Trillions of dollars were liquidated in major stock market corrections during the first week of February. While the mainstream capitalist media are trying to reassure themselves that the economic “fundamentals” are sound, the stock market upheaval reveals something far more ominous: The fragility of the world capitalist system. The developments also reveal how the whole system is rigged in favor of big business and against the interests of ordinary people. ALAN JONES explains
What Has Happened?
The stock market correction – which included the largest one day fall in history (though not in percentage terms) – in early February was triggered by the news of a slight increase in wages for workers. One of the largest fears of investors is that increased wages and a slight increase in inflation will lead the Federal Reserve to raise interest rates it charges to banks for loans. The increase in wages was a mere nine cents per hour for non-supervisory workers, but it was enough to be seen as a threat to the massive profits of big business. What about the theories of “trickle-down economics?” It fundamentally reveals a diseased, profit-addicted economic system that only does well when the vast majority are suffering and goes into conniptions when workers make any gains.
Investors and large banks are also concerned about the ending of the period of Quantitative Easing (QE) when they could borrow money from the Federal Reserve virtually for free. In the aftermath of the 2008 crisis, the Fed injected trillions of dollars in the financial system in an effort to avert a complete collapse of the real economy. However, after 2012, the easy money continued stimulating an inflation of stock market prices, financial bubbles, and speculative binges. A slight increase in interest rates by the Fed exposed the reality of the speculative bubbles in the stock markets around the globe. Referring to the all time highs of the stock market the World Economic Forum warned: “US stocks have only twice in history been higher than they are at the moment: just prior to the crashes of 1929 and 2000″(WEF Global Risks Report 2018).
The period of easy money and low interest rates also led to unprecedented levels of consumer and institutional debt – with the Institute of International Finance (IIF) estimating world debt climbing to $233 trillion in the third quarter of 2017.
Despite the assertions of Trump about a strong economy, the Bureau of Labor Statistics estimates real average hourly wages rose by a mere 0.4% at the peak of an economic recovery in 2017. Household debt meanwhile has now surpassed the critical levels of 2008 while Pew Research studies show that wages have remained largely stagnant since the 1970s. According to the Economic Policy Institute, productivity has increased almost six times faster than wages. Taking on longer working hours, more debt, and “gig economy” jobs to make ends meet has been the experience of working people. Meanwhile the vast bulk of the gains have gone to the top 1% and especially the top 0.01%.
While Wall Street was making record profits, some astonishing statistics reveal what is really happening among large sections of workers: As of 2013, 45 percent of working-age households had no retirement savings. A 2015 Federal Reserve study revealed that half of those surveyed said they could not gather $400 to cope with an emergency, while household debt has surpassed the high levels before the 2008 crisis.
Meanwhile, the Trump administration is busy shoveling more money in the pockets of the rich with the passage of tax reform – a massive transfer of wealth – costing over $1.5 trillion, while at the same time eliminating any regulations on industry and the financial system.
Non-financial corporations made net investments of $2 trillion in buildings and equipment since 2012. But an astonishing $6 trillion went to inflated stock dividends to shareholders, in other words profits. This exposes the fabrication that the stock market serves as a vehicle for “productive investment” when in reality it serves as a way to siphon money away from production and into speculation and new financial bubbles.
Letting the Banks Loose
The extremely limited financial regulation like the Consumer Financial Protection Bureau passed by Congress after the Great Recession did not force banks to separate regular deposits from the complex derivatives transactions of Wall Street like the Glass-Steagall Act of 1933 -which was removed during the Clinton administration.
Assisted by further deregulation, government bailouts, and virtually interest-free money provided by the Federal Reserve, the giant U.S. banks that dominate Wall Street and the economy – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley – have grown bigger and more profitable since the economic collapse of 2008.
The Trump administration, which promised to “drain the swamp” in favor of ordinary people is completely dominated by people like former Goldman Sachs partner, now Treasury Secretary Steven Mnuchin. The administration – aside from massive tax cuts to the rich – is signaling even more deregulation for big business and finance. An example is Mnuchin removing oversight for AIG, the insurance giant that was at the center of the previous crisis. It is as if every lesson about lax banking oversight and how deregulation fuels catastrophic speculative bubbles is completely forgotten.
Wall Street has been emboldened because of apparently limitless profits based largely on speculation over the past few years. They forgot or don’t care about the havoc that they caused in 2008 when millions lost their jobs and their savings creating enormous instability for the world capitalist system. It should be remembered that the Democrats and Obama, along with the Republicans, bailed out these criminals. Not a single major bank CEO went to jail for their rampant criminality. Obama reminded the bank CEOs at one point that he stood between them and the “pitchforks” of the angry masses. Democrats like Clinton and Obama deregulated and bailed out the criminals who run the financial system. This helped to pave the way for right-wing populist scoundrels like Trump and his ilk in Congress who wish to give Wall Street even more latitude for their criminal behavior.
The Coming Recession
The sharp market correction came on the heels of a number of apparently positive economic reports including that all major economies in the world were growing simultaneously for the first time since the Great Recession. The U.S. economy is projected to grow by 2.7% in 2018 and for a period, the tax cuts and deficit spending by Congress will act to stimulate the economy further. The recent correction does not therefore inevitably mean there will be a recession in the immediate future as there are various factors which could keep the recovery going for a certain period of time.
But at a deeper level, there are serious problems which are acknowledged by many the representatives of capitalism. At the recent summit of the elite at Davos in January, the World Economic Forum warned about the state of the world economy:
“However, this relatively upbeat picture masks numerous concerns. This has been the weakest post recession recovery on record. Productivity growth remains puzzlingly weak…And in many countries the social and political fabric has been badly frayed by many years of stagnating real incomes.”
In his recent book, The End of Alchemy: Money Banking and the Future of the Global Economy (read Peter Taaffe’s review here) Melvyn King, the former head of the Bank of England from 2003-2013 warned the international ruling class about the next inevitable crisis in the financial system: “Without reform… another crisis is certain and the failure to tackle the disequilibrium of the world economy makes it likely that it will come sooner rather than later.”
The anxiety of the more sober representatives of capital is also increased by having Trump at the helm in this situation. A recent New York Times editorial warned that “The prospect of a recession or financial crisis on Mr. Trump’s watch is unnerving, because he is as confident in his own abilities as he is lacking in knowledge and sound judgment” (2/8/2018).
On the basis of the continuation of capitalism in a period of “secular stagnation” further downturns are inevitable leading to more austerity and reductions in living standards. Upheavals, downturns, and financial shocks are inherent in a system dominated by an irrational and destructive drive for profits dominated by an obscene concentration of wealth in the hands of a literal handful: Five men control as much wealth as half the world!
The Socialist Alternative
There is no final crisis of capitalism. It will continue its trajectory toward the abyss of poverty, wars, racism, and environmental destruction. The only way to reverse course is for the working class to take hold of the levers of power and bring the giant financial cartels that run the world economy under democratic public ownership and control as a first step towards a democratic, socialist system.
The economic collapse of 2008 eventually gave rise to Occupy Wall Street, BLM, the North African revolutions, and the rise of new radical political parties across Europe – and made socialist ideas popular once again in the U.S. – as workers and young people tried to find a way out of austerity and crisis. A new financial crisis will mean that the political system of Republicans and Democrats will once again try to unload the crisis on working people and to bail out the banks and Wall Street. But it would also inevitably lead to new explosive struggles against austerity, capitalism and a reawakening of the ideas of genuine socialism.
The current selloff and instability in the financial system is a reminder that Wall Street and the big banks learned nothing since the crisis of 2008. This time, there should be no bailouts, but an open investigation of their criminal practices and bringing the financial system under democratic public ownership and control. Other key sectors including the energy industry, transportation and health care also should be brought into democratic public ownership alongside a massive public investment in rebuilding the nation’s infrastructure on the basis of renewable energy creating millions of good, well paid jobs. This is the only way that investment can be directed to benefit the vast majority and not the profits of a tiny few – a democratic socialist system.
For more analysis see Peter Taaffe’s review of The End of Alchemy.