we have no reason to change a single word of this.

Crisis in the USA

What happens to the US economy is the decisive question for the future of the entire world. The USA is the richest countries in the world. But it has used up all its resources in an attempt to halt the slide into recession. Unlike Europe, the American economy has moved away from austerity. Just before Christmas, Congress agreed to Obama’s deal with the Republicans in Congress that extends Bush’s tax cuts for the wealthy in return for more stimulus spending. The agreement not only extended the tax breaks for two years, but it also added more than 2% of GDP in new breaks for 2011. This means more profits for the rich in exchange for yet more empty promises.

The economists predict that American output will grow by as much as 4% this year. But America’s politicians are following a very risky strategy. In effect, they are attempting to reflate the bubble. But the long-term budget outlook is catastrophic, and Obama and the Republicans have no idea of how to fix the deficit. The Federal Reserve is responsible for the soundness of the world’s main reserve currency. Thus far, the markets have turned a blind eye to the dodgy activities of the US monetary authorities. America is still seen as a safe haven for capital. They have “Confidence”. But how long will confidence last when it is contradicted by the economic facts?

Trillions of dollars of public money have been handed over to the banks in the hope that they would begin to lend again. They have not. The bankers are not prepared to lend under the present circumstances and no amount of interest cuts or state subsidies will make any difference. Unemployment in the USA remains stubbornly high, hanging like a dead weight on the American economy and the economy of the whole world. As a result, huge and unprecedented budget deficits threaten the stability of the world financial system.

In a desperate measure to reflate the economy, the Federal Reserve is continuing to buy American bonds. This is the equivalent of a drug addict injecting himself with another dose of stimulus steroids. With every injection, a bigger dose of the drug is required until the patient finally enters into a coma. The subsequent “cold turkey” treatment will be extremely painful.

Some may see faster growth on the way; but a growing number are worried about the size of America’s gaping deficit. If those worries turn into a panic, the United States could even see a bond-market crisis in 2011. Whenever it occurs, sooner or later the markets will conclude that the dollar is not so strong after all. Once the panic starts it will not stop until the entire world financial order has been turned upside down. The consequences for America and the whole world are incalculable.

The American ruling class is suffering from acute schizophrenia. On the one hand they advocate plundering the public finances to save the banks; on the other hand, they wail and gnash their teeth over the runaway debts of the state. Thus the Republicans threaten to stonewall Obama’s proposals in Congress.

The split in the US ruling class is expressed in the bitter conflict between the White House and the Republicans. This conflict exposes deep contradictions at all levels of US society. The recent attempt on the life of a Democratic congresswoman by a crazed gunman was undoubtedly a reflection of the extreme polarization in American political life and society generally. The assassin was clearly mentally unbalanced but the leaders of the right wing Republicans are also somewhat unbalanced. The fact that a hysterical petty bourgeois like Sarah Palin could be seriously put forward as the potential leader of the most powerful nation on earth is sufficient proof of this.

In reality, neither Democrats nor Republicans have any solutions. Barack Obama has been quickly exposed as an empty phrasemonger. He is impotent to solve any of the serious problems of the American people. The Republicans, sensing his impotence, are baying for blood. The most crazed and reactionary sections are mobilized in the so-called Tea Party movement – a heterogeneous movement that exploits a whole series of grievances of different layers of US society, and an amorphous desire for “change” – the same amorphous desire that was previously expressed in the movement for Obama.

The workers of the USA had to pass through the painful school of Obama in order to learn a bitter lesson. Neither Democrats nor Republicans can offer anything to the people of the USA under present circumstances. Today the demagogy of Obama stands exposed. Tomorrow it will be the turn of the Republicans.

The crisis of the euro

For most of 2010 all eyes were fixed on Europe and the travails of the euro. The crisis of capitalism has revealed the existence of deep fissures in the EU. The first phase of the crisis was mainly characterised by defaults of the banks. The second phase is characterised by defaults of states.

Iceland was the first state to go bankrupt. But that was, after all, a tiny island off the coast of Europe. Even so, the Icelandic crisis had serious effects in countries like Britain and Holland.

The next victim was Greece – a member of the EU. But the Greek crisis was “solved” by the intervention of Germany and other EU states, which set up a special fund of around a trillion dollars to deal with such cases. But in reality nothing was solved. In the best case scenario the Greek crisis has been postponed to a future date. And the “aid” from the EU was obtained at the price of savage cuts in the living standards of the Greek people, a deep recession and mass unemployment.

If the leaders of the EU thought that these measures would be sufficient to stop the rot, they were sadly mistaken. The Irish economy, threatened with complete collapse, was compelled to seek assistance from the EU. This spelt further attacks on living standards and a crisis of government. Immediately after the Irish crisis, Portugal has become the latest target of attacks by the capitalist speculators.

The IMF, OECD and European Commission put euro-area potential growth at around one percent. Germany is the source of much of the recovery, and its growth has benefited some other economies in Europe. But this is dependent mainly on Asia. On the other hand, the rate of unemployment in the EU remains stubbornly high, at 10.1 percent, rather than falling as it should in a recovery. This is a clear symptom of the underlying sickness of the system, which is manifested as the crisis of the euro.

The success of German-based firms in Asia’s export markets has benefited suppliers in Eastern Europe, such as the Czech Republic. This is now really a satellite of German capitalism; around a third of its exports go to Germany. Poland’s economy has been mainly held up by a big fiscal stimulus. But its budget deficit may hit 8% of GDP this year. And Hungary is in a desperate state. Its credit status is only a little above junk status. The crisis in Eastern Europe can still affect countries like Austria, Germany and Sweden.

Europe faces threats on all sides. The euro area is now a source of stress, both financial and macroeconomic. Government spending cuts will lead to a fall in demand and growth. Tied to a single currency, they cannot hope to improve their competitiveness by devaluation. From a capitalist point of view, the only alternative is to screw down wages. The fiscal tightening will begin in earnest this year. But this will further reduce demand, deepening the recession and increasing unemployment.

In Britain the recent increase in VAT will cause a reduction of demand by two billion pounds and combined with other cuts will increase unemployment. Already Ireland and Greece are in deep recession and the austerity policies will make it hard for them to climb out. Spain is barely growing and has a budget deficit approaching 9% of GDP. Portugal’s government has been forced to take action to cut a deficit of similar size, provoking a general strike in the process.

Germany decides

The crisis of the euro has underlined the fact that power in the European Union is now firmly in the hands of Germany. The pretensions of Nicolas Sarkozy have been cruelly exposed. It is in Berlin, not Paris, that the future of the EU and the euro will be decided. In the past, a polite fiction was maintained of a Franco-German condominium. Now power has passed to the other side of the Rhine.

Although France remains close to Germany, and tries to maintain the illusion of a Paris-Berlin axis, its long-term interests are not the same as Germany’s. Its ties are with Africa, while Germany looks to Eastern Europe, the Balkans and Russia to strengthen its power and influence. The enlargement of the EU to the east has further strengthened Germany at the expense of France.

On agriculture, for example, France’s interests favour the wasteful Common Agricultural Policy (CAP). There is strong pressure to rethink the CAP after 2013. Despite German opposition, they have agreed to a joint statement with France that farming is a “strategic activity” and that Europe “needs a strong CAP”. The French regard this as a victory. But the fact is that on all the fundamental issues, Mrs Merkel has got what she asked for, while Sarkozy has finally learnt the lesson: “he who pays the piper calls the tune”.

Thanks to the strength of its exports, Germany has pushed GDP growth to 3.7%, against only 1.6% in France and a euro-zone average of 1.7%. Between 2005 and 2009 Germany’s share of world exports grew, whereas France’s shrank. No French government has balanced its budget for 27 years. In 2011 France’s budget deficit is expected to be over 6% of GDP, whereas Germany’s may be under 3%. These figures place France closer to Greece than to Germany in the eyes of the markets. This is very difficult for the French bourgeois to accept, but accept it they must.

Germany’s economic supremacy inevitably expresses itself as a desire to assert its political weight. It is no longer inclined to hide its national interests. Having succeeded in establishing its domination in Europe, Germany sees no reason why it should pay the price for other people’s problems. It was compelled to underwrite the deficit of Greek capitalism, and then Irish capitalism. But it does not have any possibility of solving the economic problems of Spain, let alone Italy.

During the Greek crisis last spring the EU belatedly put together €750 billion ($980 billion) in bail-out funds. Then came the crisis in Ireland. The European Central Bank (ECB) bought €2 billion ($2.6 billion) of government bonds in the week ending December 3rd, taking its cumulative purchases since May 2010 to €69 billion.

Jean-Claude Juncker, the prime minister of Luxembourg, tried in vain to convince a meeting of euro-zone finance ministers on December 6th to adopt a plan he had worked out with the Italian finance minister, Giulio Tremonti. This would commit euro members to issue collective Eurobonds. According to this plan, the richest and most creditworthy countries in Europe should use their privileged position to prop up the credit rating of their less fortunate brethren.

Such “E-bonds” might eventually account for up to 40% of the euro zone’s GDP. Juncker and Tremonti suggested that their plan would “send a clear message to global markets and European citizens of our political commitment to economic and monetary union and the irreversibility of the euro.” A clear message was immediately sent by the Germans and their allies to the authors: that they should insert their plan in a place where the sun never shines. Another idea was put forward by Belgium: for the bail-out fund to be enlarged. This met with no greater success. “We can’t have a new debate every week,” grumbled Germany’s Wolfgang Schäuble.

Germany is increasingly reluctant to spend more treasure saving its neighbours. Yet even German bond yields are starting to rise. A question mark is therefore posed over the future of the euro itself. The recovery of the world economy is threatened by the euro crisis. This in turn threatens to spread chaos throughout the money markets of the world, and push the almighty dollar off its perch. On December 9th The Economist commented:

“That the ECB has been pushed so far is because seemingly small financial tremors can quickly turn into earthquakes. This is a particular worry in the euro zone, where countries and banks alike are heavily exposed to one another’s debts. Financial integration has been celebrated as one of the big successes of the euro. But it also means that more trouble in peripheral countries could easily spread to the entire euro-zone economy.”

The same journal has drawn the most pessimistic conclusions:

“Worse, the financial consequences of a shift to a world where a euro-area country can go bust are only just becoming clear. Not only do too many euro-zone governments owe too much, but Europe’s entire banking model, which is based on thorough integration across borders, may need revisiting. These difficulties would tax the most enlightened policymakers. The euro zone’s political leaders, alas, are a fractious and underwhelming lot. An even bigger mess seems all but certain in 2011”.

Can Asia save the world?

The hopes of the bourgeois economists are based on the rapid rate of growth in places like China and Brazil. But in the first place, this growth does not compensate for the shrinkage of the US market, and secondly, there is no guarantee that this growth will continue in 2011. At first sight these hopes seem to be well grounded. From Shenzhen to São Paulo the economies have been soaring ahead. Spare capacity has been used up and foreign capital is pouring in. But this rapid growth is limited by consumption. And consumption in Europe and the USA is not growing but shrinking.

The younger and more robust capitalist economies of the “emerging” countries have a number of advantages: bigger and more youthful populations and a huge reserve of cheap labour in the countryside. They have had the advantage of higher productivity and (at least initially) a higher rate of profit, and consequently the additional benefit of a huge influx of foreign capital. The law of combined and uneven development has allowed them, on the basis of this huge investment boom, to construct factories utilising the most advanced machinery and technology imported from more advanced countries.

However, this progress must sooner or later come up against the inherent contradictions of capitalism. In every capitalist boom in history there is an inherent tendency to overshoot the market, to produce too much for the market to sustain. The immense productive power that is built up to extract more and more surplus value from the workers goes beyond the restricted power of consumption of society. The result is a crisis of overproduction.

The limits of the capitalist boom in the USA and Europe were reached in 2008 (in Japan a decade earlier). The moment will be reached when the same contradictions make themselves felt in China and the other “emerging” economies. Profitability in China, as one could expect, is falling back to more normal levels. A new generation of younger workers is no longer prepared to accept the Dickensian conditions of work that the first generation, straight from the villages, was prepared to swallow. There has been a marked increase in worker protests.

In order to offset the slump of 2009, governments have loosened monetary discipline. This policy can lift growth in the immediate term but in the longer term it is unsustainable because it leads to inflation. Worries about asset bubbles have been replaced by a fear of overheating. China is not the only example of this. Brazilian inflation has surged above 5% and imports in November were 44% higher than the previous year. In order to stop prices accelerating, the “emerging economies” will need to raise interest rates, as China is already doing.

To some extent countries like China can offset declining demand in export markets by increased domestic consumption. But the domestic market too has definite limits and sooner or later these must be reached. The serious economists are expressing concern about the “overheating” of the Chinese economy. On Christmas day, the People’s Bank of China raised key interest rates, the second such move in less than three months. The amount of money banks keep in reserve has also been restricted to try to reduce bank lending levels.

This was the latest in a series of actions taken by China’s central bank to try to combat rising prices. The problem is that this can cause growth to slow sharply. The latest data showed that China's economy grew at an annual pace of 9.6% in the three months to the end of September from 11.9% in the first quarter of this year. If they do not take measures now, there will be higher inflation, necessitating an even bigger tightening at a later date. Either way, the period of rapid growth will come to an end, causing shock waves throughout the world economy.

Will the contradictions lead to war?

It is increasingly clear that the world economy is fragmented into three segments: the big “emerging” markets (China, India, Brazil), the euro area and the USA. It is also increasingly clear that they are moving in different directions. This divergence is increasing the chances for friction and opening up new contradictions. What happens in one part of the global economy has immediate repercussions for the rest. The central contradiction is simply stated. Every country wants to export. But in order to export, somebody has to import! We are entering into a period of growing protectionism and tensions between the main capitalist nations.

The tendency towards protectionism is clear in the USA, where loud voices are raised in Congress demanding restrictions on Chinese imports. This is very dangerous ground. Protectionism would provoke retaliation from America’s rivals and threaten to unravel the fragile edifice of world trade. Globalization would be thrown into reverse, with catastrophic consequences for the world economy.

The divergence between the three major components of the world economy poses serious risks to the entire edifice of globalization. Europe and America are obsessed with internal problems and have adopted contradictory strategies for dealing with them. They are in fact moving in different directions. On the one hand, America is following a loose monetary policy, allowing the deficit to rise alarmingly. On the other side of the Atlantic, there are concerns about sovereign defaults in the euro zone.

The budget cutting austerity plans of Europe poses a grave danger to the future of the euro, which unsettles the markets. But then, America’s tactic of eat, drink and be merry, and to hell with the deficit is hardly sustainable, either. These worries are reflected in a steady flow of capital to the “emerging economies” like China, which are awash with cash in sharp contrast to the debt-ridden West. This is what makes their central banks reluctant to raise interest rates and dampen down inflation. The Economist warned: “A more divided world economy could make 2011 a year of damaging shocks.”

It is clear that the global crisis of capitalism will mean a sharpening of tensions between Europe and the USA, between the USA, China and Japan and between Russia and the USA. In the past such tensions would have led to a world war. In the 1930s it was not the Keynesian policies of Roosevelt’s New Deal that solved the crisis. It was the outbreak of the Second World War that eliminated the mass unemployment of the 1930s through massive arms spending and the wholesale destruction of the means of production during the war. This has raised the question in some people’s minds of a new world war. However, the situation now is entirely different to that of 1939.

The collapse of the USSR and the colossal power of US imperialism mean that a world war is ruled out. With an annual arms expenditure of more than $700 billion, no power on earth can stand against the USA. On the other hand, there can be no question of either the USA or any other country invading China to turn it into a colony, as happened before the Second World War.

A world war is therefore ruled out. But there will be constant “small” wars, like the wars in Iraq, Afghanistan and Somalia. The conflict between Russia and the USA can lead to wars like the war in Georgia. In Africa the undeclared war in Somalia continues on its bloody path to further chaos, while Côte d’Ivoire teeters on the brink of a new civil war. The instability in Asia was underlined by the armed conflict between North and South Korea. US forces have participated in the South’s latest military exercises. A new war can break out in Yemen at any time. There is no lack of explosive material on a world scale.

The recent revelations of WikiLeaks have raised at least partially the thick curtain of lies that conceal the ugly reality of bourgeois diplomacy. Diplomacy is the continuation of war by other means. But the increase in diplomatic tensions is a reflection of the general instability, as is the uncontrollable spread of terrorism. They are a symptom of the underlying crisis. To bemoan these phenomena, as sentimental pacifists do, is as pointless as it would be for a doctor to take out a handkerchief and weep at the symptoms of a disease. What is required is not tears but a precise diagnosis and an effective prescription.

The symptoms we see on a world scale are merely an expression of the underlying cause, which is the contradiction between the colossal potential of the productive forces and the narrow limitations of private property and the nation state. The capitalists cannot find a way out of the crisis by taking the road of war as they did in 1914 and 1939. Therefore, all the contradictions will be expressed internally, through a growth of the intensification of the class struggle.

Changing mood

The first effect of the crisis was one of shock, not only for the bourgeois but also for the workers. There was a tendency to cling to jobs and accept cuts in the short term, especially as the union leaders offer no alternative. But this will be replaced by a general mood of anger and bitterness, which will sooner or later begin to affect the mass organisations of the working class.

The attempts to generate confidence clash head-on with the prevailing mood of the public in Europe and America. According to the Pew Research Centre, only 31% of Britons, 30% of Americans and 26% of the French have confidence that their countries are going in the right direction. This indicates a malaise at all levels of society. People no longer have any trust in the pronouncements of the politicians. There is a growing feeling that none of the existing parties and leaders represents the ordinary people.

Changing reality impinges upon consciousness only gradually. However, at a certain stage quantity becomes transformed into quality, producing a sudden leap in consciousness. Already we see the beginnings of revolt. This naturally begins with the youth, which on the one side are the first victims of the crisis and in the second place are highly sensitive barometers for the moods of discontent that are maturing silently in society. The revolt of the students in Britain is the most striking indication that this is beginning. This phenomenon is not confined to Europe. Even before the New Year there was an uprising of the youth of Tunisia against unemployment, which has now spread to Algeria.

In the USA the inflated globe of false hope lifted by Obama has been punctured like a tire passing over a nail. The Republicans have no alternative programme at all and if they returned to office we can expect them to fuel the fires of anger and resentment of an embittered middle class. For a long time every generation of Americans could look forward to living better than their parents. Now less than half of Americans think their children’s living standards will be better than theirs. This conclusion is the result of experience: the average real income of workers in the USA has not improved since the mid-1970s. Social mobility in America is now among the lowest in the industrialized world.

Everywhere there is ferment in society. Even in China, where the economy is still going forward at a rapid pace, the bad conditions and merciless exploitation of the workers has led to a wave of protest suicides and strikes. In Europe increasingly militant and violent mass protests are taking over on the streets of Athens, Dublin, London, Madrid, Paris and Rome.

In Spain there was a general strike in September. In Italy there have been big protest demonstrations. France has been shaken by a series of mass strikes and demonstrations. In Italy, the metalworkers’ union (FIOM) organized a mass demonstration of up to half a million in Rome. In Portugal the recent general strike, followed by 65 percent of workers, was the biggest since the Revolution. In Greece, where the movement has acquired an explosive character, one general strike has followed another.

In Venezuela the Bolivarian Revolution has reached a decisive turning-point. The counterrevolutionary opposition accuses Hugo Chávez of launching a coup against other branches of government, after the outgoing national assembly approved new powers for 18 months. The measures, taken days before a new legislature with a large opposition minority is due to be sworn in, prepare the way for an open showdown between left and right. In Ecuador an attempted counterrevolutionary coup by the police was defeated by the masses and troops loyal to the government of Rafael Correa.

All these facts indicate that we have entered a new period, a period of enormous turbulence and instability – a period of revolution and counterrevolution that can last for years, with ebbs and flows. The world situation is full of dangers for the bourgeoisie. Let us remember that in England in the 17th century and in France in the 18th century, the great bourgeois revolutions were sparked off by the question of huge state deficits and who would pay for them.

What is missing is leadership. This is the central contradiction. The objective conditions for socialist revolution are maturing rapidly everywhere, but everywhere consciousness is lagging behind the objective situation. Many workers have not yet understood the seriousness of the crisis. Above all, the mass organizations and their leaderships – both in the trade union and political sphere – are lagging behind events. They reflect the past, not the present or the future.

It is an irony of history that precisely at this moment they have renounced all claims to stand for a revolutionary change of society. Now history is taking revenge on them. The degeneration of the mass organizations has reached unheard-of depths in the last period. The Social Democrats have abandoned all pretence to standing for socialism and the former “Communists” have abandoned all pretence to standing for communism.

The crying contradiction between the needs of the objective situation and consciousness will have to be resolved. This can only be done by the masses passing through a series of experiences. All the existing parties and leaderships will be put to the test. There is growing discontent in all the mass organizations. It will grow as the crisis unfolds and the policies of the leadership are exposed in practice.

On the basis of painful experience, the workers and youth will come to understand the need for a fundamental change in society. The ideas of Marxism will find an increasing echo among the new layers who are being awakened to political action. The old organizations will be shaken from top to bottom. There will be a whole series of crises and splits, in which the old right-wing leaders will be vomited out. Gradually, a mass left wing will crystallize, which will be open to Marxism.

Those sceptics who moan about the alleged “low level of consciousness” of the masses merely show that their knowledge of Marxism consists only of undigested scraps. Their pedantic approach to the class struggle is a toxic mixture of ignorance and intellectual snobbery. All the impotent jeremiads of the sceptics will be confounded on the basis of the titanic events that are being prepared. Unlike the eunuchs, the masses can only learn through struggle. There will, of course, be many defeats, mistakes and setbacks, but through all these experiences, the movement will learn and grow. There is no other way.

Step by step, the disintegration of capitalism is preparing the way for revolutionary developments. The road to great social transformations is prepared by a whole series of partial struggles. This is the necessary preparatory stage in which we find ourselves. In the first decade of the 19th century, Hegel, whose dialectical method so brilliantly anticipated Marx, wrote the following inspiring words, which capture the spirit of his age, and of ours also:

“For the rest it is not difficult to see that our epoch is a birth-time, and a period of transition. The spirit of man has broken with the old order of things hitherto prevailing, and with the old ways of thinking, and is in the mind to let them all sink into the depths of the past and to set about its own transformation. It is indeed never at rest, but carried along the stream of progress ever onward. But it is here as in the case of the birth of a child; after a long period of nutrition in silence, the continuity of the gradual growth in size, of quantitative change, is suddenly cut short by the first breath drawn – there is a break in the process, a qualitative change and the child is born. In like manner the spirit of the time, growing slowly and quietly ripe for the new form it is to assume, disintegrates one fragment after another of the structure of its previous world. That it is tottering to its fall is indicated only by symptoms here and there. Frivolity and again ennui, which are spreading in the established order of things, the undefined foreboding of something unknown – all these betoken that there is something else approaching. This gradual crumbling to pieces, which did not alter the general look and aspect of the whole, is interrupted by the sunrise, which, in a flash and at a single stroke, brings to view the form and structure of the new world.” (Hegel, The Phenomenology of Mind, Preface.)

Old Hegel, through his idealist spectacles, could see the future only in a dim outline. Using the method of materialism, Marx and Engels transformed the Hegelian dialectic into a powerful tool of analysis. Two centuries later, this scientific method enables us to see beyond the surface of events, eliminate what is secondary and transient, and lay bare the fundamental processes. Only the Marxists, standing on the basis of dialectical materialism, can look forward to the future with real optimism.

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