Capitalism in an Apocalyptic Mood

22 May 2008 by Walden Bello

An apocalyptic mood has seized the highest levels of global capital as the global financial system continues to implode. This implosion is but the latest financial crisis to wrack global capitalism. Financial crises are inevitable since capitalist growth has increasingly been driven by speculative bubbles such as the housing bubble in the United States. The increasingly uncontrolled financial gyrations stem from the increasing divergence between an expansive financial economy and a stagnant real economy. This “disconnect” stems from the persistent stagnationist trends in the real economy owing to overproduction or overcapacity. The search for profitability is capitalism’s driving force, and increasingly, significant profits can only be obtained from financial speculation rather than investment in industry. This is, however, a volatile and unstable process since the divergence between momentary financial indicators like stock and real estate prices and real values can proceed only up to a point before reality bites back and enforces a “correction.” The bursting of the US housing bubble is one such correction, and it is leading not only to a recession in the US but to a global downturn owing to the unprecedented level of integration fostered by corporate-led globalization. It will not be easy to restore dynamism by fostering another speculative bubble Speculative bubble An economic, financial or speculative bubble is formed when the level of trading-prices on a market (financial assets market, currency-exchange market, property market, raw materials market, etc.) settles well above the intrinsic (or fundamental) financial value of the goods or assets being exchanged. In such a situation, prices diverge from the usual economic valuation under the influence of buyers’ beliefs. , for instance, by resorting to “military Keynesianism.”

“We have to pay for the sins of the past.”
Klaus Schwab, key organizer of the Davos elite jamboree

Skyrocketing oil prices, a falling dollar, and collapsing financial markets are the key ingredients in an economic brew that could end up in more than just an ordinary recession. The falling dollar and rising oil prices have been rattling the global economy for sometime, but it is the dramatic implosion of financial markets that is driving the financial elite to panic.

Capitalist Apocalypse?

And panic there is. Even as it characterized Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
Board Chairman Ben Bernanke’s deep cuts amounting to a 1.25 points off the prime rate in late January as a sign of panic, the Economist admitted that “there is no doubt that this is a frightening moment.” The losses stemming from bad securities tied up with defaulted mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
loans by “subprime” borrowers are now estimated to be in the range of about $400 billion, but, as the Financial Times warned, “the big question is what else is out there” at a time that the global financial system “is wide open to a catastrophic failure.” What is “out there” is suggested by the fact that it has only been in the last few weeks that a series of Swiss, Japanese, and Korean banks have owned up to billions of subprime-related losses. The globalization of finance was, from the beginning, the cutting edge of the globalization process, and it was always an illusion to think that the subprime crisis could be confined to US financial institutions, as some analysts had thought.

Some key movers and shakers sounded less panicky than resigned to some sort of apocalypse. At the global elite’s annual weeklong party at Davos in late January, George Soros sounded positively necrological, declaring to one and all that the world was witnessing “the end of an era.” World Economic Forum host Klaus Schwab spoke of capitalism getting its just desserts, saying, “We have to pay for the sins of the past.” “It’s not that the pendulum is now swinging back to Marxist socialism,” he told the press, “but people are asking themselves, ‘What are the boundaries of the capitalist system?’ They think the market may not always be the best mechanism for providing solutions.”

Ruined Reputations and Policy Failures

While some appear to have lost their nerve, others have seen the financial collapse diminish their stature.

As chairman of President’s Bush’s Council of Economic Advisers in 2005, Ben Bernanke attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative activity, so is it any wonder, ask critics, why, as Fed Chairman, he failed to anticipate the housing market’s collapse stemming from the subprime mortgage crisis Subprime mortgage crisis This was the crisis that started in the US in 2007 involving subprime mortgages, considered to carry the highest risk. It triggered the 2007 – 2011 financial crisis. The suspicion it cast on securitized debts that included part of these loans meant that financial institutions lost confidence in each other, leading to the crisis. ? His predecessor, Alan Greenspan, however, has suffered a bigger hit, moving from iconic status to villain of the piece in the eyes of some. They blame the bubble on his aggressively cutting the prime rate to get the US out of recession in 2003 and restraining it at low levels for over a year. Others say he ignored warnings about aggressive and unscrupulous mortgage originators enticing “subprime” borrowers with mortgage deals they could never afford.

The scrutiny of Greenspan’s record and the failure of Bernanke’s rate cuts so far to reignite bank lending has raised serious doubts about the effectiveness of monetary policy in warding off a recession that is now seen as all but inevitable. Nor will fiscal policy or putting money into the hands of consumers do the trick, according to some weighty voices. The $156 billion stimulus package recently approved by the White House and Congress consists largely of tax rebates, and most of these, according to New York Times columnist Paul Krugman, will go to those who don’t really need it. The tendency will thus be to save rather than spend the rebates in a period of uncertainty, defeating their purpose of stimulating the economy. The specter that now haunts the US economy is Japan’s experience of virtually zero growth per annum and deflation in the nineties and early part of this decade despite one stimulus package after another after Tokyo’s great housing bubble deflated in the late 1980’s.

The Inevitable Bubble

Even as the finger-pointing is in progress, many analysts remind us that if anything, the housing crisis should have been expected all along. The only question was when it would break. As progressive economist Dean Baker of the Center for Economic Policy Research noted in an analysis several years ago, “Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardship.”

The subprime mortgage crisis was not a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money that flooded the US in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
that would later be readjusted to jack up payments from the new homeowners. These assets were then “securitized”with other assets into complex derivative products called “collateralized debt obligations CDO
Collateralized Debt Obligations
The term CDO covers multiple means of structuring paper products for financial assets. These include bonds, loans and sometimes non-listed shares. Such derivatives enable banks to render normally non liquid debts liquid, thus increasing the tradability of the asset. From the buyer’s point of view, CDO are also supposed to reduce risk by diluting it, since there is less chance of default on a bouquet of credits than on one single credit. In reality, the absence of clear information about the composition of CDO and the fact that they are often combined with high risk assets make them a very risky product.
” (CDO’s) by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. . The shooting up of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates triggered a wave of defaults and many of the big name banks and investors— including Merrill Lynch, Citigroup, and Wells Fargo—found themselves with billions of dollars worth of bad assets that had been given the green light by their risk assessment systems.

The Failure of Self Regulation

The housing bubble is but the latest of some 100 financial crises that have swiftly followed one another ever since Depression-era capital controls began being lifted at the onset of the neoliberal era in the early 1980’s. The calls now coming from some quarters for curbs on speculative capital have an air of déjà vu to many observers. After the Asian Financial Crisis of 1997, in particular, there was a strong clamor for capital controls, for a “new global financial architecture.” The more radical of these called for currency transactions taxes such as the famed Tobin Tax Tobin Tax A tax on exchange transactions (all transactions involving conversion of currency), originally proposed in 1972 by the US economist, James Tobin, as a means of stabilizing the international financial system. The idea was taken up by the association[ATTAC and other movements for an alternative globalization, including the CADTM. Their aim is to reduce financial speculation (which was of the order of 1,500 billion dollars a day in 2002) and redistribute the money raised by this tax to those who need it most. International speculators who spend their time changing dollars for yens, then for euros, then dollars again, etc., as they calculate which currency will appreciate and which depreciate, will have to pay a small tax, somewhere between 0.1% and 1%, on each transaction. According to ATTAC, this could raise 100 billion dollars on a global scale. Considered unrealistic by the ruling classes to justify their refusal to adopt it, the meticulous analyses of globalized finance carried out by ATTAC and others has, on the contrary, demonstrated how simple and appropriate such a tax would be.

that would slow down capital movements or for the creation of some kind of global financial authority that would, among other things, regulate relations between northern creditors and indebted developing countries.

Global finance capital, however, resisted any return to state regulation. Nothing came of the proposals for Tobin taxes. Even a relatively weak “sovereign debt Sovereign debt Government debts or debts guaranteed by the government. restructuring mechanism” akin to the US Chapter Eleven to provide some maneuvering room to developing countries undergoing debt repayment problems was killed by the banks despite its being proposed by Ann Krueger, the conservative American deputy managing director of the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
. Instead, finance capital promoted what came to be known as the Basel II process, described by political economist Robert Wade as steps toward global economic standardization that “maximize [global financial firms’] freedom of geographical and sectoral maneuver while setting collective constraints on their competitive strategies.” The emphasis was on private sector self surveillance and self policing aiming at greater transparency of financial operations and new standards for capital. Despite the fact that it was Northern finance capital that triggered the Asian crisis, the Basel process focused on making developing country financial institutions and processes transparent and standardized along the lines of what Wade calls the “Anglo-American” financial model.

While there were calls for regulation of the proliferation of many of the new, sophisticated financial instruments Financial instruments Financial instruments include financial securities and financial contracts. such as derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). being placed on the market by developed country financial institutions, these got nowhere. Assessment and regulation of derivatives were to be left to market players who had access to sophisticated quantitative “risk assessment” models that were being developed.

Focused on disciplining developing countries, the Basel II process accomplished so little in the way of self regulation of global financial from the North that even Wall Streeter Robert Rubin, formerly Secretary of the Treasury under President Clinton, warned in 2003 that “future financial crises are almost surely inevitable and could be even more severe.”
As for risk assessment of derivatives such as the “collaterized debt obligations” (CDOs) and “structured investment vehicles” (SIVs)-the cutting edge of what the Financial Times has described as “the vastly increased complexity of hyperfinance”—the process collapsed almost completely, with the most sophisticated quantitative risk models left in the dust as risk was priced according to one rule by the sellers of securities: Underestimate the real risk and pass it on to the suckers down the line. In the end, it was difficult to distinguish what was fraudulent, what was poor judgment, what was plain foolish, and what was out of anybody’s control. As one report on the conclusions of a recent meeting of the Group of Seven’s Financial Stability Forum put it:

There is plenty of blame to go around for the financial chaos: The US subprime mortgage market was marked by poor underwriting standards and ‘some fraudulent practices.’ Investors didn’t carry out sufficient due diligence when they bought mortgage-backed securities. Banks and other firms managed their financial risks poorly and failed to disclose to the public the dangers on and off their balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets. Credit-rating companies did an inadequate job of evaluating the risk of complex securities. And the financial institutions compensated their employees in ways that encouraged excessive risk-taking and insufficient regard to long-term risks.

The Specter of Overproduction

It is not surprising that the G 7 report sounded very much like the post-mortems of the Asian financial crisis and the bubble. One chieftain of a financial corporation chief writing in the Financial Times captured the basic problem running through these speculative manias, perhaps unwittingly, when he claimed that “there has been an increasing disconnection between the real and financial economies in the past few years. The real economy has grown...but nothing like that of the financial economy, which grew even more rapidly-until it imploded.” What his statement does not tell us is that the disconnect between the real and the financial is not accidental, that the financial economy expanded precisely to make up for the stagnation of the real economy.

This growing gap between the financial and the real cannot be comprehensively understood without referring to the crisis of overaccumulation that overtook the center economies in the late seventies and 1980’s, a phenomenon that is also referred to as overproduction or overcapacity.

The golden period of postwar growth globally that skirted major crises for nearly 25 years was due to the massive creation of effective demand via rising wages for labor in the North, the reconstruction of Europe and Japan, and the import-substituting industrialization in Latin America and other parts of the South. This was done principally via state intervention in the economy. This dynamic period came to a close in the mid-seventies, with stagnation setting in, owing to global productive capacity outrunning global demand, which was constrained by continuing deep inequalities in income distribution. According to the calculations of Angus Maddison, the premier expert on historical statistical trends, the annual rate of growth of global gross domestic product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP) fell from 4.9 per cent in what is now regarded as the golden age of the post-World War II Bretton Woods system, 1950-73, to 3 per cent in 1973-89, a drop of 39 per cent. These figures reflected the wrenching combination of stagnation and inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. in the North, the crisis of import substitution industrialization in the South, and erosion of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. margins all around.

In the eighties and nineties, global capital blazed three escape routes from the specter of stagnation. One was neoliberal restructuring, which included redistribution of income towards the top via tax cuts for the rich, deregulation, and an assault on organized labor. Neoliberalism took the form of Thatcherism and Reaganism in the developed North and World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and International Monetary Fund (IMF)-imposed structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

in the global South.

Another was corporate-driven globalization or “extensive accumulation,” which opened up markets in the developing world and moved capital from high-wage to low-wage areas. As Rosa Luxemburg long ago pointed out in her classic The Accumulation of Capital, capital needs to constantly integrate precapitalist societies to the capitalist system to shore up the fall in the rate of profit. In the last two decades, the most spectacular case of incorporating a precapitalist society into the global capitalist system was China, which became both the world’s second biggest exporter and the primary destination of foreign investment. This was, however, a double edged sword for capitalism, as we shall later see.

A third was the process we are mainly concerned with here: “intensive accumulation or”financialization,“that is, the channeling of investment towards financial speculation, where much greater returns were to be derived than in industry, where profits were largely stagnant. Finance capital forced the elimination of capital controls, the result being the rapid globalization of speculative capital to take advantage of differentials in interest and foreign exchange rates in different capital markets. These volatile movements, the result of capital’s liberation from the fetters of the post-war Bretton Woods financial system, was one source of instability. Another was the proliferation of novel sophisticated speculative instruments like derivatives that escaped monitoring and regulation. Instability derived ultimately from the fact that speculative finance boiled down to an effort to squeeze more”value" out of already created value instead of creating new value since the latter option was precluded by the problem of overproduction in the real economy.

The disconnect between the real economy and the virtual economy of finance was evident in bubble of the 1990’s. With profits in the real economy stagnating, the smart money flocked to the financial sector. The workings of this virtual economy were exemplified by the rapid rise in the stock values of Internet firms which, like, still had to turn a profit. The phenomenon probably extended the boom of the 1990’s by about two years. “Never before in US history,” Robert Brenner wrote, “had the stock market played such a direct, and decisive, role in financing non-financial corporations Non-financial corporations All economic agents that produce non-financial goods and services. They represent the greatest share of productive activity. , thereby powering the growth of capital expenditures and in this way the real economy. Never before had a US economic expansion become so dependent upon the stock market’s ascent.” But the divergence between momentary financial indicators like stock prices and real values could only proceed to a point before reality bit back and enforced a “correction.” And the correction came savagely in the collapse of 2002, in the form of the wiping out of $7 trillion in investor wealth.

A long recession was avoided, but it was only by encouraging another bubble, the housing bubble, and here, as noted earlier, Greenspan played a key role by cutting the prime rate to a 45-year low of 1 per cent in June 2003, holding it there for a year, then raising it only gradually, in quarter-percentage-increments. As Dean Baker put it, “an unprecedented run-up in the stock market propelled the US economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery.”
The result was that real estate prices rose by 50 per cent in real terms, with the run-ups, according to Baker, being close to 80 per cent in the key bubble areas of the West Coast, the East Coast, North of Washington, DC, and Florida. How big was the bubble created? It is estimated by Baker that the run-up in house prices “created more than $5 trillion in real estate wealth compared to a scenario where prices follow their normal trend growth path. The wealth effect from house prices is conventionally estimated at five cents to the dollar, which means that annual consumption is approximately $250 billion (2 per cent of gross domestic product [GDP]) higher than it would be in the absence of the housing bubble.”

The China Factor

The housing bubble fueled US growth, which was exceptional given the stagnation that has gripped most of the global economy in the last few years. During this period, the global economy has been marked by underinvestment and persistent tendencies toward stagnation in most key economic regions apart from the US, China, India, and a few other places. Weak growth has marked most other regions, notably Japan, which was locked until very recently into a one per cent GDP growth rate, and Europe, which grew annually by 1.45 per cent in the last few years.

With stagnation in most other areas, the US has pulled in some 70 per cent of all global capital flows. A great deal of this has come from China. Indeed, what marks this current bubble period is the role of China as a source not only of goods for the US market but also capital for speculation. The relationship between the US and Chinese economies is what I have characterized elsewhere as “chain-gang economics”: On the one hand, China’s economic growth has increasingly depended on the ability of American consumers to continue their debt financed spending spree to absorb much of the output of China’s production. On the other hand, this relationship in depends on a massive financial reality: the dependence of US consumption on China’s lending the US Treasury and private sector dollars from the reserves it accumulated from its yawning trade surplus with the US-some one trillion so far, according to some estimates. Indeed, a great deal of the tremendous sums China-and other Asian countries—lent to American institutions went to finance middle class spending on housing and other goods and services, prolonging the US’s fragile economic growth but only by raising consumer indebtedness to dangerous, record heights.

The China-US coupling has had massive consequences for the global economy. One has to do with the addition of massive new productive capacity by American and other foreign investors moving to China. This has aggravated the persistent problem of overcapacity and overproduction. One indicator of persistent stagnation in the real economy is the aggregate annual global growth rate, which averaged 1.4 per cent in the 1980’s and 1.1 per cent in the 1990’s, compared to 3.5 per cent in the 1960’s and 2.4 per cent in the 1970’s. Moving to China to take advantage of low wages may shore up profit rates in the short term but, as it adds to overcapacity in a world where a rise in global purchasing power is limited owing to growing inequalities, it erodes profits in the long term. And indeed, the profit rate of the largest 500 US transnational corporations, which fell drastically from +4.9 per cent in the 1954-59, to +2.04 in 1960-69, to -5.30 in 1989-89, -2.64 in 1990-92, and -1.92 in 2000-2002. Behind these figures, notes Philip O’Hara, was the specter of overproduction: “Oversupply of commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. and inadequate demand are the principal corporate anomalies inhibiting performance in the global economy.”
The succession of speculative manias in the US have had the function of absorbing investment that did not find profitable returns in the real economy and thus not only artificially propping up the US economy but also “holding up the world economy,” as one IMF document put it. Thus, with the bursting of the housing bubble and the seizing up of credit in almost the whole financial sector, the threat of a global downturn is very real.

Decoupling or Chain-Gang Economics?

In this regard, talk about a process of “decoupling” of regional economies, especially the Asian economic region, from the United States has been without substance. True, most of the other economies in East and Southeast Asia have been pulled along by the Chinese locomotive. In the case of Japan, for instance, a decade-long stagnation was broken in 2003 by the country’s first sustained recovery, fueled by exports to slake China’s thirst for capital and technology-intensive goods; exports shot up by a record 44 per cent, or $60 billion. Indeed, China became the main destination for Asia’s exports, accounting for 31 per cent while Japan’s share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. dropped from 20 to 10 per cent. As one account pointed out, “In country-by-country profiles, China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.”

However, as research by Jayati Ghosh and C.P. Chandrasekhar has underlined, China is indeed importing intermediate goods and parts from these countries but only to put them together mainly for export as finished goods to the US and Europe, not for its domestic market. Thus, “if demand for Chinese exports from the US and the EU slow down, as will be likely with a US recession, this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries.” Perhaps the more accurate image is that of a chain gang linking not only China and the United States but a host of other satellite economies whose fates are all tied up with the now deflating balloon of debt-financed middle class spending in the US.

New Bubbles to the Rescue?

One must not, however, overestimate the resiliency of capitalism. Many are now asking: After the collapse of the boom and the housing boom, is there a third line of defense against stagnation owing to overcapacity? One theory is that military spending could be a way that the government might pull the US out of the jaws of recession. And, indeed, the military economy did play a role in bringing the US out of the 2002 recession, with defense spending in 2003 accounting for 14 per cent of GDP growth while representing only four per cent of the GDP of the US. According to estimates cited by Chalmers Johnson, defense-related expenditures will exceed $1 trillion for the first time in history in 2008.

Stimulus could also come from the related “disaster capitalism complex” so well studied by Naomi Klein—that “full fledged new economy in home land security, privatized war and disaster reconstruction tasked with nothing less than building and running a privatized security state both at home and abroad.” Klein says that, in fact, “the economic stimulus of this sweeping initiative proved enough to pick up the slack where globalization and the booms had left off. Just as the Internet had launched the dot.-com bubble, 9/11 launched the disaster capitalism bubble.” This subsidiary bubble to the real estate bubble appears to have been relatively unharmed so far by the collapse of the latter.

It is not easy to track the sums circulating in the disaster capitalism complex, but one indication is that InVision, a General Electric affiliate, producing high tech bomb detection devises used in airports and other public spaces received an astounding $15 billion in Homeland Security contracts between 2001 and 2006.

Whether or not “military Keynesianism” and the disaster capitalism complex can in fact play the role played by financial bubbles is open to question. For to feed them, at least during the Republican administrations, has meant reducing social expenditures, resulting in their positive employment effects being overwhelmed fairly quickly by reductions in effective demand. A study Dean Baker cited by Johnson found that after an initial demand stimulus, by about the sixth year, the effect of increased military spending turns negative. After 10 years of increased defense spending, there would be 464,000 fewer jobs than in a scenario of lower defense spending.

But even more important as a limit to military Keynesianism and disaster capitalism is that the military engagements to which they are bound to lead are likely to create quagmires such as Iraq and Afghanistan that could trigger a backlash both abroad and at home. This would eventually erode the legitimacy of these enterprises, reduce their access to tax dollars, and erode their viability as sources of economic expansion in a contracting economy.

Yes, global capitalism may be resilient, but it looks like its options are increasingly limited. The forces making for the long term stagnation of the global capitalist economy are now too heavy to be easily shaken off by the economic equivalent of mouth-to-mouth resuscitation.

Dr. Walden Bello is president of the Freedom from Debt Coalition and senior analyst at Focus on the Global South.

Walden Bello

is senior analyst at the Bangkok-based Focus on the Global South and the International Adjunct Professor of Sociology at the State University of New York at Binghamton.



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