The stock market reached the 10,000 mark in the middle of October. Wall Street investment banks like Goldman Sachs were preparing to dole out a record $140 billion in pay to their traders. If you only watch the mass media, it’s as if the shock of the economic collapse that was triggered by the collapse of Lehman Brothers two years ago never happened. More and more optimistic predictions of economic recovery are everywhere.

But while the happy talk continues on Wall Street, for regular folks the crisis is getting worse and worse. One commentator called it “one nation-two economies.” Unemployment is continuing its inexorable rise to double digits, while even mainstream economists now recognize that if the underemployed and those no longer looking for work were included this rate could easily reach 20% of the workforce. Business Week warned that we may see an absolute decline in wages in 2009 for the first time in 60 years.

CNN reported that third quarter foreclosures reached a record 940,000 – a 23% increase over the third quarter of 2008 – a sign that the crisis is spreading deeper and deeper in the real economy. World trade, one of the major engines of world economic growth over the past period, is expected to contract by almost 10% this year for the first time since the early 1980s.

In the U.S., consumer credit has been falling fast for seven consecutive months. Bank lending is off 14% since October 2008 despite interest rates remaining at very low levels. This is starting to threaten the viability of the dollar as the world reserve currency.

A new speculative bubble
The absence of any attempt to regulate the U.S. financial sector has led to a return to high-risk speculation. Behind the “green shoots” and talk of “economic recovery” is in fact a return to a new speculative, and probably short-lived, bubble.

While massive government spending – $11 trillion of taxpayer funds to support the financial sector – has temporarily stabilized the economy and prevented a collapse, the Financial Times warned that, once the effects of the temporary, cushioning effects of these tax cuts, government liquidity, and stimulus measures begin to wane, the deep problems of bad debts and toxic assets threaten to burst to the surface.

Major economists like Nouriel Roubini and Nobel Prize Laureate Joseph Stiglitz warn that we are going into an extended period of “economic malaise” and a “double-dip recession” or at best an anemic recovery. These far more sober forecasts confirm the general analysis of socialists that the world is not facing a routine cyclical recession but a deep structural crisis which will probably extend for years.

There is an enormous overhang of spare capacity in industry and construction. Combined with the massive debt levels of government, business, banking, and household debt, this creates an extremely difficult situation for a sustained recovery. In every major capitalist economy, it is estimated that there is now more than 30% overcapacity in virtually all sectors of industry and construction.

In its special report on the world economy in October, The Economist warned that in the “new normal,” 25 million will have lost their jobs in the advanced capitalist countries and “several million may never regain them,” demand in rich countries will remain weak, and emerging economies will not be able to compensate.

Protectionist pressures
Since the onset of the crisis, we have seen an unprecedented degree of global coordination among the major economies. This reflects the enormous interdependence of the world economy today. However, on the basis of capitalism, each capitalist government inevitably is forced to fight for advantages for their own companies and markets. This can be seen in the sharp trade conflict that has erupted between China and the U.S. over tires, which threatens to escalate after Obama increased tariffs 35% for Chinese-made tires. Similar tensions exist between the U.S./Boeing and the European Union’s Airbus over protection of their respective aircraft production industries.

Tariffs and protectionist measures can easily begin to be used by other countries against Chinese exports, leading to further retaliations. A similar process is reflected in the secret discussions of a number of countries on replacing the weakened dollar as the world reserve currency. An escalation of protectionist measures and retaliations would have a devastating effect on world trade and living standards and could easily open the door to new, sharp national and regional conflicts as each country tries to solve its problems at the expense of others.

New banking crisis
The banking sector could face another serious crisis not too far into the future. Toxic debts, credit card defaults, and the continued crisis in real estate will continue to be a serious problem. More foreclosures because of increasing unemployment and falling wages could lead to new, huge losses for the banks. Nouriel Roubini of the Financial Times, one of the few economists who predicted the crisis, believes that up to 1,000 banks and financial institutions could go under. It should be remembered that in the 1930s depression, the worst year for bank failures was in 1933, four years into the crisis.

A Financial Times editorial warned that “according to IMF calculations the savage losses incurred by the banks since the beginning of 2007 – about $1.3 million – are only the beginning. It expects them to write down another $1.5 trillion by the end of 2010…All this means that the financial sector remains on extremely shaky ground.” (10/1/09)

If such a crisis develops again, it will be questionable if another bailout along the lines of the past year will be possible. A number of economists make the point that the banks today are “too big to fail” and the government has no choice but to rescue them. Socialists argue that, in reality, there is a strong case for nationalization of the banks under democratic workers’ control and management – i.e., genuine nationalization, not corporate welfare or “socialism for the rich.”

Workers pay the price
It is not the barons of Wall Street who are expected to pay the price for this economic catastrophe. The plans of both major parties that support and are supported by Wall Street and big business is to make the workers and the middle class pay for the crisis of their sick system with massive job and wage losses and cuts in public services such as health care and education.

In reality, a whole new period of austerity and savage attacks on the rights and living conditions of working people has opened up. The important gains in living standards that workers made since World War II have come to be seen as “normal” in the advanced capitalist countries. Socialists always warned that this was not at all “normal,” but a historical exception under capitalism during the postwar economic upswing.

There will not be a return to “normality.” For the working class, this will be a jobless recovery. There will be no return to easy credit. Stiglitz forecasts that it may not be until 2012 that unemployment levels will begin to decline.

The OECD predicts another 25 million workers in the advanced capitalist countries may lose their jobs by the end of next year. The stage is increasingly set for a savage confrontation between the classes, with fierce attacks on living standards, cuts in services, and increased taxation against the working class and the middle class. This will inevitably lead to increased class struggles in the U.S. and on a world scale.