Abstract: In the US economic downturn that began in mid-2000, job losses were devastating, especially in manufacturing; households’ incomes fell; and corporate profits plummeted. But US GDP barely declined, consumer spending actually rose, and monopolies’ profits quickly rebounded. This article explores how US capitalism pulled through the crisis. China’s continued rapid growth stabilizes the global economy, as its purchases from capitalist economies keep the circulation process moving. Wall Street dominance of world markets facilitates pushing off losses onto smaller competitors. The US war in Iraq, by driving up oil prices, cheapens labor, destroys or limits unused productive capital, and flushes massive amounts of capital into the US. This capital has been recirculated as loans to households, deepening their debts but allowing consumers to continue buying in the face of low wages and lost benefits. Wall Street’s solutions thus set the stage for deeper crises.
The four years since July 2000 have arguably been the most difficult for US workers since the 1930s. Well over 60 million people lost their jobs, through layoffs, firings, corporate bankruptcies and just plain 'job churning.' Industrial workers and their unions – the heart of the US working class – suffered tremendous blows.

Most of the 60 million eventually found other jobs. But the US economy recorded three million net job losses in 40 months, before upticks in the spring of 2004. And even one day of unemployment is highly stressful, economically, socially and personally. New jobs typically pay less and come with fewer or no benefits. Many unemployed find jobs only by opening their own businesses, which commonly spells six- and seven-day workweeks, lower pay, no vacations or benefits.

Tens of millions of workers have suffered significant losses in retirement benefits. Retired steel and airline workers, and employees of bankrupt corporations, live with brutal cuts in pensions and health care. Cuts in health benefits can bankrupt overnight. The cost of housing, energy and transport has soared in recent years, translating into lower wages.

Two of those years have not been pretty for corporations, either. Beginning in July 2000, manufacturing suffered 16 consecutive months of decline in output. Business investment dried up. Exports plummeted. There were unparalleled bankruptcies – Enron, WorldCom, KMart and United Airlines, to name some. There were crises worldwide, including in Argentina and Turkey. And the profits of US monopolies took a pummeling in 2001 and 2002.

And yet, the US recession of 2001, as measured mainly by GDP, was exceptionally mild. GDP declined only in three quarters of 2001. Consumer spending rose through the period, instead of falling, as might be expected considering the drop in jobs, wages and benefits. And the profits of the largest US monopolies, the Fortune 500, rebounded in 2003 back to their 2000 heights.

How could this be?

Problems in the System

The capitalist class faces considerable losses if significant portions of their factories sit idle. Factories sit idle when they produce too many goods that cannot be sold: supply exceeds demand. This is why the government reports frequently on industrial-capacity use, and every two years it issues a report called the 'Survey of Plant Capacity.'

In a modern economy, it can be expected that five to 10 percent of plant capacity will not be in use at any one time. In the boom year of 1999, 26 percent of factory capacity sat unused. By the end of 2001, with the economy supposedly on the mend, 36 percent was idle. Thirty-seven percent of factory capacity lay idle in the fourth quarter of 2002, according to the latest Survey of Plant Capacity published in January 2004. More recent estimates, based on figures from the Federal Reserve, indicate that 35 percent of capacity remained idle as of mid-2004.

So three years into recovery from one of the mildest downturns in US history, around 35 percent of productive capacity is unused. This figure summarizes capitalism’s biggest problem: production outruns demand, imbalance between production and demand, the system’s inability to develop demand – despite crying unmet need for food, shelter and so much more, in the US and worldwide. Unemployment is the result of idle factories. When capacity use fell in 2000, millions of manufacturing workers lost their jobs.

Speculation, or extremely risky investments made in the hope of quick profits, is another measure of imbalance. When the capitalists cannot profit by investing in production, Marx explained, they turn to speculation in attempts to pocket existing wealth off others. Speculation is a loaded game favoring the largest capitalist families.

According to the Comptroller of the Currency, speculation is on the rise. US banks’ portfolios in derivatives, a risky form of speculative gambling on future interest rates, prices of commodities and currency exchange rates, grew from $7 trillion in 1990, to $51 trillion in September 2001 with 95 percent held by six banks like Citi and Chase. Speculation in currencies and interest-rate 'derivatives' alone is currently running in excess of $3 trillion per day. Speculation in grains and other basic commodities exceeds $1 trillion a day.

Falling profits, increases in losses and bad debts also reflect growing imbalances. Profits fall when goods cannot be sold. The profits of the Fortune 500 fell 54 percent in 2001 from their 2000 level. They tumbled another 66 percent the following year. So falling profits were consistent with falling capacity use, unemployment and speculation.

But in 2003, the Fortune 500 profits jumped 540 percent from their depressed 2002 levels, rebounding to their 2000 heights. And that is strikingly inconsistent with the other measures of imbalances. And US Gross Domestic Product (GDP) reversed after the brief dip in 2001. This too is inconsistent, as manufacturing, inventories and employment were still declining. Net US business investment, after accounting for wear-and-tear and technological obsolescence, fell into negative territory.

How did US GDP and the monopolies’ profits rebound? Normally, when there is such a sharp increase in idle capacity and corporate bankruptcies, brutal crises, declines in profits, jumps in losses and bad debts follow. Yet US GDP barely declined and profits quickly rebounded. The bad debts remained relatively low. And while the economies of Turkey and Argentina suffered crises, even they have rebounded. The size and weight of the US economy should have brought capitalism worldwide to its knees. What gives?

Stabilizing Factors

One factor worthy of consideration is that the world economy is not entirely capitalist. There remain major states and economies created by socialist revolutions. These include China, the fastest-growing major economy in the world for decades, Vietnam, whose economy is growing almost as rapidly, Cuba, Laos and the Democratic People’s Republic of Korea. Between them, these five states now account for around 15 percent of world production, up from perhaps 10 percent in 1991. The vast majority of this growth is due to China’s economic strength in the last decade.

Thanks to their socialist revolutions, these states’ economies are not cyclical; within limits, they can maintain a balance between production and demand that capitalism is innately incapable of sustaining. Purchases by China and Vietnam especially from capitalist countries act like aspirin, anti-clotting agents that stabilize the global economy by keeping capitalist circulation from suffering a 'heart attack' and freezing up in a crisis. Even pro-capitalist economists, such as Morgan Stanley’s Stephen Roach, admit that China’s purchases are fundamentally behind the recent rebound in Japan’s economy after its 'lost decade.'

China and Vietnam’s purchases (imports) from the capitalist world have increased over 350 percent since 1989-90, when capitalism’s latest round of crises of 'overproduction' began. Their combined purchases will approach $500 billion this year. Demand from China is the largest source of export growth for the US, Japan and Germany. China’s demand is also directly or indirectly behind the recent bounce in the economies of Argentina, Brazil, Turkey, Thailand, Indonesia and several other countries. With their economies producing instead of freezing up, these countries have been able to continue paying interest on their direct and indirect debt to Wall Street.

Still, China’s role alone cannot fully explain the stability of US GDP since the early 1980s, the mildness of its 2001 recession or the sharp rebound in US monopolies’ profits. Japan and Germany, the second and third largest capitalist economies after the US, are not registering growth and profit rates on the scale of those found in the US. What gives?

For the answer we also have to examine the relationship of forces between the US and other capitalist countries, including Japan and Germany. Sixty years after D-Day, the US still maintains significant military bases, at its convenience, in Japan and Germany, not to mention Britain, Italy and over 20 other countries. That alone speaks volumes about relationships of forces.

For decades, US monopolies have dominated most industries and record consistently higher profitability than their junior partners in the EEC and Japan. This is because size and profits are far more important in determining economic strength.

Thus, the secondary source of relative US stability then is Wall Street’s dominance of the capitalist world and consequent capacity to push problems off elsewhere. The Japanese, German, etc. capitalists are none too happy about it. We cannot ignore the contradictions among them. But Japanese capitalists are in no position to challenge this relationship.

War For Expensive Oil

When US monopolies’ profits began to plummet in 2001, it was a foregone conclusion that the US would go to war, at home and abroad, to cheapen labor and plunder weaker capitalists. That is what has happened. One witness told the Commission on 9/11, 'We could not go to war without an attack like September 11.' Of course, he only meant a war 'on the terrorists.' September 11th opened the path for US imperialism to embark on a war of plunder at home and abroad, and to curtail democratic and labor rights to facilitate that war.

War then is a third source of US stability and overcoming the economic crisis of the early 1990s.

There was a time when capitalism went to war to secure cheap oil. But Gulf War I (which also followed a decline in US monopolies’ profits) and Gulf War II were not wars for cheap oil, but for expensive oil. No global industry is more monopolized by Wall Street than oil in all its aspects – exploration, production, distribution. Even 'British' Petroleum and 'Anglo-Dutch' Shell are controlled today by Wall Street, through debt as well as stock ownership.

What 'expensive' oil does above all is to cheapen labor worldwide, with the added profits from the cheaper labor going not to the capitalists directly employing workers, but to the handful of US families that have monopolized oil. Expensive oil also loots weaker capitalists. And expensive oil can trim 'overproduction' by driving weaker manufacturers out of business.

So US monopolies are selling oil for $50 that cost around $2.20 a barrel worldwide to produce. Other US monopolies buy coffee – the second largest traded commodity in the world – and other commodities below their cost of production. This and similar unequal exchange (including from sales of arms) results in massive Wall Street looting of the rest of the world.

In addition, debt owed to Wall Street banks is repaid through oil sales. So if Mexico 'sells' a million barrels of oil at $50 a barrel, Chase or Citibank is likely to first collect $30 million of the $40 million proceeds, to service Mexico’s debts. Both Citi and Chase are reporting record profits, second only to ExxonMobil’s. Imperialism has a profound interest in expensive oil.

The expensive oil and the US’s grab of Iraq’s oil resources also have significant economic and strategic implications in imperialism’s efforts to undermine socialist China, and consequently weaken and cheapen labor. Since the early 1990s, China has gone from an exporter of oil to a huge importer, second only to the US. The US has moved to block China’s efforts to secure long-term supplies of oil from the Middle East and from former Soviet republics. Since September 11, the US has established new military bases in Afghanistan and former Soviet republics that encircle China.

Exporting Capital to the US

A fourth source of stability: capital flight into the US. Wall Street has learned that instability and war, combined with low profit rates in other countries, 'flush' capital into the US. This parallels human emigration to the US, fleeing war and poverty.

Massive capital flight into the US began in earnest with the 1990-91 Gulf War I. In 2003, $881 billion fled to the US from the rest of the world, according to 'Flow of Funds Accounts' issued by the Federal Reserve. In the first quarter of 2004, financial assets from the rest of the world flowed in at a $945 billion annual rate.

Financial markets now follow the monthly US 'Treasury International Capital' (TIC) reports. 'Net foreign purchases of domestic securities reached $56.4 billion,' the latest (July 16, 2004) TIC Report announces. This was down from $76 billion the previous month, but 'enough to finance the current-account deficit,' the Wall Street Journal reported with relief on its front page.

Furthermore, the US makes practically no payments on its massive $3 trillion debt to the rest of the world.

Still, does all of the above account for avoiding a major crisis after the decline in production, employment and profitability of 2001? In this writer’s opinion there is a fifth source: rising consumer spending. But wait! Weren’t millions losing jobs, pensions and benefits? Median household income fell 2.2 percent in 2001 and another 1.1 percent in 2002. How could consumers hike their spending?

In a word, debt. The capitalists, flush with plundered capital, lent it to them. Those massive capital inflows from the rest of the world do not go directly to consumers. They go to the US capitalists, through their government and banks. Because of massive overcapacity in every industry, it made little sense to invest the capital into expanding and modernizing production, as in the late 1990s.

So the capitalists lent the funds to households to purchase, furnish, remodel and refinance homes, with ever-larger loans and ever-larger fees on skyrocketing house prices. US mortgage debt rose almost 40 percent between early 2000 and the end of 2003, from $5 trillion to almost $7 trillion. Households’ average debt jumped from about 85 percent of disposable income to 118 percent in less than a decade.

Bush and the neocons promoting the 'culture of ownership' played on individuals’ rising economic and social insecurity to encourage heavy debt to 'purchase' homes. Their myth is that individuals can find security by owning a home. But there are no personal solutions to capitalism’s contradictions, only class solutions, and international ones at that. Even state-owned housing in the Soviet Union proved not safe from imperialist predation. This housing is being privatized to service debts to Wall Street!

Banks fanned the housing bubble. 'Appraisers have complained they felt pressured to deliver high appraisals on home sales so that real-estate agents could make bigger commissions and bankers could generate more loan fees' and larger loans, the Wall Street Journal reported in 2002.

The result is a population more indebted than ever, facing rising interest rates, energy costs and regressive taxes (including stiff property taxes climbing with house prices), and with more insecure jobs paying less with fewer benefits.

So Where Did All the Losses Go?

If the economic imbalances still exist – and the evidence is strong that they do – where did the resulting losses go? Where did the bad debts from the bankruptcies of Enron and Worldcom and KMart go? How could the big banks behind Enron and WorldCom register low bad-debt figures?

The answer is that Citi and Chase and its partners in crime pushed those losses off onto pension funds, insurance companies and other weaker entities, in the US and abroad. These losses can take some time to show up. Fortune reported in late May that the pension funds of state and municipal governments flipped from $245 billion in assets in 2000 to $366 billion in liabilities in 2003. Fortune attacked 'greedy unions' for this extraordinary $610 billion reversal. A separate article in the same issue of Fortune reported that Citibank was setting over $9 billion aside to cover litigation around its criminal Enron and WorldCom activities.

Thus, because of growing contradictions and ensuing losses, Wall Street families are plundering pension funds, mutual funds, home equity, individual savings, insurance companies, smaller capitalists and practically anything that moves. The billionaires are trying to transfer the costs of retirement, health care, elder care and so on, from government and corporations onto individuals. To survive economically, working people will have to fight for peace, good jobs, higher wages, expanded benefits, protection of their pensions, universal health care and saving the public system of social welfare, public education and social security.

To sum up, capitalism was able to overcome the crisis of the early ‘90s by: a. Trade with China; b. Wall Street’s dominance of the world economy allowing them to transfer problems elsewhere; c. War in general and war for expensive oil in particular; d. Capital flight into the US; e. Massive consumer spending spurred on by encouraging huge personal debts. Wall Street’s 'solutions' thus set the stage for deeper crises. Only the working class can achieve a genuine resolution.



--Wadi'h Halabi is a contributing editor of Political Affairs and can be reached at pa-letters@politicalaffairs.net.