Threat of deepening global crisis Elusive solutions

DILLI RAJ KHANAL

Despite revival of the global economy being faster than expected in the aftermath of the great financial crisis of 2008 with average growth rate rebounding at 4 percent in 2010 after the sharp fall by 2.5 percent in 2009, it was, however, fragile and far from added risk. Now corroborating such a fear, recent trends indicate that unlike earlier forecasts of 2.6 percent, the growth of the global economy in this year 2012 will be even lower.

The US economy is expected to grow by only 1.4 percent in this third quarter. There are reports that UK economy has already gone into recession. Despite massive bailouts, depression in both Greece and Spain is continuing with additional toll on already affected global economy. Now, added by many internal problems, China and India are expected to register 7 and 6 percent growth respectively in 2012 unlike the earlier projection of 8.7 and 7.7 percent. There is a fear of chain type effect as they contribute almost 50 percent of growth in the global economy today.

Most typical phenomenon is that along with continued rebounding of money, share, commodity and bullion prices surpassing the pre-crisis level of 2008 in all capitalist countries except in some Euro Zone countries, the threat of deep recession has mounted. Aggravation of structural problems amidst ongoing debt crisis together with contradictory or opposite policies enhance the possibility.

It is clear that the global crises that began in the early 1970s originated from the US as it is the epicenter of today’s dominant economic system. Today’s debt crisis as a culmination of great financial crisis has its roots in the policies of macroeconomic imbalances pursued in the aftermath of 2000 crisis leading to massive increase in the US debt as a part of funding unthinkable budgetary and trade deficits. This is apparent from the US data. Between 1960 and 2007, total debt of the US jumped by 64 times compared to 27 times rise in the GDP. Interestingly, financial debt increased 490 times as against household and government debt by 64 24 times respectively. This means, the root of the problem was the financial not government debt as is often argued. The crisis in Greece also originated similarly.

Such a course was used to counter the crisis emanating from continued decline in the productivity of the real sector leading to fall in the rate of profit and real wages with emergence or aggravation of under-consumption led crisis. As such, formation of unreal or fictitious capital augmented with increased bubble in property prices and hence the gap between the financial and real sector widened adding the risk of anytime bust. This is the main problem faced by today’s financial capitalism. In the US overconsumption was made possible amidst stagnating income and wages. For instance, the personal consumption rose from about 60 per cent of GDP in 1960s to 72 per cent in 2007 supported by household debt. Today, along with continued rise in debt, stagnation in the real sector and very high unemployment, the rebounding of equity or property prices is persisting. The increased recessionary trend, however, indicates that such a paradox can not continue for long.

The unprecedented rise in inequality is the biggest stumbling block. The inequality in US has reached higher than the pre-Great Depression level. Beyond half of the overall economic growth of 1993 to 2006 captured by 1 per cent of income earners, three quarters of income growth was captured by them under the Bush administration. Contrarily, between 1990 and 2005, the federal minimum real wage fell by 9% against 298 percent rise in CEOs’ average compensation.

Speculation and financial bubble and then bust inducing policy course instead of being a sustainable solution has now become instrumental to aggravate stagnation. Moreover, the way the strong anti-working class austerity policies are being dictated as evident from Greece, Spain and many other countries, it is bound to deepen depression or aggravate crisis globally. As is well known, the exploitation of workers is being intensified to transfer surplus of productive capital to remunerate fictitious capital. Therefore, without alternative course of re-launching a cycle of expansion of productive investment at the centre of the world system, the solution to the crisis emanating from gigantic amounts of fictitious capital seems to be impossible. Generally, this will require destruction of fictitious capital which will not be possible in a given dominant system threatening the risk to the capitalism itself.

But the ground reality is such that now, unlike 2008, it is almost impossible to introduce mammoth bailouts programs to the big banks in the present debt crisis situation. Similarly, augmentation of anti-working class policy is bound to raise inequality more with added problem of under-consumption leading to deepening of crisis further as recent trends indicate toward such a possibility. Therefore, the likelihood of contradiction between the labor and capital is mounting as events in Euro Zone and many other countries point out. For countries like Nepal, it is instructive to derive some important policy lessons. As such, it is necessary that our economy is insulated from the whims of the speculation driven global financial capital for strengthening sustainable path of development.