FAIRY-TALE ABOUT THE UPSWING

Hopes for a Fragile Boom and New Risks of Crisis

By Winfried Wolf

[This article originally published in: junge Welt, November 11, 2003 is translated from the German on the World Wide Web,  http://www.jungewelt.de/2003/11-11/004.php. Winfried Wolf’s book “Sturzflug in die Krise (Nosedive in Crisis) – World Economy, Oil and the War” was published in June 2003.]

The predictions of a new upswing in 2004 have multiplied since October 2003. These are like promises of the moon. Consider the new “Frankfurter Allgemeinen Zeitung – Economic Indicator” published on October 10, 2003. The headline exclaimed “FAZ-Economic Indicator Climbs”. The table showed that the business climate indicator based on surveys of businesses regarding future economic development suggested a deterioration of economic development for the next half year. Only the last August indicator showed a plus of 1.5 percent. The Financial Times of Germany titled its November 6, 2003 issue “Germany Escapes Recession”. The German Institute for Economic Research started from an estimated growth of 0.1 percent for the third quarter of 2003. Even if this mini-growth proves true, the figures published by the Federal Office for Statistics are even more interesting. The German gross domestic product declined for three consecutive quarters – from the fourth quarter 2002 to the second quarter 2003. In the August statistics, industrial production was even 3.2 percent below 2002. According to official terminology, Germany is enduring a recession, the second after the 2001 recession.

NEGATIVE WORLDWIDE REAL ECONOMY

The worldwide situation is similar. The world economy experienced the “double dip” in 2003, the second economic collapse within three years. The first collapse in 2001 was “explained” with the attack on the Twin Towers. Everyone spoke of a new upswing at the beginning of 2002. The new recession came in 2003. We should orient ourselves in these hard facts.

The US economy fell into a recession in the second quarter of 2001, before September 11, 2001. After the upswing tendencies at the end of 2001, a new recession occurred at the beginning of 2003. Since the middle of 2003, recovery of the gross domestic product was loudly proclaimed. However the last statistics on industrial production showed a minus of 0.6 percent for September 2003 compared to 2002. Since March 2001, 2.8 million jobs were cut. These job cuts will continue. Large corporations (Chrysler, Eastman Chemical, Sun Micro) are still announcing cuts of several hundred thousand jobs.

Japan, the second largest economy of the world, has experienced a stagnation period interrupted by recessions since 1`992. The last five years are typical: in 1998 a recession, in 1999 a mini-upswing, in 2001 a recession, in 2002 a slight plus and in the first two quarters of 2003 a new recession. “Recovery” is heard again and again. With all the ups and downs, unemployment is at a postwar record high. Industrial production in the middle of 2003 was four percent below the level of 1997. The fact that there were 32,143 suicides in Japan in 2002, 1101 more than the year before and more than 30,000 for the fifth year is revealing. Japan has the second-highest suicide rate worldwide (second to Hungary). A large part of the suicides occur “for economic reasons”.

The third largest economy, the German economy, fell into a recession at the end of 2001. After upswing tendencies in 2002, there was at best a “zero growth” in 2003. In October 2003, seasonally adjusted unemployment was at 4.4 million. The slight decline compared to September resulted exclusively from the new labor market laws (“Hartz laws”) that prompted thousands of unemployed to declare themselves “independent” and forced hundreds of thousands to be “removed from the statistics”. On the occasion of the October statistics, the Federal Labor Office chief Florian Gerster proudly announced the artificial adjustments. Of the 747,100 men and women who registered in October at the employment offices, “more than half, 336,100 had nothing to do.” Afterwards there was a real jump in mass unemployment. This will continue. For 2003, the credit inquiry agency Credit Reform expects a bankruptcy record with 40,000 firm bankruptcies and 300,000 destroyed jobs. The same institute that spoke of an upswing for 2004 assumed that mass unemployment would grow even in the official numbers. The mark of five million unemployed will be surpassed in January and February 2004. A new postwar record will be reached.

IS THE US A GROWTH-ENGINE?

What is the foundation of upswing expectations? Since 2002, the US economy, formerly the growth-engine for the world economy, has been marked by enormously higher state expenditures, particularly in the defense- and IT-security sectors. This is coupled with tax cut programs for the rich and corporations and the lowest interests since the 1950s. Increased arms expenditures and expenses for “Homeland Security” alone meant extras expenditures of $150 billion in 2003 over 2000. Together with the tax cuts and the prime rate interest level at an all-time low of one percent, this produced a massive increased demand, an economic program equivalent to two percent of the gross domestic product.

This is mainly a credit-financed upswing. The expansion of demand in other areas is also artificial. Car manufacturing, the largest branch of the US economy, is typical. Up to the middle of 2003, sales were kept at a relatively high level through massive price discounts. When the US car manufacturers reduced these rebates – ruinous for profits -, sales in October plummeted. Car purchases earmarked for later were moved up with the eye-catching prices. Only 15.6 million motor vehicles were sold in 2003, below 17 million for the first time since 1998.

In the European Union, there is also a competition with tax cuts that has a stimulating effect. Enormous holes are torn in the state budgets. The fact that the two leading EU-countries Germany and France violated the Maastricht criterion of a maximum budget deficit of three percent of the gross domestic product for three years shows the desperate and risky nature of this policy.

One part of the EU-upswing tendencies is explained by the eastern EU-expansion. EU businesses destroy hundreds of thousands of businesses and small livelihoods and increase unemployment in Eastern Europe by several million. This process is similar to that process from 1990 to 1992 when the West German economy boomed in the course of annexing East Germany when West German firms took over the East German market. In a similar way, the “eastern expansion” now brings down the economy in the core of Europe. The consequences are alarming. Poles, now especially exposed to the firestorm of superior West German businesses, has an average unemployment rate of 20 percent and posts a budget deficit in 2003 of seven percent of the GDP. The Dresden bank expects a deficit of 8.7 percent for 2004, nearly three times the Maastricht criteria.

Finally, China plays an important role in the boom expectations. The economic growth in the 1.3 billion-person state is eight percent in 2003. Car sales will double from 2002 to 2003 from 1.1 to two million. Since 1995, car sales have risen six-fold. In 2003, more cars will be sold in China than in Germany. In 2002, China was in first place in German foreign investment, even ahead of the US.

GROWING POTENTIAL CRISIS

The worldwide upswing tendencies are hardly convincing. If an upswing occurs in 2004, it will be very expensive. The bill will be presented in the next recession. However the dangers facing the world economy today are so great that a short-term upswing is in doubt. Several critical factors should be mentioned here:

- the danger of an international market earthquake, triggered by particular trouble spots in the financial sector, for example with the Jukes affair in Russia and the financial scandal around the Uzan family in Turkey;
- The drastic crisis in the financial sector of several G7 states. The “Association for Reviving Industry” was founded in May 2003 in Japan outfitted with the enormous capital of 74 billion Euros whose only goal is buying up bad credits in financial institutions to avert their collapse. In West Germany, insurance companies lost more than 100 billion Euros through stock market losses from 2000 to 2003. The life insurance company Mannheimer went bankrupt in 2003;
- The unstable situation in Latin America/ Argentina, Venezuela, Bolivia, Brazil) and in the tiger states. According to the Swiss bank VBS, “The public debts in Asia (without Japan) in relation to the GDP are now higher than in Argentina and Russia at the time of their insolvency.”

In addition, three enormous trouble spots exist.

Firstly, there is the falling mass demand. A worldwide upswing of normal duration is only conceivable if demand is lasting. However this is not clear. Neoliberal policy lowers individual real income, increases mass unemployment and reduces mass demand. This is particularly true for “Agenda 2010”: higher private expenses for health care, lower pensions and lower incomes of the jobless. All this adds dozens of billions of Euros to reduced demand. High private indebtedness reduces the possibilities for the artificial expansion of consumption when interests are rising again. Demand is also endangered on the world market. Several large export sales markets (Russia, Latin America) stagnate.

In other markets, demand is still high on account of artificially low exchange rates (Asia). The Chinese market is especially unstable. Enormous over-capacities are arising in China, above all in the auto industry. Simultaneously a financial crisis threatens. Every second loan of Chinese banks cannot be collected. The demand from China can abruptly breakdown. Lastly, the stock market losses occurring between March 2001 and the summer of 2003 represent income losses. This first only appeared hesitantly and will be mitigated by record-low interests.

We are experiencing the continued attempt of economic policy to improve the exploitation conditions of capital (profit conditions) – through lower wages, longer working hours, low interests, lower taxation, promotion of capital concentration. This fuels production in the short-term when new sales markets open up. These measures also reduce (private and public) demand and increase the instability of the economies that are goals of the GT-export streams. Even inexpensively produced goods and services find few buyers. This results in typical, short-lived ups and downs as we now experience worldwide with the “double”, “triple” and “multiple dips”.

Secondly, there is the continuing speculation. The recovery on the stock market in the middle of 2003 only made up for a part of the huge losses since March 2001. At the same time the merger- and buyout-fever flourishes. Oracle wants to hostilely takeover PeopleSoft. The scandal around the head of the New York Stock Exchange, Richard Grasso (2001 annual salary $31 million, as much as the profit of the New York Stock Exchange) and his forced retirement in the summer of 2003 shattered the trust in the stock exchange again. Bribe money or payoffs flowed in the takeover of Mannesmann by Vodafone.

Real estate speculation presently seems very dangerous. In Spain and Great Britain, real estate prices have doubled since 1995. A “bubble” has also developed in the rest of Europe (except for Germany and Austria) and in the US. The low interests intensify the construction- and debt-rescheduling boom. All this represents an important support of mass demand. However the end of the real estate boom approaches. A first shock occurred in the US with the near bankruptcy of the leading construction financier, Freddie Mac in June 2003. In Great Britain, the Bank of England resolved on November 7, 2003 the first interest increase in two years in the industrial countries. The Bank of England wants to stop the dangerous expansion of the real estate bubble. This is a decision between the plague and cholera. The bursting of the bubble is risked, the fall of real estate prices and the hundred thousand fold bankruptcies of heavily indebted homeowners.

This recalls Japan. In Japan, a collapse of the prices in the real estate sector followed the collapse of the stock market from 1989 to 1991. The real estate collapse was the basis for the erosion of the whole economy and of millions of private households. Since then, stagnation, crisis and deflation have befallen Japan for more than a decade.

VOODOO ECONOMIC POLICY

The US deficits and their financing represent the third trouble spot. The so-called twin-deficit (budget- and balance of payments-deficits) creates an enormously unstable situation in the US. While the budget was in a surplus in 1999 and 2000, the deficit reached $374 billion in 2002/2003 (budgetary year ends in September). A deficit of $500 billion is expected in 2003/2004, five percent of the GDP. Simultaneously the difference between what the US exports in goods and services and what it imports becomes greater and greater. In 2002, the balance in payments deficit corresponded to more than five percent of the GDP. The need for a constant influx of foreign capital is gigantic, $2.3 million a minute.

The unstable financial situation in the US is interwoven with the economies of Japan, the tiger states and China. These states essentially finance the US capital thirst since they buy US dollars and US bonds. Of the $2.5 trillion in worldwide currency reserves, $1.5 trillion is in the Asian states. Their sudden craving for dollars is fed by the efforts to keep their own currency artificially low and the dollar rate high and in this way extends the export boom. This is the basis of the US balance of payments deficit.

The demand of the US government to upgrade Asian currencies is logical and absurd at the same time. US exports could increase again and the deficits fall. However this could suddenly interrupt the urgently necessary capital flow to the US. A devaluation of the dollar could quickly lead to a dollar nosedive. The upgraded currencies, the Euro, Yen, pound, Swiss franc etc, would destroy the hopes for 2004, that rising exports could be a basis of a new upswing.

Dangers of an economic collapse and accelerated mass unemployment should be taken more seriously than the hopes for an upswing. The desired upswing is bound with continued worldwide record unemployment and drastic social cuts.
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