The Third International after Lenin

Friday, April 9, 2010

Trade and profits boom on gov't bailouts and anti-worker austerity drive

Profits boom under pins recovery

Alex Callinicos summing up a brief tour of the sovereign debt crisis at the beginning of February explained that “All this should put in perspective the idiotic announcements that “the recession is over”. The Great Depression went through several stages and lasted ten years.” ...writes Bill Jefferies....

Callinicos assertion that the world recession was ongoing akin to the 1930s Great Depression is a banal everyday when it comes to the lefts assessment of the current crisis.But facts are stubborn things and are strangely immune to the leftists “reality”. Barry Eichengreen and Kevin O'Rouke two US academic economists who drew up a series comparing this crisis to that of the Great Depression and who were cited by Callinicos in the SWP's perspectives document conclude that that industrial production and trade now show "clear signs of recovering." Their contemporary data series is based on research by the Dutch government's CPB trade monitor. This confirms that over the last year, both world trade and industrial production have recovered at the fastest rate following any post-war recession.

Trade has recovered 13% of its fall, and in January was 10% below its peak, the Trademonitor says, “In the three months up to January 2009, world trade was up by 5.2% from the preceding three months, a new high in our series of trade momentum, which starts in 1991.”

While industrial production has recovered even faster, “On the basis of preliminary data, world industrial production grew by 1.2% in January 2010, following an unrevised rise of 0.7% in December 2009. Production went up in nearly all regions, including the Euro Area, where production contracted in December. Growth was strongest in Japan (again). In January, industrial production was 3% below the peak level reached in March 2008. It has risen steadily by an accumulated 10% from the March 2009 trough.”

The reason it still feels like a recession in the West is that this crisis has seen a marked shift in world economic power towards the emerging markets and particularly China.

Industrial production Jan 2007- Jan 2010

Jan 2007-Jan 2010
Jan 2008-Jan 2009
Jan 2009-Jan 2010
World (production weights)

Advanced Economies (a)


United States

Euro Area

Emerging Economies


Central Eastern Europe


Latin America


Africa and Middle East

(a) OECD excluding Turkey, Mexico, Korea and Central European countries.
World industrial production fell by -11.2% between January 2008 and January 2009, but that fall was concentrated in the advanced economies and non-Asian emerging economies. During 2009-2010 it recovered 10% of that fall. Japan the most export dependent economy among the major powers fell furthest but has recovered fastest as it has re-oriented its economy towards China.

Across the entire period of the recession industrial production has actually increased, by 3.9% but this growth has been concentrated in the Asian emerging markets. While the emerging markets outside Asia have stagnated, the Asian rise of 36%, has been enough to pull the category as a whole up by 22%, while in the advanced economies industrial production has fallen by -10.5%.

Before the recession it was stagnant too

Before the recession the stagnation theorists, Callinicos, Harman, Robert Brenner, Richard Brenner et al, ignored or down played the significance of the restoration of capitalism following the collapse of Stalinism in the late 1980s. This was necessary if they were to assert that the period of globalisation, which has experienced the hi-tech revolution and the creation of an entirely new paradigm of computerised just in time production was one of stagnation and decay.

They ignored the growth of capitalist production in the emerging markets and in particular the former non-capitalist Stalinist states, which were integrated into the world market from the late 1990s on, in order to claim that the transfer of production from the old imperialist powers to the newly restored capitalist ones was the disappearance of capitalism rather than its creation. The fall in GDP/capita growth rates during the 1990s is a result of the collapse of centrally planned production with capitalist restoration, the destruction of the production was the pre-condition for the creation of capitalism. And indeed the noughties saw the highest GDP/capita growth of any decade since WWII.

GDP/capita annual average growth

GDP/capita annual average growth
Source: Penn tables

Now that the recession is over, the stagnation theorists seek to down play the significance of China and the emerging markets in order to assert that the world economy remains in recession, and indeed a Great Depression, when it has been recovering from the Spring of 2009.

Profit rates

If world capitalism was genuinely in a period of stagnation then low profits would have meant that the capitalist state could not have bailed out the banks. It would have neither the funds nor the incentive to do so. In fact from November 2008 on it was clear that the banks would be saved, even if the recession that their financial mismanagement had caused were inevitable.

During this recession, more so than at any time since WWII capitalist profits after falling sharply post Lehman's over the winter of 2008/9 have recovered very quickly. The bosses have slashed employment and wages, encouraged short term and insecure working and ripped off cheap state finance in order to maintain their profit rates, at the expense of the working class. US profit rates have recovered to already surpass the levels experienced at the start of the crisis in 2007.

Source: BEA table 1.12 author’s calcs
This revival of profitability proves that this crisis was an end of cycle slow down combined with an exceptionally deep financial crisis, rather than a general crisis of over-accumulation. The fall in profit rates that proceeded it was slow and shallow, the collapse in profit rates from the winter of 2008 until the spring of 2009 sharp but even at their bottom profit rates remained well above their levels of the 1970s/80s crisis period. As financial instruments have recovered, as the banks have unfrozen their assets, as residential and commercial property prices have stabilised or even risen then the pace of the writes offs of the credit crunch rapidly slowed, so that financial profits have more than trebled since the bottom of the cycle.

Source: BEA table 6.16 (Billons US $ saar)
Profits peaked in the third quarter of 2006 at $1713.8bn (all figures saar), by the beginning of 2009 they had fallen to $1182.7bn, or 69% of their 2006 peak before recovering to $1467.6bn or 85.6%.
Corporate profits IVA and CCA
Domestic industries
Rest of the world
Source: BEA table 6.16

Financial profits have recovered strongest. They actually bottomed at the end of 2008 sinking to $122.4bn before rising to $414.1bn at the end of 2009, but across all industries profits have made up over half of their previous fall. The figures for the USA are repeated in Britain.

Source: ONS UK national accounts

UK profits never fell that far during this recession and have begun to rise again. It is against the background of rising profits that the issue of the so called sovereign debt crisis and “necessity” to slash public spending should be considered. The rich claim that they are too poor to pay for the public services required by the poor. So the poor must pay for them. They are lying.

Sovereign Debt - not worth the paper?

According to UBS the Swiss investment bank sovereign issues are “overblown”. In Europe they believe that the scale of the deficit is “manageable”. A large part of the deficit is cyclical and the cyclically-adjusted deficit is not much bigger than during previous crises, Eurostat's estimate of the structural deficit was 5.0% in 2009. But Eurostat also estimated the structural deficit in 1991 to be 5.2% - so the "unprecedented" situation today has a precedent and a worse one just 20 years ago.

UK - Public finances not so bad

During the budget speech Alistair Darling the UKs chancellor for a few more weeks at least, revised lower his forecast for the fiscal deficit from this fiscal year and the subsequent five years by an average of £9.2bn with the biggest downward revision in the first two years (£11bn in 2009-10 and £13bn in 2010-11). Where previously the government was looking to halve the deficit in four years, now the government expects to more than halve the deficit over the same period. As a result, the government expects to restrict the debt levels by £70 billion by the end of 2014-15 at 75% of GDP. This decision to save the benefit shows that on the new forecast the government will eliminate a substantial chunk of the structural deficit by the end of the forecasting period (8.4% in 2009-10 to 2.5% in 2014-15).

The improvement in public finances should be no surprise. The government’s pre-budget report assumed growth of just 1% of GDP and a recovery of financial profits in three or four years. Growth according to most estimates will be higher than that, usually following a deep crisis then there is at least a year of strong growth, and as is clear above profits are recovering much more strongly than forecast. Income from foreign earnings is at its highest level ever.

Cuts Deeper than Thatcher

There is no great crisis of public finances, but there is a recognition that the capitalists have wasted billons from their point of view on public services that the working class they believe, is in little position to fight for. They have no intention of handing over something for nothing.

All of the threats of the three capitalist parties to implement cuts deeper than Thatcher are a warning to the working class to expect the worst no matter who is elected in May’s election and whatever happens next to the ongoing recovery. The world economy, pulled along by Chinese demand and cheap money supplied by the world’s financial authorities has escaped the recession far quicker than any of them anticipated. But the good news on the economy will not make any difference to their determination to make us pay for their crisis.

The rich do not feel wealthy enough to pay for the rescue of their banks, so they are determined to make the poor – the millions of working class people in Britain - foot the bill. In 2007 the profits of the now nationalised banks, RBS, Lloyds, HBOS, ABN-AMRO (part of RBS), Bradford and Bingley and Northern Rock topped £20bn, as they recover over the next year, these profits alone will be enough to pay two thirds of the interest on the entire national debt. Of course the bosses have no intention of letting the workers receive the cash they’ve paid out to rescue the bosses banks. Who ever takes power will oversee the rapid privatisation of the banks at give away rates while complaining that they do not have the cash to fund he needs of working people.

It is the job of socialist militants to build a movement that can stop them.

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