The Roots of Capitalist Crisis - Part 4:
The Impasse of Globalization

Once again, capitalism's "miracles" lie bleeding on the floor. For the last 20 years, the fast growing economies of South-East Asia were held up as the living proof that capitalism has a bright future, that there is a way out of the misery spreading over the world, if only the Asian example of hard work, high savings and hospitality to international capital is followed everywhere. Now the very same "experts" who were gushing over Asia's promise, have turned their former models into scapegoats, blaming the turmoil in Asia on local corruption and ineptitude, all the while proclaiming that, for capitalism in general and the US in particular, "the fundamentals are strong" and the economic prospects are "healthier than ever". The Asian crisis poses no real danger, so they reassure us, it's no more than a slight bump on the road; its effect is even beneficial, according to the Wall Street Journal, "a pause that refreshes". It's a fitting irony that, at the very same time, a movie about the sinking of the Titanic is breaking all records in movie-theaters around the world. Just as the owners of that technological marvel were confidently stating that their mighty ship was unsinkable, just as President Hoover declared on the eve of the crash in 1929 "our situation is fortunate, our momentum is remarkable", today's Panglosses are reassuring the world that there is no iceberg that can sink the mighty ship of global capitalism. The "experts" are fiercely debating whether the Asian crisis was caused by too much or too little control over the financial markets, but while there's no lack of arguments on either side, both are missing the larger point: different policies would have altered the form in which the crisis in Asia would have unfolded, but none would have prevented it. And we haven't seen anything yet. Dear fellow passengers: the crisis in Asia is only the tip of the iceberg.

Condemned by its own Law

In "The roots of capitalist crisis" (IP 30-31 and 32-33), we laid out the framework to understand why the global economy is doomed to collapse. The events in Asia since July 1997 confirm this analysis, which allows us to see how the drama will further unfold. What we are witnessing is not a local crisis, but an acceleration of the historic crisis of a mode of production which has survived the conditions that made it historically necessary, which has become obsolete and must be cast aside for humanity to survive. Capitalism is a child of history, of the conditions in which human civilization grew up. These conditions implied the constant presence of scarcity, a quasi-permanent shortage of supply in relation to potential demand, inevitably resulting in want for the many and wealth for the few. They implied that wealth could only be the product of the surplus labor of the many, of work done on top of what's strictly necessary to survive, so that the growth of wealth - and thus the development of society - depended on the growth of labor productivity, or the growth of the surplus labor that could be stolen, and therefore on exploitation, on an increasing division of labor. They implied trade governed by the law of value, basing the exchange value of commodities on the average labor time required for their production.

Capitalism, by turning labor power itself into a commodity, has pushed its exploitation and specialisation to the hilt, and has thereby developed labor productivity, and thus civilisation, as far as it can go under these conditions. Yet while it remains irrevocably imprisoned by them, it has developed the productive forces to a level on which they have become incongruent with these conditions and rebel against them:

Applied science and technology have replaced the theft of surplus labor as the great well-spring of real wealth, yet capitalist wealth remains determined by the law of value, which measures wealth in labor time. That explains the contradiction which bourgeois economists and pseudo-marxists find impossible to comprehend: the more efficient modern production methods become, the more general wealth (use values) they can produce with less direct labor time, the less capitalist wealth (exchange value) they proportionally generate, and thus the more the profitability of capitalist production as a whole declines (even though this tendency is masked by the fact that the most efficient producers generally obtain the highest profits, because of their competitive advantage).

Production for profit not only is born out of scarcity, it absolutely needs it. Capitalism cannot function when global supply overshoots demand. Yet competition forces capitalists to use ever more powerful technology to lower production costs and thereby to create oversupply, while simultaneously diminishing productive demand, by reducing the number of producers required in the production process.

Its very success dooms capitalism to economic collapse. It has created the impossibilty of maintaining relative scarcity and the impossibility of basing real wealth on exchange value. We have seen in "The roots of capitalism's crisis" how this creates a dynamic in which the decline of the average rate of profit and market saturation reinforce each other. We have also seen which counter-effects check this dynamic and how their relative exhaustion makes production for profit increasingly difficult, for many capitals even impossible. This creates, then, a growing tendency for capital to shun long-term investment in production and to seek shelter outside of the productive sphere, in financial assets which for a variety of reasons provide the hope of escaping the tendency towards devaluation which inevitably results from the sagging profitability of capital as a whole. For these assets, as for any commodity, the law of supply and demand applies: because the demand for them rises, so does their market-price. Their increasing price seemingly confirms their capacity to withstand the downward trend and so they attract even more capital, which again pushes their price up, and so on. Bubbles develop which must explode at some point (when the gap between the exchange value attributed to them and the exchange value created in the real economy which feeds them becomes untenable); at which point money itself - exchange value in its most general, abstract, form - must massively devalue. Then the entire chain of payments, the nervous system of capitalism, threatens to become paralyzed so that production itself is facing collapse. When such a collapse is limited to a minor economy, it can be easily contained. When it hit Mexico in 1994, a 50 billion dollar emergency loan sufficed to stem the panic and stabilize the financial institutions. A massive devaluation of the peso and Mexico's priviliged access to the American market allowed it to export its way out of the danger zone (while the already low living standards of the Mexican working class - and even more, of the peasants and others marginalized by the global economy - took a plunge). The Asian collapse was already of a different order. It required more than four times as much emergency-aid (most of it coming from the IMF which was forced to make its largest loans ever and whose reserves are now dangerously low) to calm the waters, and even then South-Korea and Indonesia remain at the brink of massive default. It was different also in its exposure of fault-lines that run towards the centers of the world economy, most notably Japan. Still and all, the so-called "Tiger" economies play too limited a role in the global economy for this crisis to be an immediate threat to it. There would be no fundamental problem if this were only a local crisis. But it is not - and the mechanics of this crisis show it will recur again and again, each time becoming more threatening to the global capitalist economy.

From Hyper-Inflation to Deflation

When the post-war expansion period, made possible by the devaluation and destruction of existing capital in world war and the extension of the playing field of developed capital following the reorganisation of the world economy after the war, ran into trouble at the end of the '60s, most governments confronted the re-appearance of glutted markets and sagging profit rates with frenetic attempts to keep their economies growing by pushing the pedal of money creation all the way to the floor. By the end of the '70s, these policies had led the world economy to the brink of hyper-inflation. While the growing unpredictability of circulating money's future value inhibited investment and trade, thereby threatening global depression, speculative bubbles developed as capital sought refuge in financial assets like gold and foreign debt and in a wildly growing money market, where giant fortunes were made just by shifting capital from one currency to another. A change of course was imperative and had to be led by the US, given the dollar's position as the international currency. By sharply curtailing the growth of the money-supply and thus of credit, the US brought inflation under control but also triggered a deep, international recession, from which most of the underdeveloped areas of the world never recovered. In particular Latin America, which in the '70s had become a favorite investment-zone for Western capital looking for alternatives to its saturated home market, was brought to default by the sudden contraction of its export market and the devaluation of their currencies in relation to the dollar. Another bubble exploded, another "miracle" hit the floor. But the strongest countries, the US in the first place, were still able to stimulate their economies through massive deficit spending, without re-igniting inflation.

Japan, which had stuck to prudent financial policies in the '70s, did not join this orgy of debt-creation. It didn't have to, because it was well positioned to take advantage of the market-stimulating policies of others. In the decades after world war II, Japanese state capitalism, with the implicit approval of the US, had created a double economy: one serving only the domestic market, the other geared mostly towards export. The first, about four fifths of the Japanese economy, was largely sheltered from competition, from foreign competition through implicit and explicit forms of protectionism, and from domestic competition through state-directed price-fixing and other means. This created a relatively backward domestic economy, with high production costs and low productivity growth. It was unable to compete internationally but because it didn't have to, its backwardness was turned into a relative advantage: its inefficient, labor-intensive production methods (in Marxist terms, its low organic composition) kept the employment rate high and stable and provided a relatively high rate of profit and thus a high rate of savings which were siphoned off, through the tightly controlled banking system, to the sectors selected by the state to compete internationally. While some of these sectors ran into the same problems of overcapacity which plagued other countries (e.g., steel, ship building), others (cars, telecommunication, semiconductors, consumer electronics...) were well chosen for the elasticity of their markets. In conditions of generalizing overproduction, the excess supply accelerates the decline of the average rate of profit. Therefore, developed capital constantly seeks markets in which demand exceeds supply, allowing the seller to make a surplus profit. That means sectors in which a high rate of technological innovation constantly creates new, qualitatively better commodities and especially commodities which affect the production methods of others (1). While all developed capitals seek a dominant position in those sectors, Japanese capital succeeded particulary well in expanding its share, thanks to a state capitalist industrial policy which creamed off surplus value from the whole Japanese economy and directed it towards these priviliged sectors and to their constant improvement, at the expense of the development of the rest of the economy.

As a result, Japanese exports, already strong in the '70s, rose spectacularly in the '80s. Japan was raking in huge trade surpluses with all other countries but especially with the US, whose policies (tight money pushing up the dollar, thereby cheapening Japanese imports; and big tax cuts stimulating consumption by the wealthy) played right into Japan's hands. This was not without benefits for the US, since a huge chunk of Japanese profits was spent on US-securities, thereby financing America's deficit spending and pushing up the value of other American financial assets. Elsewhere in the world, Japanese capital exports also rose. Yet Japan's deep penetration of the best parts of the world market inevitably provoked reactions from its competitors. The US and Europe adopted import quotas for Japanese cars and some other commodities and in 1985 (the Plaza accord) Japan was forced to double the value of the yen and thus raise the price of its export products, and to make other concessions aimed at prying open Japan's domestic market. As a result, Japan's growth began to cool off. Instead of expanding their home base, Japanese multinationals began to move a large part of their manufacturing (about 10 % of Japan's industrial capacity) abroad, to get around import restrictions and the high yen, and also, to take advantage of low wages abroad. The other South Asia economies were the primary benificiary of this tactic. To counter-act the chilling effect on the domestic economy and to prevent the yen from rising higher, the Japanese central bank pushed interest rates down. But with a saturated home market where competition was tightly restricted, there was not much prospect for profitable investment in Japan's domestic economy. Yet there was a lot of money to invest. The Japanese export-sector was no longer expanding but was still making large profits, competing now more on quality than on price; and the low rates greased the flow of money. But where to invest it profitably? With the prospects of profit from expansion of production dwindling - Japan was awash in excess capacity - Japanese capital owners went on a buying spree, almost indiscriminately purchasing real estate, stocks, bonds and other financial assets both at home and abroad. Their surging demand accelerated the upward trend of financial assets, making investing in them instead of in the real economy even more attractive. After the New York stock market crash in 1987 more Japanese capital stayed home, again raising demand for, and thus pushing up prices of, financial assets, now to absurd levels. In 1990, real estate values in Tokyo alone, were deemed to be three times the worth of all land and all buildings in the US and "the value" of the Imperial Palace was as high as of that of the real estate of the entire state of California. The value of the shares traded on the Tokyo stock exchange rose from 91.9 trillion yen in 1981 to 611 trillion in 1989, an increase of about 4 trillion dollar in "new wealth". What makes such a bubble of fictitious capital so dangerous, is that it does not exist outside the real economy but is tightly interwoven with it. Inflated real estate is used as collateral for buying new plant equipment, pension funds or invested in overpriced stocks and so on. When the bubble bursts, the entire economy is in danger of crashing.

The bubble burst in 1990, when the world economy was approaching a new recession which further reduced the prospective earnings of the Japanese export-machine. Ironically, the explosion was triggered by an attempt of the central bank to rein in the bubble's inflation, by raising interest rates. Japanese capital massively devalued. The stock market lost half its value; real estate went down by more than two thirds. Overnight, assets turned into liabilities and Japan's mighty banks were suddenly awash in a sea of red ink. But because of Japan's enormous financial reserves the currency, while going down, did not collapse. The Bank of Japan could afford to protect private banks and did not allow any big financial institution to sink, fearing a chain-reaction that would drag the country into a depression. All the right measures - tax cuts, increased deficit spending, low interest rates - were taken which according to the textbooks, should revive the economy, but they didn't. The Japanese economy has continued to stagnate ever since, because the basic outlook - the lack of profitable expansion potential for an economy which already has a massive overcapacity and little prospect of widening its export market - hasn't changed. So the crash, and the measures to contain it, stimulated Japanese capital to seek profits abroad even more. More than 265 billion dollars of Japanese capital was poured into South East Asia, both to expand Japan's manufacturing base there and as loans to local capitals, taking advantage of the spread between the extremely low Japanese interest rates and higher ones abroad.

The Push for Globalization

The global recession of the early '90s resulted from the gradual exhaustion of the attempts of capitalism to overcome its contradictions by stimulating the economy through debt-financed deficit-spending. Government debt had risen on average 9 % a year across the OECD countries (developed capital) during the '80s, more than three times faster than their economic output. The rise was most spectacular in the US, where public debt quadrupled and the overall (public and private) indebtness of the economy rose from 4.2 trillion dollars to 12.1 trillion. As a result, a growing share of the income of consumers, companies and the government went to interest-payments, which in 1990 swallowed almost a quarter of the federal budget and 61% of the gross earnings of US-corporations (as opposed to 35% in the '70s). This left them with less to spend and forced them to cutbacks which triggered the recession.

But the US used the occasion to accelerate the restructuring of its capital already begun in the '80s, liquidating less efficient factories and services and integrating new information technology at a rapid pace, merging companies into stronger, bigger units. This caused mass lay-offs which compounded the chilling effect of the efforts (tax hikes and sharp spending cuts) to reduce the budget deficit, but eventually it improved US capital's competitive position considerably. American capital emerged more concentrated, more productive and more dominant in the most profitable markets (computer software, for instance, became its third largest industry). Other developed capitals followed the same course, but, for a variety of reasons, at a slower pace (except Britain). Besides, none of them had the American advantages of a giant home-market and control over the global currency.

The global effect of the accelerated pace of automation and other tecnological innovation in the '90s, could only be an aggravation of the basic contradictions at the roots of the crisis. By increasing productive capacity and shedding workers it exacerbates the market contradiction; by reducing human labor in production it also reduces the general rate of profit. Yet by widening the productivity-gap between the strongest capitals and the rest, by altering the shape and content of the world market, making production everywhere more dependent on new technology, the same development also increases the share of the strongest capitals in the global market and gives them a competitive advantage that boosts their profit rate.

The same worsening of capitalism's global contradictions which triggered the puncture of the Japanese bubble and the recession of the early '90s also caused the implosion of its Russian bloc. Collapsing under the weight of unproductive spending, seeing its technology and productivity gaps with the West widen at an alarming pace, and unable to launch a global war-effort, Russian capital was forced to give up (at least for now) its global imperialist aspirations, which soon also led to the abandonment of the Stalinist system of control and of its semi-autarky.

This widening of global capital's playing field coincided with a number of political and economic developments working in the same direction:

This globalization obviously benefited the strongest capitals, whose advanced productivity and dominance of the most profitable sectors gave them a competitive edge in the widened global market. But it also benefited capitals in underdeveloped areas which were best positioned to win a place in the global assembly line. Both saw their profits and thus their buying power increase and their increased spending created work and profits for others. The victims of globalization were those capitals, and thus the many millions of workers they employed, and peasants and others who couldn't compete in the global economy. But how does this acceleration of globalization affect capitalism's underlying contradictions? The effect changes over time. Initially, it boosts the general rate of profit and widens the global market. But that doesn't last.

The rate of profit initially rises, because the globalization of the labor market not only widens access to cheaper labor, but also because it allows capital to play off different labor markets against each other, using the threat of moving to keep wages down everywhere. So the rate of exploitation increases and, with it, the average profit-rate.

As we've seen earlier, this is not the only reason why profits rose for the strongest capitals in the '90s. They obtain surplus profits because of their competitive advantage on the widened global market, not only resulting from their higher productivity but also from their dominant position in non-saturated markets, created by the development of technology or artificially through marketing strategies, etc. (2) But to these surplus profits corresponds a decline of the profit rate of those less productive and less innovative capitals which, because of globalization, must now compete directly with their stronger, more concentrated counterparts, which means they must sell their commodities under their value, at a very low profit-rate. Their lack of profitability tends to devalue these capitals in their entirety, which is why their currencies are continuously worth less than the currencies of stronger capitals. (This is both an effect of their low profitability - the less the profit that can be obtained in a local market, the less sense it makes to invest in it and the less demand there will be for its currency - and a reaction to it - by cheapening their capital, weaker countries try to attract investment in export-production). This devalorization trend again benefits the strongest capitals (since it cheapens their imports from weaker countries) as long as it doesn't spread to them. But the cheapening of their capital becomes a competitive weapon for the weaker countries, that carries more weight to the degree trade barriers fall and transportation costs diminish. Since it makes no sense to compete globally by investing in backward production methods, the new capital they attract is often of the same high organic composition, or as capital-intensive as in developed countries. This allows a number of weaker countries to move up the ladder, from producers of cash crops and raw materials to producers of manufactured goods and onwards, of high-tech and services. So globalization accelerates the spread of a highly productive, capital-intensive, integrated production process over the planet while simultaneously liquidating more backward producers that can't compete in this new environment. In short, it creates winners and losers, but the losers are generally more labor-intensive than the winners, so the total sum of surplus-value extracted must decline. Thus, even though the rate of surplus value (the ratio between unpaid and paid labor) increases, to the degree globalization becomes succesful, the rate of total surplus labor to total capital, and hence the rate of profit, goes down, no matter how low wages sink.

Globalization by definition widens the market for developed capital and therefore tempers the market-contradiction. But here too, the effect is temporary. Globalization accelerates the replacement of labor-intensive production methods (low organic composition) by capital-intensive production methods (high organic composition) not only because the latter are more competitive but also because the products of the former fit less and less into the market created by global capital (3). With less workers employed per capital invested (and downward pressure on wages) productive demand goes down. Unproductive consumption may continue to grow, but as we've seen earlier, that doesn't soften the global market contradiction. (4)

The acceleration of technological change and the export of capital to underdeveloped areas like South East Asia, further adds to the overcapacity of the global production forces. The market in these areas grows, but its growth is feeding off the success of their exports to the markets of developed countries. Therefore it must crumble as soon as their exports stop growing. And since their production capacity and thus their supply grows faster than the demand of their export markets (especially since the burden of debt forces states to diminish their support to the market), it doesn't take long for that point to be reached.

Every capital owner willing to invest abroad, hears a chorus of "pick me!" shouts from around the world. Since every underdeveloped country wants to join the ranks of the developed, or at least not to slide further backwards (for which it needs foreign capital) and since the global economy is already suffering from overcapacity, the capital owner not only can afford to be picky, he also must be; and his willingness to invest will diminish - or he will demand a higher premium - each time a bubble created by globalization bursts. Which one to pick? The countries competing for capital, have mainly three weapons, apart from their political conditions (order, stability) and their degree of infrastructural development, taxes, regulation, corruption, etc.:

The more crowded the competition becomes, the more these weapons will be used. Growing overcapacity accelerates the competitive race to the bottom. Finally, when the overcapacity of a country or a region signals dismal future profits, capital begins to pull out. The more liquid it is, the faster that happens. One reason the South East Asian crisis unfolded so fast, was the growth of speculative, short-term loans in the preceding years.

The Asian Crisis...

Globalization spurred a massive influx of capital, and therefore rapid growth, in South-East Asia in the early '90s. A lot of it came from the US and Europe, but by far the largest investor was Japan. It invested more than twice than as much as the US in the region, most of it - at least orginally - in the expansion of export-oriented manufacturing. With Asian exports booming, still more capital flowed into the region from 1993 onwards. European and American capital increased their lending, prompting Japanese banks to loan even more at lower rates to grab a larger market share. They did so, not only because of the lack of profitable investment opportunities in their domestic economy, but also to tie the region to Japanese capital, just as American capital had done in Latin America and European capital was trying to do in Eastern Europe.

With this lending binge, a new bubble began taking shape. More and more capital went to non-export related sectors and fueled asset-inflation in real estate. But the growth of the region's domestic market depended on the growth of its exports. Competition was getting more crowded, especially because of the strong export-expansion of China, which was increasingly competing in the same sectors as the other "emerging" countries. After getting over the disastrous results of Mao's attempts at autarkic development, China had opened its doors wide to foreign capital. The resulting booms in investment and exports, and a rapidly growing money supply, spurred on rapid economic growth but because of the mounting losses of the state sector and increasing speculative investment, debt and inflation rose dangerously. In 1994, China adopted a stringent austerity policy, reined in the growth of money, and devalued its currency by 35%. The effect was chilling for its domestic economy but increased the confidence of foreign capital. With its cheap currency, its extremely low wages (averaging 0.30 dollar), and its Stalinist regime maintaining a harsh discipline in the factories, China was very competitive. The only drawback was that foreign-owned plants couldn't sell on the Chinese market, but, betting that this would change in the event that China joined the World Trade Organisation, foreign capitals wanted to position themselves nevertheless in this potentially large market. Foreign investment in China rose sharply, peaking in 1996, when it received almost half of the so-called developing world's share. It went into the building of a mammoth-export sector ("just 12 years ago, foreign-owned factories produced only 1% of Chinese exports." Today, "only one-fourth of China's exports consists of Chinese goods made by Chinese-owned companies and that share is shrinking, Chinese customs statistics show". (5) The yen also began to slide (by 60% to the dollar by the end of '97) because Japan maintained a cheap-money policy (with interest rates close to zero) to prevent its stagnation from becoming a depression. But it also made its exports cheaper and thus more competitive. The pressure for devaluation on its competitors increased.

Asia's exports began to stagnate in 1996. With sales increasingly lagging behind production, the Wall Street Journal reported "a time bomb of deflationary pressure - vast inventories of unsold goods, the detritus of yesterday's great expectations". In country after country and sector after sector, it signaled "massive manufacturing overcapacity" resulting in giant stocks of all sorts of commodities, some produced years ago. China, with an overcapacity of almost 100%, had "the mother of all inventories, with more than 360 billion dollars in unsold goods (6) This glut forced them to a price war which dragged down the prices of most Asian exports (by 50 % in 1997). With export earnings down, profits were sagging and bankruptcies rose. In early 1997, South Korea's largest steel companies collapsed and yet, foreign capital, facing stagnation in their home-markets, plunged in even deeper. Only now, the vast majority of incoming capital consisted of short term loans, to be repaid in foreign currency. That way, financial capital sought to protect itself against future risks but it only inflated a bubble already doomed by deflationary pressure. The implosion began in Thailand, where reports of the continuing fall of exports set the exodus of foreign capital in motion. Stocks were unloaded, investments withdrawn, local currency converted into foreign money. Thailand's attempts to swim against the deflationary tide and resist pressure for devaluation, only created room for massive speculation which accelerated the collapse (7). Soon Indonesia, Malaysia, the Philippines and South Korea were swept up in the crisis. In just a few months, more than 100 billion dollars fled the region. Stock markets crashed, currencies lost half their value or more, foreign debts rose accordingly and, inevitably, the chain of payments broke at thousands of places, threatening to provoke a collapse of the banking system and paralyze the region in a deep depression.

Was the problem compounded by the corruption, cronyism and mismanagement in Asia, which wasted so many loans on unprofitable ventures? Was it worsened by the recklessness of foreign capital pouring in so much money for short term profits, despite the signs of impending disaster? The answer is yes to both questions. But it's striking how all commentaries on the Asian crisis have worked to reduce the problem to those two aggravating factors, to cover up the real causes of Asia's crisis, of which those aggravating factors were only by-products. They must be covered up because capitalism can't adress them nor prevent them from worsening. Asia's overcapacity reflects the growing overcapacity of global capital in relation to the productive demand it generates. Financial capital's restlessness reflects the growing incapacity of global capital to generate enough profit to prevent capital's massive devalorisation.

... And its Hangover

Asia's financial meltdown had to be stopped to prevent if from spreading to the rest of the world and to assure that the region would maintain at least some ability to pay off its debts to foreign capital. So the IMF and other institutions of developed capital moved in a big way to stabilize the situation. But their loans are no gift - they must be repaid with interest at market rates - and they don't come without strings attached. The IMF imposed reforms which force these countries to remove most obstacles for foreign capital to compete in their markets (in finances as well as commodities), to abolish cross-shareholdings and other market-manipulations typical for the "Japanse model" which most of them had adopted, and to sell off state companies, close insolvent banks, maintain a tight money policy and take other austerity measures.

For the devalued South East Asian capital's, the crisis is obviously a disaster. Especially for Indonesia, Korea and Thailand, which haven't hit bottom yet. Their possessions have shrunk, their markets have contracted and they face a mountain of debt. It's worse for the many millions of workers who are losing their jobs and for all the others who see their already meager incomes plunge. The foreign banks, to the degree they are exposed (especially the Japanese), are losers too. They can never recoup all of their loans. But in many ways the crisis is, at least in its initial effects, a boon for developed capital, the US in the first place:

Obviously, the South East Asian market is contracting sharply, but the contraction also spreads to other regions. The devaluation of Asian capital, cheapening its exports, puts intense pressure on all its direct competitors to devalue also, in order to remain competitive. These competitors are in the first place other "emerging" countries in Asia, Eastern Europe and Latin America. It's better for them if they can avoid a devaluation, because it destroys their own buying power and fuels inflation (because of the higher price of imports), while the competitive advantage it gives, disappears when others are doing the same. But market pressure can make it impossible to avoid. The pressure builds when falling export-earnings prompt capital to move out. The main weapon of defense against this is raising interest rates. Brazil, for example, had to raise its interest rates to almost 40% to support its currency in the aftermath of the Asian crisis. So far, this has worked (it prevented a devaluation of the real and a flight of capital) but at a devastating price: the high interest rates have contracted Brazil's domestic market which forced mass lay-offs. Therefore either "solution"- devaluation or high interest rates - shrinks the domestic market and increases dependency on exports. So South East Asia as well as the rest must try desperately to increase their exports and cut prices to do so. "Double Exports!" proclaims a banner at the headquarters of Hyundai. The slogan echoes all across the world. But its implementation faces many obstacles. One is that developed capitals who face increased competition from cheaper Asian and other imports, respond by investing in new technology to reduce production costs and to develop new products. Lacking the capital access they enjoyed before, companies in Asia and other "emerging" areas can't keep up the technological pace and risk a deterioration of their competitive position, especially in the most profitable sectors. In some others, they might simply swamp their export markets were it not for the many import quotas and tariffs that still exist, despite the movement towards freer trade in recent years (apparel, for example - one of Asia's main export sectors - can't expand anymore because of import quotas). This is expecially true for China. The walls around its market and the inconvertibility of its currency protected it from speculation and devaluation during the Asian crisis, and from IMF-diktats afterwards, but the same semi-closedness limits its export-market access. And while Asian and other capitals look to export expansion as the only way to prevent the further devastation of their home markets, they must increase the volume of their exports at least as much as their export prices have dropped, just to prevent their export earnings from falling. Finally, price cuts become increasingly powerless against market saturation. Just because prices of TV sets drop, doesn't mean that consumers rush to the store to buy five TV sets.

The Market of Last Resort

With the domestic markets of most countries shrinking or at best stagnating and all of them focusing on export-expansion, new inventory gluts are building, which again will force deep price-cuts, just to make room for what keeps pouring off the assembly lines. Inevitably, deflationary pressure will keep building up. Where it is the strongest, devaluation wreaks devastation but also lowers production costs most. The steeper the devaluations, the more they push up the value of the dollar and other strong currencies and thus the relative costs of production in countries with strong currencies. With more countries possessing an educated and adaptable work force, this growing cost differential lures away production from more sectors, threatening to hollow-out gradually the industrial base of the strongest economies. Deflation will invade more sectors and thus become more difficult to escape. As we said earlier, developed capital's first line of defense is to improve its competitive position in other ways, in the first place by employing new technology that raises productivity. In this way it tries to eliminate its wage cost disadvantage not so much by lowering wages as by employing fewer workers per output. Besides its downward-pushing effect on the average rate of profit, this further increases global overcapacity, while diminishing productive demand, consumption that leads to the creation of new value; to profit. So, unavoidably, global saturation is building.

At present, only two regional markets are still growing: North America and Western Europe. They are supposed to absorb all of the growth in output. They have been playing the role of market of the last resort increasingly since 1980 but at the price of an explosion of debt, that is, a creeping transfer of value and thus of buying power from the whole economy to financial capital. As the debt mountain grows, a growing part of incomes, profits and taxes must be forked out as interest payments to financial capital. Europe's public debt crisis has forced its governments to cut back state support to the market, in order to bring down budget deficits. They will have to do so even more, if they want to inspire condidence in their new single currency, because their debt-burden keeps growing, only at a slower pace. The US has increased its debt spending even faster since 1980. Its public debt is by far the largest, though as a percentage of GDP still far lower than most European countries. Thanks to the rising profits in the '90s and draconian spending cuts, it (temporarily) brought down the budget-deficit but not the public debt. The general indebtness of the American economy keeps rising. The importance of this is not that the US has become a net-debtor nation, even the biggest one in world history (it owes foreign capital owners 9% more than what foreigners owe to US capital), for the economy as a whole, the nationality of creditors and debtors doesn't really matter. What's important is the growing transfer of wealth from the economy as a whole (which through its productive consumption creates new wealth) to financial capital which, by itself, creates nothing. The main reason why America could keep on playing the role of market of the last resort for the rest of the world economy, is the dollar's position as the world's dominant reserve currency - the preferred store of value for corporations, central banks and capital owners in general around the world. This creates an endless global demand for dollars and dollar assets which not only allowed the US-government to increase its debt so fast, always finding buyers for its debt-notes, but also allows the whole economy to buy more than it sells year after year. Since 1980, the US economy bought in excess of 1.6 trillion dollars more from the rest of the world than it has sold to it. Any other country with such chronic trade deficits would soon deplete its foreign exchange reserves to settle its trade debts and its currency would plunge as a result. But the US can settle its current account deficits simply by printing dollars since the dollar is its trading partners' reserve currency. Obviously, its capacity to do so is far from unlimited, since inflation would flare up if the dollar supply rose too fast. But the stronger the global demand for dollars and dollar assets - and the demand increases each time a deflating bubble sends more capital to the safe dollar haven - the more leeway it has to raise the money supply and encourage domestic spending. So, thanks to the growing global demand for dollars, the US could in past years cheapen credit and see its dollars and dollar-values increase in value at the same time. This caused a spectacular burst of borrowing for consumption, the chief reason for the US' relatively strong economic growth. But total household debt in the US grew to 5.4 trillion dollars, 91% of the disposable income, an all-time record (on the eve of the recession in 1980 it stood at 65%). Personal bankrupcies are also at a record high. This means that a growing part of personal income (now one-fifth) goes to interest payments, transferring buying power from consumers to financial capital. This points to decreasing economic growth in the near future. The market of the last resort will begin to contract. Thanks to globalization, the impact will be felt more widely than ever. With the dependency on the American market so great, and so many capitals around the world hanging on by their teeth, declining export earnings will again devalue currencies, cause a flight of capital, create social upheaval, and make the affected capitals lower their own demand and cut their export prices. This increases price competition and spreads saturation to more sectors, even the more profitable ones. It is estimated, for instance, that in the year 2000 the global automobile industry will produce about 80 million vehicles for a market of fewer than 60 million buyers. And so on. The best positioned capitals will still rake in surplus profits but the growing saturation will further push down the average rate of profit, already declining because of the rising average organic composition of capital, which reduces the labor and thus surplus value content of production.

The debate on protectionism will flare up again. The most affected industries and the trade unions in North America and Western Europe will demand new tariffs and quotas against imports. But the globalization of the production process and the increased concentration of capital has made more capitals dependent on access to large, global markets and thus rightly fearful of an erosion of free trade. The experience of the '30s has shown how rising protectionism can accelerate a spiral of depression. But without protectionist measures, deflationary pressure spreads even faster to the centers of capitalism.

Deadend Street

It is approaching fast. As one economist has noted: "In Europe and the US, we are only a foot away from outright deflation in consumer prices. At the level of producer prices, we are already there".(8) And in Japan, deflation has reached the retail-level, with prices generally falling since mid-1997. In much of the rest of the world, there is deflation in financial assets and currencies but inflation in consumer-prices because of currency-deflation (rising import-prices). On the global market, deflations is so far most pronounced in sectors such as agricultural products, textiles and even more so prime materials (oil, steel, etc), a sector which is often likened to a canary in a coal-mine: an early warning-system of dangers ahead for the entire economy. It is suffering its worst decline in prices in more than half a century. On the surface, deflation may appear a technical question, a problem of mismanagement of the quantity of money in relation to the commodities it circulates. Indeed, too little money makes it more expensive and therefore cheapens comodities, just like too much money raises commodity-prices and thus fuels inflation. But the enormous growth of the money-supply and of financial assets in general, proves that the problem lies elsewhere. With market-saturation and the average profit-rate jointly worsening, and wealth moving from the whole economy to financial capital, the incentive to buy commodities, either for consumption or for production, is diminishing perilously. The incentive isn't restored when more money is floating around. This merely chases money away to other financial assets and the only way to stop it is by raising interest rates, that is by making money more expensive again.

The forces leading up to a tidal wave of deflation have slowly been building over several decades, fed by the very policies aimed at keeping the twin contradictions of decadent capitalism - market saturation and the fall of the profit-rate - at bay: the massive creation of money in the inflationary '70s, the debt-explosion of the '80s, globalisation in the '90s. They have created a massive, global financial market that demands ever more from an economy ever less capable of delivering it.

In part 3 of this text we noted how financial capital is growing at a pace ever faster than the real economy. Between 1980 and 1992 the financial asets of the OECD countries (developed capital) grew twice as fast as their economies. In 1992 they represented twice the value of the OECD's output, by 2000 they will be valued as three times the OECD's production. In other words, an ever larger share of the total buying power is transferred from the economy as a whole to financial capital. That would not matter much for total capital, if financial capital would use this buying power like other economic agents and spend it on goods and services. But financial capital doesn't have to spend. It only does so if that's the best way to augment its value.

The goal of financial capital (M) is to become more money (M'). The goal of the real economy, the reason why it exists for society, is to assure its survival and if possible prosperity, to produce in such a way that it can consume more, and to consume in such a way that it can produce more. Or, in other words, to transform the commodities at the onset of the productive cycle (C) into more commodities (C') which allow society to survive and to continue to produce. The fundamental argument upon which capitalism's dominance over society rests, is that M-M' and C-C' make each other possible. The intermediary role of M in the circulation process of commodities (C-M-M-C: commodities are sold, and the resulting money is used to purchase new commodities) makes possible the cycle of expanding reproduction (M-C-C'-M': money is spent on commodities, whose use in production leads to the creation of more commodities, containing more value -since surplus value is added- and therefore, when they are sold, to more money than at the start of the cycle). But deflation breaks the cycle. When prices are falling, so that the M' at the end of M-C-C'-M' no longer exceeds M, there is no incentive for M to make the essential next step in the cycle, to accomplish M-C. It will remain money, though it may shift nervously within the financial market, always in search of the best way to retain its value. The more deflation spreads, the less incentive there is for financial capital to accomplish M-C, but that also means the less the real value of M can increase, since its increase is the result of the cycle M-C-C'-M', which is interrupted to the degree that M refuses to become C. But this decrease in value growth of M isn't reflected in the prices of financial assets. Because M increasingly seeks an alternative investment to M-C, a store of value within the financial market itself, increasing demand pushes up the price of M. With M appreciating more by staying M, the incentive for M-C diminishes further, so that even more M resulting from the cycle M-C-C'-M' remains M instead of returning into the cycle of production and consumption, thus further feeding the forces of deflation.

Because C has no choice but to try to become M at any price (commodities lose their value when they remain unsold) while M is losing its incentive to become C, C-M and M-C, supply and demand, are pulling in opposite directions. The two essential moments of the exchange process that regulates the economic cycle, sale and purchase, are disjointed, so the circulation process, C-M-M-C, breaks apart. The two can only be realigned by a violent correction, a massive devaluation of financial capital, of the value that already exists in relation to value that is newly created, so that C' has more value than C, so that M-C, and thus the cycle M-C-C'-M', can make sense again. Since this impasse is not the result of policy mistakes but of the inherent logic of the market, there is absolutely nothing that can be done to stop it, despite all the wisdom that the capitalist class thinks it has gained since the 1930s, when the same impasse led to global depression and world war.

Nothing can force global capital to do what makes no sense for capitalists to do, nothing can force M to become C. But its value really is C, it is based on the fact that money is universal exchange value, exchangeable for all other commodities. Without C, M is just paper. Therefore, the real value growth that the appreciation of financial capital represents, can only come from the growth of value in the real economy. All appreciation above that is fictitious value, which cannot be maintained when there is a devalorization of C and the economy's inability to increase value makes it impossible to meet its obligations to financial capital. Deflation destroys profits and therefore also financial capital's claims on profits (dividends, interest payments) so that its fictitious value must collapse. It collapses first where the tension between the rising fictitious value of financial capital and the deflationary pressure on the real economy is the greatest. That's why the bubble burst in South East Asia. While it's not certain where the next bubble will be punctured, there's no shortage of candidates, Russia and Brazil are among the most likely. Both are suffering from crushing debt levels and a flight of capital only reined in by steep interest rates which worsen the depression-conditions in much of their economies. They don't need much to crash, but there are many others whose position is only slightly better.

As with the deflation of South East Asia's bubble, future asset-deflation in other regions will have some benificial effects for developed capital, especially for the US, as more capital will flee to dollar-assets. The ship is slowly sinking and the rats run to the upper decks where they see no problem whatsoever. But with every crash, the choices for financial capital narrows and deflationary pressure moves closer to the center of the system. It's therefore likely that the unavoidable next global recession will be very dangerous. The demand for emergency-loans might well become so large that the IMF will run out of funds and financial panic will spread beyond the periphery of the global economy. Even Western Europe could be threatened. European capital has lost ground in the global competition and wants desperately to obtain the advantages which are such a tremendous boon to US capital: a huge, unified home market providing a strong base for multinationally operating, profitable mega-capitals, and a currency that is used as a global reserve currency, so that its central bank, like the American Federal Reserve, can act as global banker and use foreign demand to expand its money supply and thus its wealth. Therefore it rushes ahead with the Euro, despite the fact that almost none of its members meets the self-imposed condition of having reduced its public debt to 60% of its GDP. But with fiscal policy still decided by the different states and no credible means to enforce economic discipline throughout the union, it's quite possible that a recession would break it apart, with speculation against and capital flight from the hardest hit member-states. If the Euro survives, it could itself become subject to speculation and deflation, or it might deflect this pressure onto the dollar.

But the most threatened of the central economies is the world's second largest economy, Japan, whose dollar value is twice as large as the rest of Asia's combined. A Japanese meltdown would be disastrous for all other economies, the American in the first place. Since the early '80s, Japan has been a steady buyer of American financial assets, pushing up the prices of American stocks and bonds and of capital in general, creating purchasing power for American capital, allowing it to consume more than it produces, to spend more than it taxes. America's relative prosperity is dependent on this high valuation of its assets, and thus on continuous strong demand for it. While this demand is global, Japan has been by far the largest source.

But Japanese capital is reeling after the Asian crisis. Since 40% of Japan's exports went to Asia, its export-market is contracting sharply. The continuing wave of bankrupcies in Asia is affecting Japan in another way: it invested and loaned close to $300 billion to its neighbours. A good chunk of that money - no one knows exactly how much - is lost. This comes on top of the mountain of bad loans at home which Japanese banks have accumulated since 1990. The banks have reported more than 560 billion dollars in bad loans; their total value is estimated to be larger than that of the entire economy of China. Furthermore, under the Japanese system of cross-shareholdings, a huge chunk of Japanese stocks is owned by the banks. The downward slide of the Japanese stockmarket since 1990 therefore means a continuous loss of assets for the banks.

Experts agree that most Japanese banks are insolvent. The sector can only recover if the Japanese economy recovers. The government has tried many things to make this happen, but all to no avail. Since 1992, the state has augmented its spending with stimulus-packages to the amount of $560 billion, to which another $124 billion is now added. On public works alone, Japan has spent about $500 billion in the last seven years (9). Taxes were cut and interest rates are the lowest in the world. Despite all this, prices are falling, the economy is close to recession, while public debt ballooned to 98.4 % of the GDP. With the highest budget-deficit of all developed countries (5.9 % of the GDP) and 22 % of its budget spent on debt service, the state is afraid to expand its spending and afraid to shrink it for the same reason: that this will trigger a recession which pushes the banks over the brink. That's also why the central bank doesn't raise interest rates, even if though the low rates send about ten times more capital abroad than is invested domestically. A recession certainly would accelerate this capital flight. With more and more yen withdrawn from the banks and converted into dollars, banks would start to collapse. Falling demand for yen assets would further drag the stock-market down and thus wreck more havoc in the banking sector. For other countries that would cause not only a fall of their exports to the contracting Japanese market but also (because the devaluation of the yen would slash Japanese export prices) a sudden acceleration of deflationary pressure, pushing down the rate of profit.

This spiral could be prevented by a vigourous defense of the yen. Japan certainly still has the means to do so. Its central bank possesses 230 billion dollar in US securities and holds, together with other institutions, some 570 billion dollars more in foreign assets. It could sell some of these and convert the proceeds into yen to defend its currency. But if it must do so in a massive way, Japan becomes a seller instead of a buyer of American financial assets. Since American financial markets need at least a billion dollars a day in foreign demand to keep the price-level up without rising interest-rates (10) and since most of that demand comes from Japan, the defense of the yen could raise supply and lower demand in the American financial market and therefore cause prices to fall. It would then be the most important bubble of all, the one that has become vital to the functioning of the global system, that would come under attack.

I don't suggest that the above scenarios will necessarily become reality or that the next recession will immediately lead to a global collapse. I don't think that the underlying contradictions have deepened yet to the point of making that inevitable. But while it cannot be foreseen when a global collapse will occur, it seems certain that the world economy is heading towards it and that nothing can be done to stop it, because we're being dragged there by forces which are only following the logic of the market. It also seems certain that the period which separates us from this cataclysmic event will be one of growing social turmoil. But we can't predict precisely where and how this turmoil will manifest itself. In Asia, after the recent crash, we saw hunger riots and demonstrations, but also the scapegoating of an ethnic minority in Indonesia, strikes and workers' demonstrations against wage cuts and lay-offs in China, and a left talking governement using the trade unions to clear the way for mass layoffs in South Korea. In the coming period, we'll see the same turmoil magnified, with the forces of capital working very hard to make the devastation accepted like an act of nature, to deflect the anger into destruction and hate, and workers refusing to take what is done to them and fighting back on a class-basis. We can't predict what the outcome of this conflict will be, whether it will lead to an orgy of destruction or to a new beginning for humankind. All of us are deciding. We can make a difference; to understand what is happening is the first step.


March 1998


Part 1 - The Inevitable Fall in the Rate of Profit

Part 2 - The Immanent Barrier to Market Expansion

Part 3 - From Decline to Collapse

Part 4 - The Impasse of Globalization

Part 5 - The Law of Value of the World Market


1. See "The Roots of Capitalist Crisis, Part 3, "Markets and Profit-rates", and following.

2. See same text, Part 3. The wider the market, and the more it is threatened by saturation, the more investment in marketing makes a difference.But this also raises improductive costs for capital substantially because of "the great quantities of labor that are expended, in both manufacturing and the service sector, to hold on to customers or to lure them away from other companies (...)the greatest drag on productivity (comes) from the huge investment in manpower to develop products and services that are only slightly different from their predecessors, and then to advertise and market these variations." (Louis Utichelle,"America's treadmill economy, New York Times March 8, 1998). A recent study of the US Labor Department named Marketing as the category with the highest job growth in the US. "The decision structure in a gobal economy demands these people," commented an economist on the study, "it takes less and less to produce a product or service, but more and more to promote it, manage the process, customize it...No firm feels it can cut back without losing market share." (New York Times, Feb. 10, 1998). For US capital , the marketing-experience gained in its vast home market and the fact that many potential foreign competitors cannot afford the same marketing-efforts, obviously give it a big advantage in global competition.

3. When capitalism was young, it competed with non-capitalist producers, often making the same commodities. Now the latter are chased to the farthest corners of the market. What they can produce and sell, doesn't fit anymore in the modern world. In the same way, globalisation drives the old, labor-intensive, pre-electronic industrial way of producing things to near-extermination. Not only because of cost but also because of content of production.

4. See "The Roots...", part 2 (IP 30-31) p.33, and Part 3, p.6 and 10.

5. Wall Street Journal, July 4 1997

6. Wall Street Journal, November 26, 1997.

7. When it's clear that a currency must go down and a governement tries to resist it, it's easy to make money. You borrow in this currency, convert the amount in dollars and by the time you have to pay the loan back you only have to spend part of your dollars to convert them in the sum you owe. To fight this speculation, interest rates have to be raised even higher, which provides an irresistible incentive for owners of already declining stocks to sell, so that the stock market crashes which increases the pressure on the currency even more.

8. MIT-professor Rudy Dornbusch in the Wall Street Journal, May 1, 1998.

9. That this is aid to capital, not to the population in general, is illustrated by the fact that half of the homes in "super rich" Japan are still not connected to a sewage system.

10. According to an estimate of Deutsche Bank Group Asia-Pacific, quoted in the New York Times, December 17, 1997.

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