Nowhere to hide: In a global economy, Australia cannot dodge the credit crunch

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If you believed the propaganda of the previous Howard government, China’s economy

was a bulletproof shield against any downturn in Western economies. Of course, no one

believed John Howard in the end, as the 2007 election result showed. Still it’s good to

have hard evidence that he was wrong — again — in a vital area of policy.

That is, it would be good if the reality wasn’t so bleak. According to JP Morgan chief

economist, Stephen Walters, unemployment may rise to 9% by 2010. That’s about

950,000 workers out of a job. Globally it’s much worse. The Organisation for Economic

Co-operation and Development (OECD) predicts that 210 million people will be jobless

in less than two years in OECD member States.


When the market is allowed to rule, massive numbers of car
workers around the globe are set to lose their jobs.
Photo from wot.motortrend.com

The Rudd government has not been so criminally overconfident, correctly pointing to an

inevitable weakening of the local economy as a result of the planet-wide credit squeeze.

But Rudd and his finance ministers, Wayne Swan and Lindsay Tanner, want Australian

working people to believe that it will be OK in the end. All we have to do is spend the

billions of dollars thrown at us by Treasury. Then we’ll “save Australian jobs,” “help

Australian businesses to stay afloat,” and the good ship SS Australia will weather the

storm.

Throwing money at the problem. Rudd’s strategy is complete nonsense, ignoring a

fundamental economic principle. The government’s distribution of funds requires a

massive increase in banknotes. But printing money has a negative effect on the economy,

unless it is accompanied by a matching increase in the volume of commodities and

services.

The reason for this is that the price of all commodities and services (including currency)

must be based on their value at a given moment. If an economy produces 1 million

units of goods and services and the number of banknotes equals $10,000,000, then the

average price per unit is $10. If the government prints notes (or issues credit) to the value

of $5,000,000, the average price of commodities and services also increases by 50%.

Without an increase in output, the price of goods and services increases and the value of

money decreases. This is inflation.

If inflation gets out of control, as it has in Zimbabwe, the price of commodities soars

beyond the point where people can afford them. Production then plummets, businesses

go broke and unemployment rapidly balloons. This only deepens and lengthens the crisis.

Rudd’s release of cash is very risky: a far better plan would be to create jobs by spending

money on infrastructure and nationalising failed industries. That is, increasing output.

Capitalism’s Big Lie. The economic crisis has many roots, some dating back decades.

But the main reason for the current situation is the myth of continuous economic growth.

An irrational faith in the ability of markets to expand indefinitely is a cornerstone of

capitalist ideology. Yet, as the climate crisis shows, we only have one finite planet.

Despite the thundering of pro-capitalist commentators, there are limits to growth — in a

system driven by profit.

The direct cause of this meltdown was the collapse of the U.S. housing market. In this we

see the Big Lie at work. The entire system of mortgage finance was based on a bet: house

prices always rise. That meant that banks and insurance companies played a dangerous

game of pass the parcel — the parcel being full of mortgage contracts, many of which are

never likely to be paid. As long as the music played, so to speak, the game went on, with

profits made through huge brokerage fees and interest payments based on risk. But the

music did stop. House prices stopped increasing and, at the same time, interest charges

on so-called sub-prime mortgages “reset.” Suddenly people were saddled with debts that

they could not pay or with property that was worth less than the cost of the loan. Faced

with this, householders began to walk away. Prices collapsed and banks found themselves

holding “assets” worth nothing. The first collapses happened when banks were unable to

pay their own creditors. Because the web of trading in parcels of debt was so complex,

nobody knew who had the ticking bombs.

So, late in 2007, banks started failing because other banks wouldn’t lend them money

to cover debts. This led to a domino effect that eventually led to the almost complete

paralysis of the global banking and insurance sectors in September, October and

November 2008. Complete collapse of the planet’s economic framework has been

averted through massive injections of taxpayers’ funds and the effective nationalisation

of many of the world’s biggest banks, along with large chunks of the insurance sector.

Meanwhile, back in the real economy, the shockwaves began to spread. One of the first

companies to go under in Australia was ABC Learning, the largest provider of childcare

in the country. Its board jumped on the debt merry-go-round just as the engine failed.

ABC was caught with a very empty parcel and is now bankrupt. If that were the only

problem, we would only have to shake our heads at corporate stupidity.

But it’s not the only problem — 100,000 children attend ABC Learning centres. Faced

with the near-total collapse of the childcare sector, the Rudd government stepped forward

with tens of millions of dollars, keeping the doors of all centres open until December 31.

This allowed administrators to negotiate with interested parties to hand most of them on

as going concerns. But 55 are closing, with job losses and dislocation for children and

parents. Rudd can find $2 billion to bail out the retail car industry, but nothing to put

childcare back into public hands.

Still, the fact that car dealers couldn’t get credit to buy stock is an indication of the

depth of the problem. The global automotive industry, recently bailed out by the Bush

administration, is still in dire straits. And in ports all over the world, cargo sits on

wharves because shipping companies won’t take uninsured goods, but manufacturers

can’t get credit to buy insurance, if it’s available at all.

Whole countries have had to go begging to the International Monetary Fund for loans

to keep their national economy afloat. Iceland was the first State to be effectively

bankrupted by the crisis. States in Europe, Asia, Africa and Latin America have now

joined it in tapping capitalism’s emergency reserve.

The boom-bust roller coaster. The ongoing downturn is part of a cycle stretching

back to the beginning of the capitalist era. Since the panic of 1797, market busts have

occurred every ten years, on average. Mainstream commentators argue that the sequence

of expansion and contraction of the world economy is intrinsic to a globalised economic

system. Marxists have a different explanation: the rotation of ups and downs is intrinsic

to a globalised capitalist economy. It is possible to conceive of a world where there

is a smooth, continuous expansion of the economy. However that would require the

substitution of market competition with a system based on scientific planning.

The boom-bust cycle is the result of the unplanned nature of capitalist production. With

decisions about production left to boards of directors, there is no real forecasting of the

ability of a population to buy goods. The competition between corporations leads to

a very quick advance in technology, making the cost of production ever cheaper. For

the capitalist, it is an advantage to produce goods as quickly as possible, regardless

of the prospect of selling them. That way your product is at the point of sale before

the competition’s. However, at the same time as companies jockey to produce goods

ever more cheaply, by introducing labour-saving technology, they reduce the ability of

workers, as consumers, to buy the goods.

This results in unsold inventories — a crisis of overproduction. Very quickly, the goods

have to be sold at a discount, as companies run out of cash to fund their operations.

The crisis worsens and eventually the goods are sold at a price below the cost of

production, or not at all. Companies fold, more workers are thrown out of work, and

the crisis intensifies. The bust cycle continues until the devaluation of capital (plant

and machinery) in an economy falls to a point where it becomes possible to re-enter the

market. But this period can last years, like the 23 year long recession that plagued the

United States in the mid-19th century.

In the meantime, millions of people are condemned to poverty and starvation. So much

for the myth of continuous expansion! Every market collapse on record can be explained

this way.

Speculation hastens collapse. The unplanned nature of the market economy means that

the risk of failure is largely unknown. Market prices might fall before goods can be sold

at a profit. For example, a competitor with lower production costs could undercut a rival.

Shipments can be lost at sea. Political developments half a world away can disrupt supply

chains. This requires insurance, which has been the underpinning of commerce for 5,000

years (see “Public Liability Crisis: insurance for profit is a fraud on society,” Freedom

Socialist Bulletin No. 27, Winter/Spring 2002).

Market speculation, on the other hand, is a capitalist phenomenon based on protecting

one’s holdings against an adverse market. Put simply, speculators bet on a market level

and enter into arrangements to protect their position. This acts to distort the market as

they put their money on the next best thing, and has turned share markets into globalised

betting rings. The crash of 1929 was worsened by speculation on the market as a

whole. Massive wagers on technology companies, which drove their share prices to

ridiculous levels, preceded the crash of 2002. Uncontrolled gambling in mortgage-related

debt preceded the present downturn. The underpinning crisis of overproduction was

exacerbated by the almost instantaneous evaporation of credit.

Inexorable trend. There is a reason that speculators are driven to bet on the latest market

fad. As long as the market has been measured, there has been a decrease in returns on

investments. This constant fall in the rate of profit is an inherent feature of capitalism.

It arises from a principle first stated by the Scottish economist and philosopher, Adam

Smith, in his 1799 work, The Wealth of Nations. He writes:

“The real value of all the different component parts of price, it must be observed, is

measured by the quantity of labour which they can, each of them, purchase or command.

Labour measures the value not only of that part of price which resolves itself into labour,

but of that which resolves itself into rent, and of that which resolves itself into profit.”

It’s a principle adopted and refined by Karl Marx and other socialist economists. The key

refinement is this: labour must be the equivalent of average, socially necessary labour.

That’s the labour needed to make something today, using the best available technology.

So, for example, the socially necessary labour time in each mass-produced car is a tiny

fraction of the time to make the same vehicle by hand. Hand-made cars are now confined

to so-called “prestige” consumers, prepared to pay for the extra weeks of labour time. A

company employing more than the average socially necessary labour will soon go out of

business. The price of labour — wages — is the greatest part of the cost of production,

averaged across all industries. In order to maximise profits, there’s a constant race to

lower this cost by technological innovation and salary cuts.

Here, then, is the central contradiction of capitalism. Because labour is the measure of

value of commodities, a general reduction in the labour applied to commodities means

a proportional reduction in their value. Since price is the expression of that value on the

market, the average price of commodities also falls. The average price of labour also falls

due to unemployment on the one hand and wage cuts on the other. Goods produced at last

year’s costs must be sold according to today’s market. Worse still, the factory and plant

must be paid for, usually on credit, or, less commonly, out of cash flow. It’s a downward

spiral.

Individual capitalists can buck the trend by taking new products to market. But, taken

across the world economy as a whole, year after year, the rate of return on capital

investment edges lower.

It is this process that leads to speculative bubbles. The big profits can only be made

through market manipulation, gambling and, less commonly, outright fraud. It also helps

if one can take a punt with other people’s money.

In the end, greed plays little part in crashes like this one. It’s just the inevitable by-
product of the capitalist system itself.

No bailouts! The collective hypocrisy of the corporate world and its apologists is

revolting. The working class is meant to take on all the risks, through injection of

government funds. The big end of town wants to escape with its fat profits largely intact.

No way!

The savings, homes and pensions of working people must be guaranteed indefinitely.

We are not responsible for the bust! Let the banks, the stockbrokers, the insurers and the

speculators go broke. They contribute nothing to the real economy of production and

consumption.

The predicament of the car industry is entirely of its own making. For years, companies

have produced vehicles that people don’t need and don’t want to buy. No matter that the

price of oil has fallen for the present. Consumers want cars that are economical to run.

Let the shareholders wear the cost by nationalising the industry — here and in the U.S. —

under control of the car workers. Then use the confiscated plants to construct practical,

sustainable vehicles. It’s a far better use of taxpayers’ money.

The Rudd government probably had no option but to spend $22 million in its emergency

intervention to keep ABC Learning centres open. The previous government carried

out the privatisation of childcare. The issue is that it must take the obvious step of

renationalising the whole sector and expanding it to meet demand. Childcare is too

important to the working people of this country to be run for profit. The women of

Australia are then freed from the spectre of being forced out of the workforce through the

chronic lack of places. But only if another condition is met — pay childcare workers a

living wage!

Not immune. The idea that Australia’s economy could be cushioned by demand from

China is false. Despite its vast population, expansion of the Chinese economy has slowed.

Shipments of iron ore and coal have been delayed and nickel mines mothballed in

Western Australia. It may be true that the country will avoid a recession. But that’s just

an economist’s technicality, meaning nothing when standing in a dole queue or waiting in

line at a soup kitchen.

People are beginning to feel the pinch. As the housing market rapidly contracts, 600,000

families face the prospect of owing more than the sale price of their houses. Hundreds

of jobs are disappearing every week, despite the labour shortage in key industries. It is

unacceptable that the market is still permitted to dictate investment decisions. Even many

mainstream economists have declared that neoliberalism is a failed philosophy.

Of course, what they refuse to see is that this failed philosophy underpins a chronically

flawed economic system.

Capitalism will not just fall over. It is still necessary for a mass uprising to push it over.

But there are actions we can demand of government to mitigate the crisis. Stop corporate

bailouts and indiscriminate cash handouts. Governments must fund infrastructure projects

to create new, productive jobs and provide full training to laid-off employees of bankrupt

companies. If that’s not enough, they must reduce the working week, with no loss of pay,

until the demand for jobs is met. Tax corporations to fund the spending.

Big business is happy to take profits when times are good. The rich caused the mess —

let them pay for the cleanup.

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