As the present edition of International Worker was going to press, there was a chain of scares on the principal stock markets all over the world. The apparent reason for the fall may have been an announcement by the Federal Reserve Board of the United States that they would push forward the schedule on the planned increases in the interest rate.
What has occurred is, actually, a preview of the form the next financial crisis will take, or, to put it differently, a small scale dress rehearsal. Because with a budgetary deficit of the order of 600 billion dollars per year and a net foreign debt of four billion dollars (six and a half in gross debt), the suspension of payments of the United States is a fact. Nothing shows this better than the virtual suspension of debt financing on the part of private capital; the one hundred per cent of new debt emission on the part of the US Treasury has been absorbed by the central banks of those countries having a commercial surplus. This simply signifies that the United States public debt is financed by the emission of dollars on the part of the central bank of that country. Why should it come as a surprise then that the dollar has lost half of its purchasing power to the euro... Although less well-known, another piece of news has jolted the international financial chessboard: the withdrawal of capital from the United States real estate market. Since real estate is generally over-valued and heavily mortgaged, a collapse in this market is capable, all on its own, of unleashing a financial crisis. In any case, a simultaneous flight of capital in the debt bond and real estate markets would signify the formal declaration of suspension of payments. But it has been to avoid this that the Federal Reserve Board has just announced pushing forward the program of increases in the interest rates. Neither should we underestimate the announcement made by the central bank of Russia to the effect that it may convert part of its dollar reserves to euros, or in the case of other central banks, to gold. That the flip side of the devaluation of the dollar should be a one hundred percent revaluation in the price of gold shows that we are not in the presence of a redistribution of capital between different markets but rather before an immobilization of capital which is always the forerunner to capitalist depression.
An additional factor which has precipitated events is the tendency towards the revaluation of some important currencies, apart from the euro and the yen, which is the case with most Latin American currencies. This, which is the immediate consequence of an influx of capital to these markets, should accentuate the outflow of capital from the United States. Because in addition to the fact that the yield in these markets is higher than that offered on the US market, there is also the incentive represented by investment in currencies tending to rise in value. Nobody can ignore, however, that that revaluation of currencies in weak countries will eliminate the advantages represented by a currency undervalued in order to drive exports. Colombia, a case in point, has already declared a state of economic emergency as a result of the unstoppable revaluation of its currency. Nobody should be surprised by this enormous capacity the United States has of exporting its financial crisis.
China-United States... Europe
Since the US stock exchange crisis of 2000 there has been a growing international hookup between the economies of China and the United States, which has become the axis of international economic resuscitation since 2002. The US budgetary deficit has brought about an increase in Chinese exports to the United States and other important markets; the resulting balance of payments surplus for China has served to increase exports to that country from Japan, and part of Asia and Europe; on the other hand, it has also served (with the addition of an influx of capital to China) to finance the US deficit. This mechanism explains why an increase in 4 percent of the world GDP has produced a rise of 12 percent in international commerce - a real boom. A crisis in this hookup would wreak havoc in world commerce as a whole. It is that, precisely, which could be the outcome of an increase in the interest rates in the United States, because that increase would bring about a fall in demand and even a recession, and because an increase in the interest rates could provoke a drop in the price of US bonds.
In any case, the Sino-US hookup has not been without formidable negative consequences across Europe. In the end, Europe has been the adjustment variable of the hookup. While the Chinese yuan followed the 40 percent devaluation of the dollar like a shadow, the euro became 40 percent more expensive as a result of that devaluation; the same goes for the Japanese yen. This realignment has been reflected in a drastic fall in the growth rate of their economies, in some cases in recession and in big industrial bankruptcies (especially in Italy and Germany). The UE growth forecasts for 2005 oscillate around zero. The bourgeoisie, in Europe, tries to solve this impasse by means of an offensive all across the board against the working class (labor flexibility and privatization of social security), with the close support of the trade union bureaucracy.
Unhooking
Another factor, even weightier, capable of undoing the Sino-US hookup is China's potential financial crisis. In China a true market Stalinism has developed over the last few years; nothing else could be the significance of a national investment rate equivalent to 40 percent of the GDP - something simply unknown in the past and in the world. Chinese exports have risen to 1 billion dollars, while its GDP has reached 1.4 billion dollars. Which is to say that this is the greatest "export-import" platform on the planet (it falls short of being a national economy). This signifies two things: the first, that the investment of capital takes place as a function of taking over the Chinese market and that production is destined for foreign markets. Such a process implies over-investment of capital in relation to expectations of profits and of the receptivity of markets, and, on the other hand, an enormous burden of financial debt. It should come as no surprise, then, that the Chinese banks' portfolio of irregular loans makes up 70 percent of all loans. The second question is that in order to guarantee an influx of capital of the magnitude of the investments now underway, China has provided itself with reserves of the order of 600 billion dollars - foreign exchange insurance for investors and speculators. But the other side of the coin of the income in dollars is an enormous emission of yuans, the Chinese currency, which must be absorbed by the central bank through the emission of debt bonds in order to avoid a jump in inflation.
Which is to say that the financing of the US deficit through the purchase of US Treasury bonds by the Chinese central bank, has actually turned into the financing of the US debt by means of the emission of Chinese national debt. While the interest rate paid on the US debt is higher than that paid on the Chinese public debt, China will have a difference in its favor; but this does not at all cancel the mountain of reciprocal debts that has been created, or the explosion that could be provoked by any reversal in the relation between interest rates. This situation is particularly serious for China, due to the fact that its central bank and its Treasury are ultimately responsible for 80 percent of the portfolio of banks which practically find themselves in 'default'.
The most important conclusions derived from this explosive process are very instructive. First of all, what have been made clear are the insurmountable limitations represented by budgetary deficits and monetary policies to counteract the tendency towards depression which arises from the over-accumulation of capital that has been created. Whatever they say about the rise in workers productivity in the United States, it has not reversed the tendency of the rate of profit on capital to fall, even taking into account the fall brought about in real wages. By means of budgetary and monetary policies, all that has been achieved is the generalization of the conditions of a crisis even broader than the one being attempted to overcome. For the backward countries who have jumped onto the bandwagon of world recovery, motorized by the Sino-US hookup, the perspectives for 2005 may be sinister, if there is a combination of increases in the interest rates and collapse in the debt markets, which would bring about, in addition, inevitably, a fall in the price of raw materials (due to a fall in demand and to the collapse of the raw materials speculation market).
Capitalist restoration and world crisis
Secondly, the capitalist penetration of China has accentuated the saturation of the world commodity market and the over-accumulation of capital regarding that same world market. The capitalist conquest of the Chinese domestic market has barely started - it involves 20 percent of the population and 10 percent of the territory, but it already faces the perspective of a crisis that would send the army of unemployed to at least 10 percent of the active population linked to that market. The conquest of the Chinese domestic market is a great challenge for capitalist restoration, but it requires an extraordinary effort of disorganization of the old state organization of the economy; of throwing the peasants off the land; of the massive destruction of productive forces; of rebellions, repression and civil wars. The restoration of capitalism represents the period of disorganization and dismantling of the old state economy, of the relations arising from its mechanism of planning. The creation of a native capitalist class, this through the transformation of the bureaucracy into an property-owning class, presupposes the prior creation of an enormous 'pool' of capital that could not arise except for a vast process of disorganization of the economy.
Economics and politics
However important the fluctuations in the capitalist economy may be, and however inevitable, those in progress in the current period announce explosions of a general character in social organization. It is striking that a broad majority of capitalist governments, that of Bush first and foremost among them, have discarded the possibility of a 'settled' and 'organized' way out of the current economic instability (with the UE and Japan). The United States does not wish to sacrifice the special monetary area it has established with China, as would be put forward by the UE in any discussion over a 'settled' solution, and nor could China accept its exclusion from a 'settlement'. The United States applies pressure to repair the instability in the area of the dollar, by means of a revaluation of the Chinese currency, the yuan. Moreover, the 'settled' solution faces other obstacles, even more serious: the enormous mass of capital now invested in financial operations that have built into them various wagers and perspectives on the evolution of the currencies and the various commodity and capital markets. Especially in the 'hedge funds' market, where various hundreds of billions of dollars are now in circulation. The capitalist governments fear that their 'settled' solutions could be the real trigger of a financial crisis, which would become political. The 'regulatory' intervention of the Federal Reserve Board is the only weapon that the capitalist powers appear to be willing to use. But few believe in its effectiveness, and with reason.
The next stage in the world crisis will be faced by all classes, not with the resources of economics, but rather with those of politics, not with speeches, but with wars and revolutions.