The growing crisis of global capital

While Peter Costello and John Howard take every opportunity to talk up 
the prospects and viability of the Australian economy Business Week in its 
issue of June 25, is not so optimistic.about the world outlook.

Under the headline "In a One-World Economy, a Slump Sinks All Boats" it 
writes that "Anywhere you look around the globe, the stream of bad economic 
news is unrelenting.

On June 7, the British government released data showing that industrial 
production had fallen for three months in a row. The next day, Germany 
announced its second straight month of industrial decline. Then, on June

11, word came that the Japanese economy had unexpectedly contracted in the 
first quarter. Meanwhile, US growth is flat, at best.

Coincidence? Hardly. With the global economy increasingly integrated, there 
are signs that the business cycle has gone global as well. In the not-so-
distant past, business investment, residential construction, and 
consumption were only slightly synchronized across countries. When one 
region was weak, another was usually strong. As a result, global recessions 
were rare events, unless they were the result of major global shock such as 
the oil price increase of 1973.

Internet Age

But in the Internet Age, countries are becoming more and more connected — 
not only by trade but also by capital markets, by the flow of technology 
and ideas across national borders, and by psychology. Rather than rising 
and falling separately, national economies increasingly respond to the same 
forces.

[There is] a worldwide slowdown in domestic demand — the category that 
includes investment, consumption, and government spending. In Europe, 
domestic demand grew at a 0.4% pace in the first quarter, down from about 
3% a year earlier. US domestic demand is rising at 0.2%, and Japan is flat.

This coordinated slowdown is much different than in the past. For example, 
in 1986 and '87, business investment declined in the US. But that slump did 
not spread to Europe, where capital spending grew in excess of 6% annually. 
On the other hand, in 1993, business investment soared in the US while it 
fell in Europe and Japan. Similarly, residential construction and consumer 
spending have generally been out of step across countries.

Many people expected that increased globalisation and trade would smooth 
out the ups and downs of any individual country's business cycle. A nation 
facing a slowdown at home could export more to other parts of the world 
while also easing up on imports. That, in fact, was often given as one of 
the reasons why the New Economy should be less affected by recession.

In fact, the opposite may turn out to be true, as tighter ties between 
countries cause downturns to spread faster.

In particular, the slump in tech spending and other business investment has 
spread quickly from the US to the rest of the world. First-quarter capital 
spending fell at a 4% annual rate in Japan, compared with a 2% rise in the 
US. Meanwhile, Eurostat, the European statistics agency, reported that 
total residential and business investment fell at a 3% pace in the first 
quarter. Companies such as Sun Microsystems Inc. are reporting that the 
tech slump is in full swing in Europe. (The most recent example is the 
slump of Nortel which has already sacked 30,000 workers and is thinking of 
sacking a further 10,000 as a result of a slump in sales of 
telecommunications equipment — Editor)

In part, this weakness reflects the fact that many countries have become 
increasingly dependent on exports to the US to fuel growth, making them 
more vulnerable to any American slowdown. European exports to the US have 
more than doubled since 1993. So when US demand for European goods fell 
sharply in the first quarter, European companies had less need to add new 
manufacturing capacity. The same forces are holding down Japanese 
investment, since US imports from Japan fell at a remarkable 35% annual 
rate in the first quarter of 2001.

Across national borders

Stock markets in different countries have always affected each other, as in 
the case of the 1987 crash. But with investors moving money across national 
borders more easily than ever, the movements of stocks in one country are 
being felt more quickly in bourses worldwide. This has economic 
consequences.

Weakness on Wall Street, for instance, has pulled down other markets around 
the world, depriving companies of the money needed for capital spending. 
The 6% fall in the Standard & Poor's 500-stock index this year has been 
matched by similar drops in the London, Frankfurt, Paris, and Tokyo stock 
markets.

Tech stock bust

While the US is the epicenter of the tech stock bust, the decline in New 
Economy stocks has been just as ferocious overseas. The Nasdaq has fallen 
14% since the beginning of the year, but the German Neuer Markt is down 39% 
and the French Nouveau Marche is down 45%, making it far harder to launch 
startup companies in these countries.

Moreover, the major economies are part of an unprecedented global 
technological community linked by rapid communications. That means new 
ideas can leap across the ocean, stimulating growth. But failures 
reverberate globally, too. So when American dot.coms bomb, or NTT DoCoMo 
Inc. announces trouble with its 3G wireless-data handsets, as it did in 
April, the effects are quickly felt in Europe.

With US news just a click away on the Internet and TV sets around the 
world, endlessly tuned to CNN and CNBC, pessimism in one country can crop 
up elsewhere in a way that was never possible before. That may explain why 
a monthly European Commission survey shows that European business and 
consumer confidence has been steadily declining since the end of last year 
— well before the economic data registered a slowdown.

The New Economy is built on global trade, global capital markets, and 
global communications. Unfortunately, the door swings both ways. Links 
which propelled growth in the boom may help spread the slump today.

The most important factor that Business Week fails to take into account in 
its gloomy analysis is the steady working out of the law of surplus value 
by which millions of working people throughout the world are being 
impoverished and are unable to buy the huge number of gadgets that 
manufacturers continue to turn out. Just as technology has gone global so 
has the savage exploitation of the working people. This is another factor 
that increasingly makes capitalist economic crises global as well.

* * *

Debts, debts and more debts

Mortgage delinquencies and write-offs by credit card companies in the US 
are going up and personal bankruptcy filings could hit a record this 
year.

That translates to serious financial pain for families that are over-
extended at a time when unemployment is rising. It also means that just 
when the cooling US economy needs spending by consumers to sustain growth, 
they're hard-pressed to do so.

"Consumer debt isn't a problem unless and until people lose their jobs, and 
that has started to happen," said David Orr, chief economist at the First 
Union Corporation. "It's not the cause of the economy's problems, but it 
can make the snowball roll downhill faster."

Durant Abernethy, president of the National Foundation for Credit 
Counseling, a nonprofit organisation that helps families with debt 
problems, says: "Our average client is carrying more debt than they've ever 
carried, and they're in trouble. If their overtime is cut back or a husband 
or wife is laid off, they have virtually no savings, so they go over the 
edge."

The national balance on credit cards, auto loans and other consumer loans 
rose to a record $1.58 trillion in April, according to the Federal Reserve. 
Mortgage debt totals about $5.2 trillion.

In April, credit-card issuers wrote off uncollectible balances at an annual 
rate of 6.7 percent, according to Standard & Poor's. That was the highest 
loss rate since February 1997.

Perhaps the strongest measure of American debt distress is the rise in 
bankruptcies. The number of bankruptcy cases filed in the first quarter of 
this year rose to about 367,000, up 17.5 percent from a year earlier, 
according to Federal figures. Most of the debtors were consumers.

* * *

Recession forecast for Germany

The headline on the front page of the Bild Zeitung, Germany's 
biggest-selling newspaper, said it all: "Banks worried about Germany's 
economy — is a recession on the way?"

Germany experienced a 3.6 per cent inflation hike in May, some of it 
directly attributable to the euro as unscrupulous retailers and wholesalers 
used the dual mark-euro pricing system to swindle consumers.

Damaging data from leading economic institutes further downgraded Germany's 
ability to grow and is far more worrying.

Chancellor Schroeder's bid to get unemployment down by 500,000 to 3,500,000 
before the year's end is seen to be an impossibility.

Joachim Scheide of the Institute for Economics said: "The government will 
almost certainly not attain its target of substantially cutting the jobless 
queues."

Sluggish consumer demand and pressures from the US, where interest rates 
have been cut five times this year, are stoking the concerns that slowdown 
could eventually translate into a damaging recession.

"Recession looks more and more likely with every new round of downward 
revisions in the economic growth forecasts," said a pessimistic report in 
the influential Frankfurter Allgemeine Zeitung.

* * *

Japan's GDP down

Japan's Gross Domestic Product (GDP) fell 0.2 per cent in last March 
quarter. This is a drop of 0.8 per cent at an annual rate.

Following the announcement, Prime Minister Koizumi Jun'ichiro stated that 
such a minus economic growth is the reason why "structural reform" is 
needed. The Government's "reform" is to shift more burdens and costs on to 
the people, such as by writing off bad loans to help banks, cutting 
government expenditure on medical insurance, and introducing a consumption 
tax increase.

Akahata the newspaper of the Japanese Communist Party says that the 
negative growth is caused by sluggish personal consumption and the Prime 
Minister's "plan" will cause more unemployment and bankruptcies and further 
discourage personal spending.

The JCP proposes countermeasures to improve people's living conditions 
rather than further the profits of major banks and corporations. The Party 
calls for the consumption tax rate to be cut, a freeze on adverse revisions 
of social welfare services and a restriction on corporate restructuring.