THE UNKNOWABLE CONSEQUENCES of likely US military action and its repercussions make it difficult to predict the trajectory of the world economy. Nevertheless, it is already clear that the events of 11 September will reinforce and aggravate the serious worldwide downturn into which the global economy was already rapidly sinking. In periods of sustained economic upswing, the US and other major capitalist powers can sustain a serious shock and bear the economic overheads of a costly strategic response. Dealing with a similar crisis in a downturn, however, is a different matter.
This crisis has hit the US as it was already facing serious economic difficulties. Since the beginning of 2000 the US economy has been steadily moving towards a recession, probably quite a deep recession even without the recent events. This was not merely a cyclical downturn, but reflected the undermining of the conditions which gave rise to the 1980s boom and the even bigger boom of the late 1990s.
The recent boom was driven by financial speculation, unprecedented levels of debt, and a heavy dependency by the US on an inflow of capital from overseas. Even before 11 September the strategists of US capitalism were at last beginning to grapple with the serious structural problems which have developed. Only the continuation of a relatively high level of consumer spending, just beginning to be eroded by the development of unemployment, especially in the manufacturing sector, held the economy back from a sharp slump.
Despite falls on the stock exchange since the collapse of technology stocks in March last year, shares remained overvalued in relation to company profits, which have been sharply falling. Even without the knee-jerk reaction to the attacks on New York and Washington, there would have been further falls, possibly sharp falls at a certain point. Not surprisingly, the attacks brought the biggest stock exchange falls since 1929-31 – inevitably echoed by similar falls on stock exchanges around the world. These falls will wipe out a large share of the so-called ‘wealth effect’, the propensity of investors to invest more and consumers to spend more on the basis of the growth of their financial (and property) assets. Share prices, moreover, are only likely to recover on the basis of a general revival of the economy, and currently indicators are pointing in the opposite direction.
In response to the crisis, the Federal Reserve immediately pumped in $38 billion of liquidity, and this was followed by similar injections by the Bank of Japan, the European Central Bank, the Bank of England, and others (altogether totalling $120bn). This staved off an immediate collapse which could have resulted from a chain reaction of payments failures due to the suspension of trading in New York and a cash flow crisis for many finance houses. Central banks will undoubtedly be prepared to pump in more liquidity if required. This in itself, however, will not necessarily revive economic activity generally unless there are broadly favourable conditions.
Another prop of the late 1990s boom was the historically high levels of business, housing, and consumer debt. This is now a structural problem, as many businesses and households are finding difficulty in servicing their debt. Lower interest rates may ease the burden to some extent, but people who fear the future are likely to concentrate on paying-off debt rather than spending more.
During the late-90s boom, the dollar rose to be at least 20-25% overvalued. The US economy, through sucking in a growing volume of imports, especially from the cheaper East Asian countries, piled up a huge trade and payments deficit. Normally, such a deficit would depress the value of a country’s currency. This was counteracted, however, by the huge, unprecedented inflow of capital into the US to grab a share of the profits available during the boom. The high dollar (besides financing the USA’s net foreign debt) enables US businesses and consumers to purchase foreign goods at a considerable discount.
There are widespread fears amongst the strategists of capital, however, that the high dollar cannot be sustained for much longer. It would not be surprising if the US is no longer seen as a ‘safe haven’ for investment. Since 11 September, the Bank of Japan has been buying dollars in an effort to sustain the dollar and push down the value of the yen.
A sharp fall in the value of the dollar would have a devastating impact on the US economy. There would be a flight of capital from the US, and US capitalism would no longer be able to sustain the current level of trade/payments deficit. Unless it could dramatically increase exports (difficult under conditions of world recession), it would have to drastically cut imports. Undoubtedly, many sections of capitalists would demand protection of their industries and also some kind of capital controls.
THE MOST IMMEDIATE impact of the attacks was on the airlines, which face devastating losses and even bankruptcy. Before 11 September, US airlines were being forecast to make a combined loss of up to $3.5 billion this year. Now the losses are expected to be at least $7-10 billion. Anticipating a drastic reduction of passenger-journeys, the major US carriers are cutting their capacity by at least 20%, which could mean over 100,000 job losses in the US and internationally.
The airline bosses went to the president and Congress requesting a $24 billion rescue package in the form of tax relief and guaranteed loans. The administration is offering about $17.5 billion. It cannot be ruled out that one or more of the US airlines will be forced into bankruptcy. One problem is that insurers are now refusing to insure the carriers. Airlines all around the world will face a big loss of business, together with extra security and insurance costs, and many have already announced massive job losses.
Clearly, there will be less demand for new aircraft. Boeing has already announced a output cut of more than 20%, which will mean between 20-30,000 job losses from a total civil aircraft workforce of about 94,000. This will have a knock-on effect on the 3,000 companies around the world that supply Boeing’s commercial aircraft production.
Major insurance companies will suffer huge losses as a result of the destruction on 11 September. Currently, total claims are expected to be $5 billion, but this will probably rise. Commentators are warning that this could put a ‘crippling’ burden on insurance companies, including Lloyds of London.
After the attacks, the benchmark price of crude oil rose by more than $3.50 per barrel (13%). The price soon went down, however, as the leaders of big producers such as Saudi Arabia and the United Arab Emirates promised that they would increase production in order to meet demand (which will, in any case, be reduced because of the recession). The price of oil, however, has already tripled since the slump in prices following the Asian crisis in 1997-98 – which has contributed to the recent world slowdown. Escalating conflict in the Middle East could easily provoke further rises.
A continuation of the US recession, and especially a deepening, will have a devastating effect on the rest of the world economy. Over the past five years, the US economy generated two-fifths of the increase in global demand. With near-zero growth in the first two quarters, and negative growth predicted for the third quarter (even before 11 September), the US motor has stalled. In its latest draft Outlook, the IMF comments: "Over the last four quarters the major advanced countries have for the first time since the early 1980s experienced a broadly synchronised growth slowdown". (Financial Times, 19 September)
Japan has moved into its fourth recession in the past ten years, with an annualised second-quarter downturn of 3.2%. Since the beginning of the year, growth forecasts for Europe have been continually revised downwards. The crises in Argentina, Brazil, Turkey, together with the slump in a number of East Asian economies, point to the spreading contagion.
Even before the attacks, there was a marked slowdown in global foreign investment flows (which are mainly between the advanced capitalist countries). According to the United Nations Conference on Trade and Development, investment flows will slump by 40% this year, from a record $1,270 billion in 2000 to $760 billion. This is the first drop since 1991, and is mainly accounted for by the fading of the corporate merger boom which reached its peak last year.
Foreign direct investment to ‘developing countries’ is expected to fall 6% this year, from $240 billion in 2000 to $225 billion. Taking into account the outflow of capital from underdeveloped countries, however, the picture looks much worse. The net capital flows to so-called ‘emerging market economies’ fell from $233 billion in 1996 to a mere $2 billion last year. (Financial Times, 19 September) Capital flows were undoubtedly the dynamo of globalisation, and the sharply reduced flows suggest that the recent phase is now reaching its limits. Reduced investment and the flight to capital from crisis-torn economies, will make much lower growth rates inevitable. That raises the possibility that states faced with a slump, or even economic collapse, will take measures to protect their national economies from trade and capital flows, as Mahathir did in Malaysia in 1997.
In the aftermath of 11 September, for instance, the US Federal Reserve imposed a premium on hedge funds which needed Fed loans in order to speculate on the reopened stock exchange. What was this if not a form of US Tobin Tax on financial transactions? Calls for the US government to take action against terrorism, guarantee airport security, etc, has turned attention back towards the role of the state. The heroic role of the fire-fighters (paid only a faction of market-traders’ salaries) in the rescue operation in New York is a reminder that market forces have their limits.
There is a growing awareness beyond the anti-globalisation movement that the forces of neo-liberal globalisation have helped create the conditions which gave rise to the appalling attacks on New York and Washington. Commenting on this, Hamish McRae, a fervent supporter of neo-liberal policies, laments: "It is possible that 11 September 2001 will prove a turning point: the start of a gradual clamping down of the international movements of trade and money, a gradual retreat from an interconnected world. Isolationism in America could be matched by retrenchment in Europe. If this were so, the decade between the collapse of communism in Eastern Europe and yesterday’s catastrophe will seem like a brief golden age". (Independent, 12 September)
Trigger events & underlying causes
DESPITE THE DEVELOPING symptoms of recession for many months before 11 September, the seriousness of the economic situation had not yet hit wide sections of the US public. The benefits of recent wage increases were still coming through, while inflation and interest rates were low. Workers were only just beginning to be hit by unemployment. As a result, many will see the terrorist attacks as the cause of the economic crisis. There may be a feeling that if the US government takes effective measures against terrorism and restores ‘confidence’, the economy will soon revive. The real situation is more complex.
One historical analogy is the oil ‘shock’ in 1973. The overnight tripling of oil prices by the Opec producers undoubtedly triggered a world slump in 1974-75. In effect, that downturn marked the end of the long post-war upswing. Wide sections of the public, and not a few economic commentators, saw the oil-price rise – an external shock – as the real cause of the crisis.
There is no doubt that the oil-price rise was an economic shock that pushed the world economy into a slump, which in turn accelerated the unravelling of the post-war economic order. But it was a trigger event, which itself arose from underlying economic and political causes. A big factor behind Opec’s decision to raise prices, for instance, was the effect that high and rising inflation had on the real price they received for the oil exports. There were clearly political causes as well, most immediately the 1973 ‘Yom Kippur’ war between Israel and Egypt, which provoked the Arab states and Iran to mount an embargo of oil exports to the West. The Arab-Israeli war was, in the broader sense, just one of a series of armed conflicts and political convulsions that marked the end of the upswing period. Uneven economic development, with a sharpened polarisation of wealth both between states and within societies was a major factor – as in the last period of neo-liberal globalisation. The unpredictable interaction of economic crises, political turmoil, and armed conflicts has always characterised the opening of periods of heightened international crisis.
War & the economic cycle
SOME FINANCIAL GURUS are consoling their clients with the thought that wars are often good for business. It is certainly true that when the New York Stock Exchange reopened on 17 September, amid the general collapse of share prices, shares in arms companies like Lockheed soared. It is also true that after initial knee-jerk reactions to the outbreak of the second world war and also of the Korean war, shares recovered and steadily rose in value (though not to the astronomical heights of the late 1990s). The performance of the economy, however, which determines the performance of shares, depends on the overall economic situation.
The second world war, which did not directly hit the US, meant good business for US capitalism, which supplied its allies with goods and raw materials. In reality, the ‘post-war’ boom began in 1940 in the US, with a rapid acceleration of production and profitability. US capitalism had more than enough resources to finance its war effort. The Korean war also provided a stimulus to the US economy as it took place under conditions of a general upswing in the advanced capitalist countries. Military expenditure also provided an important stimulus to the Japanese and the Southeast Asian economies, launching them on a path of rapid industrial modernisation.
The Vietnam war, however, was completely different. Though US intervention began in the early 1960s, the massive US military build up took place after 1968. That year marked a turning point in the post-war upswing, when productivity and profitability began to slow down. High military expenditure exacerbated the problems of US capitalism, giving rise to inflationary pressures which spread to the rest of the world economy. In response to the growing economic difficulties, Nixon in the early 1970s took a series of steps (including taking the dollar off its gold peg and allowing it to float) which dismantled the Bretton Woods international economic framework. The course taken by Nixon opened up a period of international economic dislocation, accelerating inflation and political turmoil. The door was opened to the process now known as globalisation.
The post-September 11 situation is much more likely to resemble the Vietnam war period than the second world war or Korean war periods. The current military-strategic crisis comes when the international economic ‘regime’ which emerged in the 1980s and was consolidated in the 1990s was already beginning to unravel after the Asian currency crisis of 1997. Even at the height of the 1990s boom, neither the US nor other advanced capitalist countries managed to attain the levels of output and productivity growth achieved during the long post-war upswing. Moreover, the US leadership has declared ‘war’, but the US does not face a defined enemy that can be confronted according to a strategic plan. The network of terror groups it faces are much more like the Viet Cong, but not even located in a single territory. The incalculable consequences of military action in this situation, together with the possibility of further unpredictable terrorist attacks, creates a climate of extreme uncertainty which, apart from any physical damage, inevitably undermines normal economic activity.
It is likely, moreover, that the terrorist threat will be used to justify across-the-board increases in military spending, including absurd projects like the national missile defence system. Some strategic experts are calling for the defence budget to be raised from the current $290 billion to over $400 billion. This will place an enormous additional burden on the federal state’s finances, at a time when the downturn is already wiping out the federal budget surplus. The government will be forced either to raise taxes and/or cut social expenditures, plunder the social security (pension funds), borrow extra money, or print money to meet the bills (thus increasing inflation).
Reagan embarked on a massive arms spending programme, which gave a big stimulus to the US economy in the 1980s. When the US launched the military attack on Iraq during the Gulf war, it could draw on its already existing stockpiles of weapons – and then sent the bill to its allies, primarily Japan and Germany. The legacy of that ‘military Keynesianism’ was a massive federal budget deficit. Fortunately for Clinton, the growth of the late 1990s enabled his administration to pay off the deficit. George W and his immediate presidential successors, however, are very unlikely to face such a favourable economic conjunctur