The dominant trend in the world economy is a major downturn in economic activity, including economic recessions in many of the most powerful countries in the world. The financial sector crisis that first became apparent when the U.S. housing bubble began to deflate in the fourth quarter of 2005 (also known as the sub-prime crisis) has now sparked a fierce, global economic crisis affecting the financial and industrial sectors of the world economy.
Near the end of 2008, the U.S., Japan, Germany, France, and the European Union as a whole, acknowledged obvious slowdowns in economic activity and declared official recessions. On 11/14/08, the European Union reported that the fifteen nations in the eurozone had entered (as an aggregate) into a recession, with its gross domestic product (GDP) declining 0.2% for the second straight quarter, (CNN, 11/17/08). The Japanese government declared on 11/17/08 that the Japanese economy, the second largest national economy in the world, was in recession with a 0.4% fall in 2008 gross domestic product up to that date, (CNN, 11/17/08).
Germany, the biggest national economy in Europe and the worlds top exporter, admitted to recession on 11/13/08, stating second and third quarter GDP drops of 0.4% and 0.5%, (Deutsche Presse Agentur). France, the Eurozones second biggest national economy, belatedly pronounced a recession through its statistics agency on 12/18/08, explaining that French GDP had contracted 0.1% in the third quarter of 2008 and 0.8% in the fourth quarter, (BBC News).
In the U.S., the largest national economy in the world as measured by gross domestic product, (IMF, World Bank, CIA Factbook), the United States National Bureau of Economic Research announced in early December, 2008, that a recession had begun in December, 2007, a year earlier.
Some capitalist economists and corporate commentators are now raising the probability that not only is the world economy as a whole in a recession, which began in late 2008, but that a possible world recession could turn into a world depression in 2009. The World Bank projects world production to grow by 0.9% in 2009, compared with 2.5% in 2008 (and a high of 4% in 2006). The World Bank also predicts world trade to contract by 2.1%, compared to growth of 6.2% in 2008 and a high of 9.8% in 2006. [T]he World Bank could identify no possible driver for recovery in the coming months. The UN and the OECD are more pessimistic, with projections for world economic output that include falls in production of 1.5% and 0.4%, (Sify.com).
Socialists must translate these dry numbers into what they mean for working people, youth, and even the ecological survival of the planet. In analyzing the world economic downturn, the December/January edition of Socialism Today (the monthly magazine of the British Socialist Party, a section of the Committee for a Workers International) gives some human perspective to the declining world economy: Population growth alone demands global growth of 3% to keep per capita (per person) GDP constant. This means world economic growth of less than 3% will immediately lower living standards for hundreds of millions of people.
The financial company Goldman Sachs and the mega-bank JP Morgan Chase predict world growth in 2009 to drop 2% or to possibly rise only 0.4%. The horrible inequality created by capitalism when it is working during nominal boom periods will now threaten the jobs and living standards of hundreds of millions more people as the system sputters into global recession or even possibly depression. The World Bank has produced a short list of 28 countries, 13 of them in Africa, which are especially vulnerable to the triple threat of food and fuel price hikes, and financial turmoil. According to Oxfam, 200 million people have dropped below the poverty line this year [2008], (Socialism Today, December/January 2008/2009).
What Caused This Crisis?
How did the world economy get so wrecked? The overriding narrative from the corporate media is filled with the usual subjectivity and empiricism that dominates capitalist thinking.
The story usually goes like this: Starting way back, around 2004, 2005, or 2006, a lot of bad working people in the U.S. got greedy and took out mortgages they couldnt really afford, so-called sub-prime mortgages. And a few bad people at the top and middle ranks of big banks and mortgage lending institutions, like Fannie Mae and Freddie Mac, got extra greedy and sold a whole lot of bad mortgages, with high interest rates (sometimes rather hidden in complex contracts), to the irresponsible working people in order to earn high fees in the mortgage transactions. The more astute capitalist economists and corporate media commentators might also go a little deeper and add talk about deregulation of the financial system in the U.S. as a co-factor in the sub-prime debacle (the deregulation starting under Carter, then Reagan, and continuing through to Bush-Clinton-Bush II).
The sub-prime crisis or housing bubble in the U.S. economy is seen as the main factor starting a U.S. recession. As the housing bubble deflated through unpaid loans and house foreclosures, the massive, growing, unpaid debt spread financial instability into the world economy. Huge bundled debts (mortgages/loans) had been turned into paper assets, supposedly of high value, and, backed up by the enormous assets of some of the worlds largest banks, sold in financial transactions around the world.
It was thought this would spread out any debt losses among very large and powerful financial institutions whose assets could more than cover any losses. However, once the mortgages (housing loans) started coming due in vast amounts and werent being paid, the losses spread worldwide because the debts were owned by financial institutions around the globe.
Also, foreclosed properties became so prevalent in the U.S. that many could not be kept secure, nor sold, as recessionary trends began to grow in the U.S. economy in 2007. Houses that big banks thought would continue to rise in price and could therefore be sold off for huge profits if loans failed became financial liabilities, instead.
The banks forgot the fundamentals of the capitalist economy. Housing, always a commodity under capitalism, was turned into an abstract notation on the balance sheets of faraway mega-banks. When the banks couldnt flip all the foreclosed properties they ended up owning, banks and large financial institutions like AIG, the insurance giant, began to go bankrupt. As the U.S. recession snowballed, the government began the bailouts and nationalizations of banks and financial institutions that made headlines in the fall of 2008.
The U.S. financial sector took such a hit that companies related to housing and housing finance began implementing massive cuts in production and layoffs. As property taxes fell, lending dried up and unemployment got worse. Many state governments in the U.S. ended 2008 with massive budget cuts and plans for more. But credit was still locked up by the big banks which took government bailout money and hoarded it or used it to buy up other big banks who were faltering.
All these trends in the U.S. economy are continuing into 2009, as the U.S. recession deepens along with a slew of recessions in other countries who are intertwined with U.S. financial institutions and/or who depended on the U.S. market for substantial trade.
Crisis is Rooted in the Crisis of Capitalism
There are some fundamental problems with the way the capitalist media portrays the unfolding of the current economic crisis. The overriding narrative they give ignores the underlying, more fundamental problems and causes of the current economic downturn. These economic problems predate the recent housing bubble in the U.S. and are more widespread and deeper, even, than the problem of credit expanding beyond real production throughout the world capitalist economy.
The current world economic crisis is rooted in the crisis of capitalism. For example, why were large numbers of working people in the United States so eager to buy houses within the last few years? And why were big banks so interested in selling them houses for no downpayments, relatively small downpayments, low starting interest rates, etc.? Also, why were there housing booms in other countries like Ireland, Spain, Canada, etc., which have also crashed and burned?
In the late 1970s, the capitalist ruling class, on a world scale, went on a resurgent offensive against the working class in the advanced capitalist countries and also in the underdeveloped world. A lot of the policies big business used are lumped into the term neoliberalism. This means deregulation, privatization, cutting government spending, and attacking unions more directly and harder than was the case during the postwar upswing of 1950-1974.
Keynesianism and Monetarism
Another feature of the move to neoliberalism was that capitalist governments dumped the Keynesian policies of the 1960s and 1970s. Instead, they adopted monetarist policies.
Keynesianism uses increases in government spending as a lever to intervene in the economy to raise employment rates, and it uses government programs and tax cuts to spur demand in times of low inflation. Keynesianism uses a lot of government intervention in capitalism to boost the economy in an attempt to prevent a recession.
However, while Keynesianism can give a temporary boost to the economy, it cannot create any permanent, long-term benefit to the economy unless the capitalists increase investment in new productive plants and equipment to create growth in the real economy. In the late 1970s, capitalists saw glutted markets and refused to do that. Instead, Keynesian spending led to a growing problem of inflation. Too much money was chasing too few goods, so the price of the goods went up.
Monetarism claims to only use the government to give the market a freer hand to operate, with the eventual goal of severely cutting back on the size of government. Monetarism emphasizes holding down inflation through gradual changes in money supply, raising or lowering interest rates, holding down or eliminating government deficit spending, and instituting low tax rates on corporations and the rich. These policies were embraced by the international capitalist class, partially to serve as an antidote to large increases in inflation in the world economies in the late 1970s.
We dont have room here to explain in detail the contradictions in both these philosophies and how they were implemented. But neither of them instituted any fundamental change in capitalist ownership of the means of production or the constant exploitation of labor and nature.
Keynesianism was jettisoned in the mid-seventies as the capitalists began their neoliberal offensive on a world scale, attempting to squeeze more productivity and profit from the working class. The U.S. ruling class led the way in this assault that eventually got personified in terms like Reaganism, Thatcherism, etc.
The 1980s and 1990s
Neoliberal assaults on workers further evolved into governmental and corporate policies which became known as globalization. International trade agreements like NAFTA were used to weaken corporate regulation, unions, and popular organizations. Outsourcing of jobs and the threat or perceived threat of outsourcing, both inside the U.S. and in other countries were, and still are, used to create job insecurity and make it more difficult for unions to organize. In Europe, the creation of the eurozone, and all the anti-worker policies that went along with that, can be seen as part of the neoliberal offensive of big business.
Neoliberalism and globalization are new terms for policies and tactics the capitalists and their governments have always used to attack working people in order to increase profits. For example, capitalists have always spread their system around the globe in order to exploit raw materials and cheap labor and to control trade routes and new or established markets. Chasing cheap labor around the globe and using cheap immigrant labor in order to get around labor organizing and socialist movements is not essentially new under capitalism, except for the evolving terminology. Today its called the inevitable effects of globalization.
Under globalization, with the use of new technology the exploitation of cheap labor on a world scale intensified, sped-up in real time, and reached further distances. But the essence of globalization has always existed under capitalism (see the quote from the Communist Manifesto, below). The collapse of Stalinism in the Soviet Union and Eastern Bloc countries also breathed some new life into neoliberalism and its offshoots, like globalization. Stalinism left in its rubble new areas of cheap labor to exploit and new parts of the globe to tear up and pollute.
From the mid-1970s up through today, working-class wages and social conditions inevitably worsened under this worldwide neoliberal assault. In order to keep up demand, i.e., the ability of masses of working people to consume while their wages were stagnating or falling, the capitalists began a massive expansion of credit. This included every aspect of individual debt, from credit cards to car loans to house mortgages, etc. Also, macroeconomic policies steeped in borrowing (leveraging), like international currency speculation and financial market deregulation, were brought to new international heights. Government deficit spending reached record levels.
As a result, we got the development of the U.S. housing bubble – and housing bubbles in other countries spurred on by the fact that the vast majority of working people could no longer afford to buy a house due to wages stagnating or falling. These were all consequences of neoliberal policies and the normal functioning of capitalism over the last thirty years, as it continually tried to drive down wages in order to increase profits.
In the 80s, 90s, and early 2000s, public house building was drastically cut, privatized, or eliminated in many countries around the world, including the U.S. and Western Europe. This created a pent-up housing demand combined with pockets of limited supply of housing. Policies were enacted by governments, especially in the U.S. and Western Europe, to encourage home ownership, primarily through loosening up mortgage lending, with policymakers thinking this would spur some demand and also create an ownership mentality among working people, with all the illusions in capitalism that term entails.
The combination of low or stagnating wages, cuts in public housing stock and/or privatization, de-regulation, and the enticements of small subsidies, tax breaks, etc., to buy a house, created a government-propelled demand to buy housing just as house prices were drastically inflating around 2002-2006 and getting more out of reach of working peoples incomes. The gap between the median wage and the median housing price in 2005 in the U.S. was over four times. That is, the median housing price was around $220,000 and the median household income, a little less than $50,000 (amounts are given in 2007 dollars, adjusted for inflation), (Boston.com, 4/14/08).
Most working people in the U.S. could no longer afford to buy a house at the old terms of putting 20% of the housing price down and paying a high interest rate on a loan from the beginning of the term of the loan. The capitalist businesses involved in house building, home repair, mortgage lending, etc., were only able to sell homes at a decent volume (from their standpoint of ever-increasing profit margins and short-term maximization of profit) by lowering or eliminating downpayments and starting loans at low interest rates. Government policies of lowering interest rates to stimulate economic activity also fed into this. In effect, this extension of credit, combined with the deregulation of financial markets, created a housing and financial bubble which helped to sell houses, even though most workers could not afford the inflated prices. The housing bubble in the U.S., peaking in 2005, was a classic extension of a credit bubble under capitalism.
Labor Theory of Value
The fundamental factors leading to the current economic crisis go deeper than credit problems. Credit is a necessary and profound part of understanding how the capitalist economy works. On a macro level, credit represents capitalism trying to overcome its own limits in terms of production and consumption of goods and services. On a micro level, credit lubricates the system on a daily basis, allows short-term expansions of productive processes, and lowers risk for the capitalists (allowing them to use someone elses money to expand). Where do these limits that credit tries to overcome originate?
The real causes of the current economic crisis on a world scale are at the root of how capitalism operates at all times and everywhere. Capitalism rests on the exploitation of labor and of nature to make a profit. The exploitation of labor works on the lines of the Marxist labor theory of value. Workers are never paid the full value of what they add through their labor to the productive process.
The difference between the costs of producing a good or service – including wages paid to workers – and the actual value and selling price of a good or service is where profit comes from for the capitalists, the owners of the productive process. This remaining value is called surplus value, since it represents the surplus left over after wages and costs are paid. Profit, seized by the capitalists, comes from surplus value that workers create with their labor.
Applied to an entire economy, you can see how the labor theory of value explains a situation where the vast majority of the population – working people, those of us who must sell our labor to live – cannot afford to buy back the full value of the goods and services we create with our labor. The actual owners of large- or small-scale production, the capitalists, make up such a small percentage of the population that their consumption, using our unpaid wages (profits), is very limited in terms of being able to soak up all the surplus goods and services produced on a national and international scale.
On a large scale – regional, national or international – working people not getting back the full value of what they produce leads to frequent overproduction of goods and services. This is expressed as an overcapacity of productive forces, and the capitalists cut productive capacity to try and avoid overproduction. This is what creates recessions and other economic crises in the capitalist system.
It was not just an inflated housing market and bad loans that created the U.S. recession and triggered a wave of world recessions. In the U.S. and around the world, underlying the financial crisis are the problems of overproduction and overcapacity. These more fundamental trends are a constant feature of the unplanned, anarchic, and wasteful capitalist system.
Tactics used to encourage and constantly increase consumption – to keep demand stable or increasing – include massive extensions of credit, lowering of prices and taxes, and government spending programs like the New Deal programs of the 30s. These and other measures consistently fail to overcome the basic drive for profits which propels growth under capitalism.
Profits result from the gap between the amount of wages paid compared to the overall amount of value produced. Wages end up not being able to keep pace with the amounts and prices of goods and services produced. As a result, the tendency towards overproduction/overcapacity sooner or later reasserts itself, time and time again, in the global capitalist economy. The drive for profits ends up not in growth, but in the shutting down or destruction of production and productive capacity.
This can be made worse, for example, by neoliberal policies that further drive down wages and social benefits on a world scale, making the gap between production and consumption even greater.
Overcapacity/overproduction is breaking out all over the world now, from markets for automobiles to computer chips (the semiconductor industry), (Business Week, 12/29/08). The glut in car production, for example, tracked for many years by the Committee for a Workers International, predates the collapse of the U.S. housing bubble.
The economic crisis now breaking out in all corners of the world is the underlying disease of exploitation and lack of planning in capitalism becoming visible. It is the consequence of years of normal capitalist policies. The labor theory of value can explain every basic aspect of capitalist production, up to the neoliberal governmental policies on an international scale that attack workers, parties, and unions, stifle minimum wages, and cut social programs. Workers living standards have been driven down to the point where consumption is strangled. Even keeping a roof over ones head and eating regularly becomes impossible for many working people around the globe.
The U.S. recession will make the fundamental problem of overproduction/overcapacity even worse because layoffs, wage freezes and cuts, job insecurity, etc., further cut demand.
Why has a recession rooted first in the United States spread throughout the richest countries in the world and affected the world economy as a whole?
The need of a constantly expanding market for its products chases the bourgeoisie [capitalist class] over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere. The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. . .It has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations, (The Communist Manifesto, published in 1848).
The objective basis for socialist internationalism in both analysis and organization is the fact that capitalism is an economic system where production and distribution are international and interconnected on a global basis. The integration of the world economy is increasing and intensifying. For example, world trade has grown twice as fast, on average, as world output from 1990-2008. Underdeveloped countries have nearly doubled their share of world exports since 2000, to 37% in 2007, ( The Economist, 12/20/08).
Even relatively small downturns in economic activity in one part of the world can directly affect economic conditions in many other countries, or even in all countries. During the recent inflationary spike in oil prices in the summer of 2008, some capitalist economic analysts even blamed the high prices on a guerilla movement causing instability in the oil fields of Nigeria.
A Global Economy
A relatively small event or series of events can be perceived to have, or may really have, a ripple effect throughout the world economy. However, this did not stop capitalist economists and commentators from trying to reassure themselves and their bosses, during increasingly unstable stock market returns in late 2007 and early 2008, that the production from underdeveloped countries, especially China and India, as well as trade between countries other than the U.S., meant that those countries economies could continue to grow or even boom, despite increasing signs of recession in the U.S.
They called this decoupling. Its the idea that the rest of the world economy had supposedly grown to the point where a downturn in the U.S. would not seriously affect other economies which now had places to trade other than the U.S. A variant of the decoupling theory was used to claim that even a recession affecting the U.S., Europe, and Japan simultaneously would not seriously affect so-called emerging economies like the BRIC countries (Brazil, Russia, India, China).
However, this theory was just wishful thinking that ignored obvious facts like the size of U.S. GDP (see above). InvestorsInsight Publishing writes that the U.S. economy grew faster than all the other G-7 economies for the past five years [and, most importantly,] that the U.S. economy remains the principal generator of global aggregate demand, accounting for around one-fifth of global imports and 25% of global production. In other words, the U.S. still buys and produces more than any other single country. Another key factor in analyzing how the world economy still stacks up is the leading role the U.S. government assumes as the world economic crisis unfolds.
The international fallout of the U.S. housing crisis – the global spread of bad loan/mortgage packages emanating from the U.S. sub-prime mortgage crisis and the emerging recession – has left the U.S. government blamed both for starting the world economic crisis but also for finding itself remaining in the role of both lender and borrower of last resort for the global economy, (Bloomberg.com, 11/24/08).
International investors still see huge positives in the vast comparative weight of the U.S. economy. The USA is responsible for 46 per cent of the world total military spending, distantly followed by the UK, France, Japan and China with 4-5 per cent each, (Stockholm International Peace Research Institute 2007 Yearbook, Chapter 8). This, along with the U.S. militarys global dominance and the relative political weakness and quiescence of the working class in the U.S., are big factors that still attract foreign investors. These factors represent guarantees of stability for international investors. In return for dumping billions into what are considered safe U.S. Treasury bonds, the leading world capitalists expect the U.S. to continue to flood the world financial institutions with money.
As 2009 begins, we no longer hear the debunked theory of decoupling from the corporate propagandists. Just as the world financial markets had to eventually line up to the reality of real economy production, which they are now painfully doing, so does the world capitalist economy as a whole. When all the failed theories lose their wind, what we see is a world that demonstrates the concept of the combined and uneven development of capitalism. The advanced capitalist countries, with the U.S. in the front of the line, are determining the direction of the world economy. The rest of the world is inseparably tied into this world economy.
The latest trade and production figures from the underdeveloped countries underscore the intensified integration of the world economy. This is further proof of the failure of the decoupling theory. As the credit crisis triggers and, in turn, deepens the U.S. recession, the debt-laden U.S. working class cannot stretch the credit bubble even further and continue to increase demand for imports. Less demand from the huge U.S. market is hitting the world economy. Canada, Mexico, and China are the top three trading partners with the U.S. The effects of the U.S. recession on these countries are becoming clear.
Canada and Mexico
Canada is facing its worst financial crisis in decades. Unemployment is at 6.2% and predicted to rise. Ontario is sinking with the rest of the worldwide car industry, and the collapse in oil prices is decimating Albertas regional economy. 71,000 jobs were lost in November, most of these in Ontario (Time/CNN, 12/15/08).
Mexico made the cover of Forbes magazine, with the editors raising the question of whether Mexico could turn into a failed state. The combination of continuing poverty, massive inequality, and the huge drug trade exacerbate the effects of the U.S. recession on Mexico. 80% of Mexican exports go to the U.S.
NAFTA made Mexico even more dependent on the U.S. than it already was. The decimating effects of NAFTA, for example on food production and farmers, are worsened by the U.S. recession. Many car companies have factories in Mexico, and these are cutting back on production, jobs, and wages. And the last lifeline for many, money remittances from Mexicans living and working in the U.S., may be down as much as 25% from last year (i.e., 2007), (Forbes, 12/22/08). Mexico, virtually ignored in the U.S. media, will probably be a focal point of increased class struggle and capitalist instability in North America. Those interested in aiding the struggles of the working class need to pay close attention to Mexico.
China and India
The Chinese and Indian governments continue their embrace of neoliberalism, with an attempt at Keynesian bailouts added to the mix. These emerging economies were supposed to have been weaned from dependence on the U.S. market by now. However, as described above, decoupling from the U.S. is proving more difficult than the capitalist propagandists expected. Instead, the Chinese and Indian economies are sinking in the recessionary wake of the U.S., Japan, and the eurozone.
Chinese government statistics show that exports from that country slipped 2.2% in November, when calculated in dollars, after seven years of rapid growth. Convert the export figures into Chinas own currency, factor in inflation over the last year, and the plunge in exports was 11.4%, (New York Times, 1/1/09). The Economist claims that the World Bank and other forecasters still expect Chinas GDP to grow by 7.5% in 2009 but that is below the 8% level regarded, almost superstitiously, as essential if huge social dislocation is to be avoided, (12/13/08).
Huge social dislocation is already in effect in China. Here are two examples out of many: In Guangdong province, so many factories are shuttering without paying their employees that some workers are resigning preemptively and demanding immediate pay before their employees go bankrupt. In Sichuan and other provinces, municipal officials are desperately searching for ways to provide jobs for millions of out of work migrant laborers whose families no longer need them for farming, (New York Times, 1/1/09).
While Indias exports to the U.S. account for only 3% of its GDP (as compared to Chinas 12% of GDP exported to the U.S.), India is clearly being dragged into an economic downturn because of recessions hitting many of the richest countries in the world simultaneously and limiting Indias export levels in general. Moreover, India, despite capitalist propaganda to the contrary, is still a country mired in massive poverty. So, domestic growth will not keep the economy there growing in any substantial way. After September, the economy [in India] seems almost to have gone over a cliff. Exports fell by 12% in dollar terms in October and advance information points to a similar decline in November. There are reports of significant declines in output of automobiles, commercial vehicles, steel, textiles, petrochemicals, construction, real estate, finance, retail activity and many other sectors, (rediff.com, 12/11/08).
Last month (November, 2008), the Chinese government announced a huge 4 trillion yuan (nearly $600 billion) fiscal stimulus package, (The Economist, 12/13/08). Given the size of the Chinese economy and the problems opening up with basic growth and exports, this may not be enough to avoid a deeper downturn in the economy than is being predicted by capitalist analysts.
Indias budget deficit, 8% of its GDP, plus its relative economic weakness in comparison to China and many other countries, makes it less able to use Keynesian-type stimulus measures. India is also hit hard by any inflationary spikes in imports like oil and fertilizer. Therefore, earlier in the year, inflation remained high in Indias economy even as inflation dissipated more rapidly in other countries economies. Despite these limitations, even India recently jumped into the fiscal stimulus camp and allocated 300 billion in its own currency for a small stimulus package, (rediff.com, 12/11/08).
World Economic Crisis
With estimates of over 60 percent of global GDP already slipping into recession (rediff.com), there will be huge pressures for protectionist measures in most countries around the world. As the capitalists debate, perhaps quietly and below the radar, whether or not the world economy has tipped into a world depression, the effects will be more and more obvious in the lives of working people around the globe. As inflation, led by speculation in oil futures, dissipated in the fall of 2008, the memory of high gas prices, food riots, and the destruction of pension funds all made their mark on working-class consciousness internationally.
Worldwide capitalism teetered from inflation to current worries of deflation within a single year. Deflation, in the current context, means that credit remains so tight and spending so low as a result of wage cuts, layoffs, budget cuts, etc., that prices continue to decline. Picture the recent holiday retail price markdowns as worse and longer lasting. Investment dries up, and the government stimulus packages dry up, deflating prices, but also deflating economic activity as a whole.
The specter of bouncing back to inflation always looms. In an attempt to revive an economy mired by deflation, governments are sorely tempted to print more money, regardless of government deficits. At what point do the all the bailouts and stimulus packages lose real backing from production and/or foreign investments in, for example, U.S. Treasury bonds? Masses of newly printed money, used to extend government bailout programs or social spending, so obviously not backed by improving economic production, could create an inflationary firestorm in the medium term of this recessionary period.
As the recessions across the globe likely become more severe in 2009, more and more working people will be thrown into poverty or at least be leading an even more precarious existence than they do now. As a result, the system, capitalism, is being questioned more as the future grows more uncertain.
This kind of instability in the past has fueled upturns in the class struggle. The suddenness and severity of the current recessions spreading across the planet may have stunned workers, in general. This, plus the weakening of labor movements and socialism on an international scale in the past two decades, may forestall any big, immediate workers struggles. But socialists must be prepared on an international scale for different levels of economic stress, different levels of working class organization, and different levels of confidence and/or desperation possibly leading to profound movements of the working class, even in the short term.
It is not ruled out that some of these movements take on a character beyond simply a fight to maintain living standards or to just survive. Movements could soon begin taking the direction, or at least raising the idea, of a new economic system with a secure future: an economic system with a future based on democratic economic planning on an international scale, integrated with non-exploitative production processes which will stop the degradation of working peoples lives and also the destruction of the ecological system. In other words, more working people and youth around the world will begin to consider democratic socialism as they move into struggle.