Economy in Freefall


Almost every day, some bad news on the economy hits the headlines: market volatility, hedge funds near collapse, rising oil and food prices, investors losing confidence and moving to less risky forms of investment such as gold.

In the last year, home foreclosure filings have jumped 60%. In the fourth quarter of 2007, the average home price fell 5.8% – the steepest ever recorded. Payrolls fell by 63,000 in February, the biggest drop since March 2003, and the dollar has fallen to record lows.

The question is now no longer “Will the sub-prime crisis trigger a broader downturn?,” but rather “How deep and long will the downturn be?” as it becomes clear this will be a serious recession.

Overall U.S. Gross Domestic Product growth in 2007 was 2.2%, the weakest growth for five years. In the fourth quarter, GDP grew only 0.6%, down from 4.9% in the third quarter, moving the U.S. economy closer to a recession, which is defined as a declining GDP for two or more successive quarters.

Over the past years, U.S. consumer spending has played a key role in keeping the world economy afloat by buying up consumer products produced around the world. This process has continued despite stagnating wages (real wages fell about 1% in 2007) and a weakening dollar.

This has been accomplished through rising consumer debt. Household debt is growing faster than the economy, reaching a record 133.7% of disposable annual income in the fourth quarter of 2007.

Due to rising home prices (a 70% increase between 1995 and 2006), many consumers used their homes like credit cards, taking out mortgages to maintain their living standards. At the peak of the bubble, homeowners were drawing $700 billion per year from their homes. This number is now down to under $200 billion.

The collapse of the sub-prime market has led to a credit crunch, making loans generally harder to get. As financier George Soros recently said, “We are at the end of an era of credit expansion…”

The Problem Is the System
Capitalism is a crisis-ridden system. Throughout its history, cyclical overproduction crises (the boom-bust cycle) have regularly occurred. The reason for this is that, while workers create all the wealth in society through their labor, the company owners siphon off part of that wealth in profits.

Since the corporate owners hoard and squander the money they receive, this means working people produce more than they can purchase. This leads to excess production piling up without a buyer, leading to full warehouses, production decreases, and unemployment.

The boom part of the cycle can be extended artificially by extending purchasing power beyond its natural limits through credit, but in the end this has to be paid back or defaulted, deepening the “bust” part of the cycle when it hits. Also, capitalism’s motivation is short-term profits, ignoring both long-term consequences and human need. Inevitably, this leads the capitalist system into periodic and deepening crises.

Effects on Working-Class Families
Consumer spending will no longer be maintained through debt. On the one hand, this spells trouble for the global economy, especially for countries like China whose economies rely on exports to the U.S. On the other hand, this will mean a painful cut in the living standards of tens of millions in the U.S.

Additionally, a recession will lead to cuts in social programs as big business attempts to make workers pay for economic problems. As working people see their hope for the “American Dream” of homeownership and ever-increasing living standards fail, this can lead to a loss of faith in capitalism and an increase in struggle.

Can the Fed or Government Save the Day?
The Federal Reserve’s rate cuts and bailouts for Wall Street will not be enough to stop the credit crunch, much less solve the fundamental problems facing the U.S. economy. The recently-passed economic stimulus package represents a drop in the bucket.

Also, there is no guarantee that this money will be used to boost spending. With an uncertain future, many working families will use it to pay off debt, thus putting an even larger portion of the stimulus package (albeit indirectly) into the hands of big business.

With no end in sight to the economic plight for the majority of people, the economy has become issue number one in the upcoming presidential elections. None of the candidates of the two parties of big business has a real answer to the economic problems faced by working people. Only by getting rid of capitalism and replacing it with a democratically-run planned economy that produces for human need instead of profit will we be able to secure a decent future for humankind.

Fed Scrambles to Bail Out Corporate America
Workers Left Out in the Cold

As we go to press, the incredible collapse of major Wall Street investment bank Bear Stearns demonstrates massive instability in the financial market. On Friday, March 15, Bear Stearns was valued at $3.54 billion. Yet, by the following Monday morning its value had collapsed by 94% to a mere $236 million.

Rocked by major exposure in the sub-prime market, the U.S. Federal Reserve created a $30 billion special financing deal with giant JP Morgan Chase to take over Bears Sterns to protect investors and help prevent a further collapse in the markets. Terry Smith, CEO of inter-bank broker Tullett Prebon, stated: “I don’t think anybody alive has seen events of this seriousness and magnitude affecting the financial markets.”

Ordinary workers will have noticed the readiness of the two corporate parties to help out rich Wall Street investors, compared to their total failure to help workers thrown out of their homes due to mortgage fraud inflicted by these same investors.