Fw: fwd: The aftermath of the 1997 'currency crisis' 2of2

[Bill Howard]

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The third factor contributing to the high valuations on Wall Street has been
the so-called moral hazard, the belief that the Federal Reserve is putting a
safety net under the market following the 0.75% cut in interest rates last
year - that the Fed will not allow the stock market correction to go so far
as to push the US economy into recession, that it will come to the market's
rescue by opening monetary sluice gates - as it did last autumn [1998] or
back in 1987 after the collapse of US equity markets in October of that
year.

Mr Greenspan, the Chairman of the Fed, admitted with great candour in
December 1996 that "Irrational exuberance" on the stock market has been the
price of an activist monetary policy aimed at "maximum sustainable growth of
the US economy." The result of such an interventionist policy has been, as
was to be expected, to send the wrong signals, resulting in inflated asset
prices and, to use the apposite terminology of Hans Tietmeyer, the former
President of the Bundesbank, to "move the financial markets in the direction
of casino capitalism," which are threatening to cause a systemic failure and
bring the markets to a scandalous collapse. Doubtless ".a policy of
responding directly to sudden falls in asset prices, and to the consequent
drying up of liquidity, provides a degree of central bank insurance to
investors against the risk of being trapped in a collapsing market. If so,
central banks may help to create the bubbles whose destabilising
consequences they so justly fear." (Martin Wolf, 'Bubble trouble', Financial
Times, 24 September 1999).

[Part II]

http://www.lalkar.demon.co.uk/issues/contents/mar2000/currency.html

The aftermath of the 1997 'currency crisis'

This article was written at the end of October 1999 with a view to being
reproduced in the November/December issue of LALKAR. However, lack of space
prevented its publication then. The reader ought to keep this in mind when
confronted with a reference to expressions such as this year and last year.
Nothing has happened in the intervening two months to make the author make
any changes to the text. The first part of this article appeared in the
January/February issue. This is the concluding part

PART 2

US imbalances unsustainable

The very factors, however, which have sustained the bull market have created
their own problems. The US current account deficit has risen from �183
billion (�115 billion) in 1995 to a projected $300 billion (�185 billion) in
1999 - the equivalent of nearly 4% of the US GDP. So far the US trade
deficit has played an important role in preventing the world capitalist
economy from taking the plunge into recession. Thus the deterioration in the
US trade deficit to the tune of $76 billion in 1997 and 1998 accounted for
two-thirds of the total improvement totalling $120 billion, in the balance
of payments of the Asian newly-industrialised countries' economies ($53
billion), the Asian developing countries ($33 billion) and Japan ($34
billion).

Encouraged by booming stock markets, US consumers have been spending like
there is no tomorrow, and their savings rate is negative. The private sector
deficit (the gap between savings and investment) stands at a huge 6% of GDP.
So far this deficit has been financed partly by capital inflows (and partly
by the budget surplus), which in turn have strengthened the dollar and kept
inflation and interest rates low.

Even bourgeois economic experts, committed though they are body and soul to
the concept of the eternity of capitalism, are of the view that the US
imbalances are unsustainable. "The US stock market," writes Martin Wolf,
"will not remain at historically unprecedented valuations indefinitely; the
private sector cannot be a vast net dis-saver; and the US will not run a
very large trade deficit permanently." ('Cauldron bubble, Financial Times,
23 December 1998).

It is the fear of the best of bourgeois economists and policy makers that
the Fed's easing of monetary policy last autumn has served to exacerbate the
gaping imbalances now dominating the US economy.

"By pumping up stock prices, it helped inflate an asset price bubble that
now poses the largest threat to global stability . By allowing domestic
spending to surge, it widened the already vast current account deficit to
more than $300 billion this year . And by accelerating demand it let the
genie of inflation out of the bottle." ('Plus marks for policy-makers',
Gerard Baker, Financial Times, 24 September 1999).

With remorseless logic, Mr Baker drives the point home that, far from being
the cure, last autumn's emergency measures in the direction of monetary
easing may actually end up producing a world-wide recession in the not too
distant future:

"The Fed, of course, has already taken back two of the three-quarter point
rate cuts of last year. But the gloomy view is that it is too late to stop
the imbalances ending in a smash. The current account deficit is undermining
the dollar; once investors leave the US currency in droves, inflation will
pick up speed and the stock market will collapse. That would provide a new
round of global financial instability, significantly damage domestic US
demand, and perhaps even precipitate the world recession the G7 worked so
hard to avoid a year ago.

"In fact, there is a broader view that a comprehensive global recovery, if
it takes hold, might pose more of a threat to stability even than the
unbalanced growth of a year ago.

"While the US was the principal engine of growth, weakness elsewhere played
a critical role in keeping prices under control. The combination of falling
commodity prices and a strong dollar counterbalanced inflationary pressures
in the US. But with demand picking up everywhere, the safety valve of global
disinflation has closed." (ibid.)

The US trade deficit has brought about a progressive increase in its net
external indebtedness. According to reliable sources, on present trends, the
rate of US net liabilities to GDP is on course to rise from 10% in 1994 to
20% this year, 30% by 2004 and 50% by 2010. "The willingness of the rest of
the world to hold claims on the US is not inexhaustible," says the Financial
Times of 28 April 1999, adding that "the worry is that any refusal to hold
more US assets will come in the usual panic-stricken rush." - characteristic
of capitalism, we might add.

That this 'worrying' scenario may already be well on the way becomes clear
with each passing month. The Financial Times of 3 August 1999 reports that
"Foreigners may finally have had their fill of Uncle Sam's IOUs," and that
the US "finds itself in the unfamiliar position of having to compete harder
for foreign capital," adding that "dollar assets in general seem less
attractive to the world's investors than they once did." (Foreign investors
lose taste for US treasuries', Richard Walters).

Economies in Europe, Asia and elsewhere are dependent on the US to keep the
forward movement of world growth, and the US economy in turn is dependent on
a continuously rising stock market to continue the growth in consumer
demand. As early as January this year, John Plender correctly pointed out
that:

"In the US the stock market is now a crucial determinant of growth in the
real economy. The decisions of American consumers, who are also the chief
locomotive for global demand, are driven by wealth effects: unrealised
capital gains provide the confidence and collateral for borrowing and
spending. It follows that US equities cannot stand still; they have to go on
rising if the US economy is not to stall. Any stalling would rebound on the
markets" ('New world disorder', Financial Times, 6 January 1999).

In other words, the whole crazy boom will come to a sudden and grinding halt
if the US equities were to tumble. No wonder, then, that thinking bourgeois
ideologues find the present state of the US stock market and the wider US
economy "frighteningly reminiscent of the political economy of the Japanese
bubble of the late 1980s, on a global scale" (Leading article, Financial
Times, 19 December 1998).

"Reason suggests," correctly observed the Financial Times leader of 17
March, the day after the Dow hit 10,000, "that over time equities can rise
only at the rate of nominal gross national product. The value of shares
rests on dividends, which depend on profits; and profits cannot indefinitely
increase their share of the economy." It went on to add that it seemed
"ominous" that while the Dow had risen tenfold since 1982, US output had
risen only 2.6 times during the same period.

It is just not possible for the stock market to continue rising indefinitely
for, as Mr Samuel Britten, writing in the Financial Times of 13 May 1999
correctly observes:

"Surveys of equity analysts show expectations of 13 to 14 per cent annual
rises in corporate earnings continuing. But if these represent real profits,
and not just a resumption of inflation, they are absurd. For the average
annual growth of nominal gross domestic product is barely 5 per cent. If any
component of GDP continues to grow faster than the total, compound interest
alone suggests that it would eventually account for almost the whole of
GDP." ('Nonsense on stilts').

The US economy has been witnessing its largest ever peacetime growth, and
has since the second quarter of 1991 expanded by an average of 3 per cent a
year. During the same period, corporate profits have grown by a compound
rate of over 10% a year (though some analysts put the growth of corporate
profits at 7%), and share prices have risen by 17% a year. To believe in the
continuation of these trends is to believe "that company earnings will eat
up an ever-larger share of the economic pie, and that investors will
attribute an ever-higher value to those earnings ." (Richard Waters, 'Stock
market odyssey', Financial Times, 17 March 1999).

Three years ago, on 5 December 1996, Alan Greenspan, the chairman of the
Federal Reserve, asked the question, which has since gained notoriety,
thanks to the meltdown of the markets last year following the twin shocks of
the Russian default and the rescue of John Meriwether's LTCM: "How do we
know when irrational exuberance has unduly escalated asset values, which
then become subject to unexpected and prolonged corrections?."

At the time Greenspan asked his question, the Dow Jones industrial average
had reached 6,500. Today it stands at over 10,000. But, as Tony Jackson of
the Financial Times correctly pointed out:

"No serious investor supposes, for instance, that US internet stocks are
sensibly valued.

"The game is rather that of the Greater Fool. Buy e-stocks at 100 times
revenues; sell immediately to the Greater Fool at 120 times; and bear in
mind that, if the game stops in the middle, the Greater Fool is you."
(Financial Times, 24 April 1999).

The dizzying heights touched by equities have given rise to wholly
unrealistic expectations. The Financial Times of 17 March 1999 reported Jim
Angel, Professor of Finance at Georgetown University's business school, as
saying: "The bull market has made everyone look like a genius," for
investors see rising share prices as proof of their earlier wisdom and a
justification for continuing to buy. But instead of celebrating rising share
prices, they should fear them, for normally "when the price of a commodity
goes up, consumers do not dance in the street in celebration."

Writing in the wake of the Dow Jones hitting the 10,000 mark, the Financial
Times of 17 March 1999 explained the phenomenal rise of the US stock market,
and the psychology behind it, in the following terms:

"This psychology perhaps explains two of the most striking aspects of the
recent spurt. An ever smaller group of companies is leading the market
higher, and more investors are betting that, because these companies' shares
have outperformed, they will continue to do so. Largely forgotten in the
celebrations on Wall Street yesterday were the many companies whose shares
have not been setting records. In fact more than half the shares in the
S&P500 are at least 10 per cent below their records. Small companies,
represented by the Russell 2000 index, have missed the party altogether.
That index is over 40 per cent below its peak.

"In this narrowing stock market, it has paid to back the winners. Investors
have placed their bets on an ever shrinking group of big names. This
so-called momentum investing, the stock market equivalent of jumping on a
bandwagon, has become the most widely practised investment technique of the
day.

"With the bull still in full charge, it seems difficult to call an end. But
it is worth remembering that after the crash of 1929, it took the Dow Jones
Industrial Average another 25 years to return to its earlier peak."

Prayers for a benign slowdown

It is the hope and prayer of bourgeois economic pundits and the managers of
the principal imperialist economies that any Wall Street crash comes after
growth in the economies of Japan, Euro-zone countries and the emerging
economies has picked up sufficient strength to enable these to take over
from the US the task of being the locomotives of world economic growth.
These prayers for a benign slowdown instead of a serious downturn, however,
are most unlikely to be answered, for while Alan Greenspan does not believe
in pricking bubbles through a monetary policy which makes an explicit target
of asset prices, he does subscribe to a policy aimed at preventing market
collapses - hence the three successive cuts in interest rates last autumn.
The problem with this is that "by decreasing the return on cash relative to
equities and persuading investors that the Fed has put a safety net under
the market, he has ensured an even bigger bubble. This, inevitably, is less
susceptible to gentle deflation." (John Plender, 'Bubbles will burst',
Financial Times, 9 January 1999).

One has only to cast a glance back at the Japanese economy in the late 1980s
to realise the close parallel between the Japanese economy then and the US
economy now. Back then the Japanese authorities too encouraged an aggressive
monetary expansion that fuelled an asset price bubble. Not only is the US
growth of broad money comparable to that of Japan's during the latter's
bubble days, the ratio of the US stock market value to the gross domestic
product, which today accounts for 125% of US GDP, is nearly as high as in
Japan in early 1990 (when the Japanese stock market stood at 140% of Japan's
GDP, as opposed to today's 60% of GDP) - just before the crash. There are
even parallels between the two economies as regards inflation. If the US
bubble has coincided with low inflation, so did the Japanese bubble. The
meteoric rise in the prices of Japanese assets in the second half of the
1980s was accompanied by fairly modest inflation, which never went above 4%.
The Japanese too appeared to be masters at manipulation of the market and,
for a time, the rigging of the market did work. But eventually the bubble
did, as it was bound to, burst, plunging the Japanese economy into a
protracted period of economic stagnation and recession from which it is only
now beginning to emerge. The Japanese monetary expansion was driven, just
like that of the US today, by the priority given to boosting domestic
demand. The resultant explosion in asset prices was regarded as a solution,
instead of a problem. And, temporarily, it worked. The Japanese economy
became the wonder of the world. Just as today, in the words of Mr Andrew
Smith, "America appears to have invented a kind of economic perpetual-motion
machine in which share gains fuel consumer spending and business investment,
and these in turn fuel market gains." (Sunday Times, 21 March 1999).

Japan too seemed back then to have hit upon the formula of the Goldilocks
economy - seemingly ever-rising asset prices, accompanied by increased
consumer spending, low inflation, low unemployment and an expanding economy.
But something had to give - and it did give - leaving Japan "with horrible
withdrawal symptoms", as the Financial Times' leading article of 19 December
1998 put it. In America's case too, something will have to give as the trade
deficit heads for $300 billion. The "Federal Reserve has to supply the fix.
But it too must worry about the ultimate fate of the junky." (ibid.)

A weak dollar and a world recession in the offing

Shortly the Federal Reserve will no longer be able to avoid the hard choices
facing it, especially as a shift in the pattern of global capital flows is
under way - increasing the scope for shocks - posing a threat to the dollar
and the insanely high valuations in US equities alike.

"Tiring of bloated western stock markets," says the Financial Times
editorial of 17 July 1999, "investors have been rushing in their droves to
the Japanese market; the Nikkei average has risen a remarkable 37% this
year, compared with a rise in the Dow Jones Industrial Average of just over
20 per cent". With the Nikkei's rise, US and European institutional
investors have been pouring large sums of money into the Tokyo market this
year. Further, the rise in the Nikkei has persuaded Japanese investors to
keep more of their money in the markets at home - especially as US assets
look overvalued, and the unsustainable US trade deficit makes the dollar
increasingly vulnerable.

According to the Securities Industry Association, last year net foreign
purchases of US government bonds were a mere fifth of the peak year of 1996,
and in the first quarter of this year, foreigners dumped a net $17.3 billion
of Treasuries. This, partly at least, is explained by the dollar's weakness
(see the Financial Times of 3 August 1999).

If a strong dollar encourages, as it has done in the recent past, investment
in the US, low inflation, faster growth than the underlying potential of the
US economy, a bull market, increased consumer demand, allowing the US to be
an importer of last resort to the world capitalist economy by running up a
huge trade deficit, a weak dollar would have the opposite effect. It would
make it harder for the US to finance its trade deficit, force the Fed to
raise interest rates, put an end to the "irrational exuberance" of the stock
market, oblige large swathes of the American public to start saving and put
an end to the profligacy it has got accustomed to - thereby plunging the US
economy into a long period of stagnation, probably downright recession.

The world has three big currencies today - the dollar, the yen and the
euro - whose movements have an important bearing on the global stability of
capitalism. In the middle of July this year, a leading article in the
Financial Times pointed out that while the drop of the euro and the rise of
the yen had attracted headlines, "yet it is the potential for a prolonged
fall in the dollar that is set to become the really big issue in the
currency markets." (17 July 1999).

At the time, the Japanese currency was hovering round 120 yen to the dollar.
In the middle of September, the yen soared close to Y103 against the dollar
(it stood at Y135 to the dollar in September 1998 and Y141 in August 1998),
and now stands at Y106 to the dollar. In other words, over the past year,
the yen has appreciated against the dollar to the tune of 36%. The surge of
the yen against the dollar this year "has the potential to blow the world's
two largest economies off course," correctly remarked John Plender in his
article 'Land of the rising yen', in the Financial Times of 21 September
1999. For, while the rising yen threatens to throttle exports and thus stop
in its tracks the fragile Japanese recovery, the depreciation of the dollar
makes it harder for the US to finance its trade deficit and carries grave
inflationary risks for the US economy - risks that are bound to force the
Federal Reserve to raise interest rates to levels which will bring economic
expansion to a stop and plunge the stock market into a downward spiral.

In the words of Mr Plender:

"The risk is that the Federal Reserve might be forced to raise interest
rates further than would otherwise be necessary to stabilise the external
account and curb domestic demand. This might be a wake-up call for the many
US investors who have put their faith in new paradigms. The sudden discovery
that the present looks more like the past than the happy visions of the
future peddled by the more cheerful Wall Street pundits might cause a
virtuous circle to break." (ibid.).

A plunge in the stock market, by forcing people to start rebuilding their
savings, would act as a powerful brake on demand and thus cause the US
economy to nosedive into a recession.

As for Japan, in the aftermath of the 'currency' crisis from 1997 to 1998,
her exports fell from $409 billion to $373 billion, and this notwithstanding
the fact that the average exchange rate in 1998 was Y131 to the dollar, as
opposed to today's far less competitive rate of Y106. Japan's trade account
managed to stay in surplus mainly because of the collapse of her imports.
Japanese growth is highly reliant on two factors - exports and government
budget deficits. While exports are extremely sensitive to the current surge
in the yen's exchange rate, a budget deficit running at 10%, while it can
provide a temporary stimulus, is unsustainable in the long run, for not many
investors will be willing to finance it at the unprecedentedly low rates of
interest which characterise today's Japanese government bond market.

It is the considered view of most of the thoughtful of bourgeois economists
that a weak dollar, far from introducing an element of balance in the world
economy, would lead to economic contraction throughout the capitalist
world - and this for the following reason. The depreciation of the dollar,
by making US goods more competitive abroad, and foreign goods relatively
expensive in the US, would serve further to limit the supply (of goods in
the US), which already falls short of the demand. With the US economy
already operating to near full capacity, a sudden and steep decline in the
dollar would be productive of a wage-price spiral, obliging the Federal
Reserve to increase interest rates. As for the rest of the world, already
suffering from weak demand in the wake of the 1997 crisis, currency
appreciation would have an equal and opposite effect, i.e., effect a further
weakening of the demand that already falls far short of the supply.

The plain truth is that the world capitalist economy is suffering incurably
from a crisis of overproduction. And this truth is beginning to penetrate
the thinking of some serious bourgeois economic experts too, notwithstanding
their bourgeois prejudices.

". The world has too much industrial capacity, a situation worsened by Asia'
s crisis, and it will take years of savage rationalisation [i.e., recession]
to bring capacity into line with demand." So wrote Mr Andrew Smith in The
Times of 14 February 1999 in an article entitled 'Deflation is a debt trap'.

A similar view was expressed at the end of 1998 by Mr Martin Wolf. Having
analysed the state of the US economy at the end of last year and concluded
that the US's economic position was unsustainable, he went on to say that
Japan's position was "as unsustainable as that of the US". In
substantiation, he went on to refer to a "frightening report" from the Japan
Centre for Economic Research (JCER), according to which "Japanese business
has invested far too much, and that the logical course would be to
drastically reduce investment.

"But, argues the report, without strong recovery in domestic demand, there
remains far more capital than the country needs." In plain language, Japan
is suffering from a crisis of overproduction.

In order to bring Japanese capacity into line with the (smaller) demand, it
will take years of savage rationalisation, whereby private investment in
plant will have to drop at an average annual rate of 7% until 2003 and its
share in the GDP reduce from 15.6% in 1997 to 10.6%, with the resultant
shrinkage of the economy to the tune of 0.7% per year. Alternative to this
would be a fiscal and monetary stimulus, which is hardly likely to happen,
given the government fiscal deficit which is already running at 10%.

Overwhelmed by the pessimism staring him from every direction - from the US
to the Japanese economic landscape - Mr Wolf resorts to quoting Shakespeare
and concludes with the following correct, if pessimistic, assessment:

"As the witches told Macbeth, 'Double, double toil and trouble; Fire burn
and cauldron bubble.' The market has been bubbling and has also caused a
great deal of trouble. But 1998 could have been still worse if the US had
not bubbled as much as it did. Optimists now predict global recovery. But
pessimists can easily see why things could become worse: neither US private
dissaving, nor Japanese private investment looks sustainable; emerging
market economies remain vulnerable; and stock markets are as irrationally
exuberant as ever. The world needed a good deal of luck to struggle through
1998. It will need just as much in 1999." (Martin Wolf, 'Cauldron bubble,'
Financial Times, 23 December 1998).

All the signs are that the dollar is headed for depreciation. It is the hope
and prayer of the bourgeoisie and its ideologues that this depreciation
would prove to be welcome news, in that a gentle decline of the dollar, in
conjunction with a revival in the fortunes of the European and Japanese
economies, would help rebalance world economic growth, facilitate a
reduction in the US trade deficit over a number of years, with the US
economy settling into a period of slower growth. In this fantasy scenario,
"rather than the balloon popping, the air would be slowly released."
(Financial Times, 27 July 1999).

"But," says the Financial Times, "some analysts say the odds are stacked
against a benign resolution. 'Investors buying dollar assets have been like
a crowd filtering into a cinema,' says David Bloom, currency strategist at
HSBC Securities in London. 'But once they smell smoke, there will be a panic
and a rush for the exit.'

"This could lead to a US recession, either through cuts in consumer spending
or higher interest rates. For the European and Japanese economies, a
substantially weaker dollar would limit export prospects. If that was
combined with a US recession, global economic growth would suffer.

"In turn, equity markets might take a hammering. The long bull run has been
built on the premise that the US economy can keep growing without
inflationary pressure. Higher interest rates or a US slowdown would hit both
corporate earnings and the valuations that investors are willing to attach
to those earnings.

"The mutual dependence of US share prices and the willingness of global
investors to finance the deficit means that the causation could work either
way. A sudden drop in the US stock market, perhaps triggered by further
interest rate rises, could make investors wary of holding dollar assets and
send the currency tumbling.

"That could give policy-makers a severe headache in the second half of the
year. But then that is the price they may have to pay for their failure to
curb the economic imbalances before they became so severe." (Alan Beattie
and Philip Coggan, Financial Times, 27 July 1999).

In other words, last autumn's interest rate cuts, led and co-ordinated by
the US Treasury and the Federal Reserve, warded off the malign demons of the
capitalist market forces only at the cost of having to see them reappear a
year later, stronger than ever before. Obviously, the bigger the binge, the
worse the hangover.

Undoubtedly, along with the sober and thoughtful analysts, many of whose
observations we have referred to in this rather lengthy article, the
bourgeois financial press is replete with fools (call them optimists if it
pleases you), who talk about the Dow Jones rising to 20,000 or 100,000, just
as their forebears in the 1920s prattled on about an era of never-ending
prosperity. The foolhardy of today merely need to remember that between 1924
and 1929 the rise in the Dow was little different from its rise between 1994
and today.

There are others who assert that the stock markets - in particular Wall
Street - cannot decline in our time because they are "sustained by private
investors saving for retirement". This assertion evoked the following
response from Tony Jackson, writing in the Financial Times of 12 June 1999:

"The management theorist Peter Drucker recounts how he published a prize-win
ning paper in 1929, weeks before the great crash, explaining why Wall Street
could never fall. His argument, he recalls, was the same: the market had
seen the advent of a new class of private investor - so-called Aunt
Sallies - who would not sell whatever happened.

"and, he adds, nor did they. The market fell 80 per cent just the same."

Most of the serious bourgeois commentators on the economy are of the view
that the stock markets cannot avoid a crash for too long. According to Mr
Stephen King of the HSBC, "virtually all the indicators on the bubbles
checklist are flashing red for the US . when such bubbles burst soft
landings never seem to be within reach". (Quoted in Samuel Brittan, 'Bubbles
do burst', Financial Times, 22 July 1999).

And bubbles do burst, for like negative savings ratios or fast deteriorating
trade deficits, they cannot go on forever. And when the present bubble
bursts, then, in the words of Gerard Baker of the Financial Times, "the
downside of casino capitalism will become obvious: consumption will collapse
and the US success of the past few years will prove to have been as illusory
as that of Japan in the 1980s." (26 February 1999).

"Capitalism is [indeed] a bumpy ride" ('Balance in a bumpy world', Financial
Times leader, 19 June 1999).

At the height of the crisis last autumn, when stock markets went into a free
fall, the US financier, George Soros, in his testimony to the US Congress on
15 September 1998, sated: "The global capitalist system that has been
responsible for our remarkable prosperity is coming apart at the seams." A
year later it is still coming apart at the seams. Last autumn's co-ordinated
interest rate cuts merely served to put off the evil day by a year or so.

The situation today reminds one of the following words, addressed in the
summer of 1931, to an upbeat audience of diplomats in Washington, of Paul
Claudel, the French ambassador and poet:

"Gentlemen, in the little moment that remains to us between the crisis and
the catastrophe, we may as well drink a glass of champagne." (quoted in
Robert Chote's article, 'Wake-up call for Greenspan', Financial Times, 15
August 1998).

Unlike many in his audience, Claudel could see that far from turning the
corner after the stock market crash of 1929, the capitalist world was
plunging into an unprecedented economic depression and a period of dangerous
political instability on a global scale.

Today too, far from turning the corner after the violent convulsions of the
past two years, the world capitalist economy is headed for a descent into an
economic depression of hitherto unknown proportions and a prolonged period
of dangerous political convulsion, to the accompaniment of a most acute
growth of inter-imperialist contradictions, leading to inter-imperialist
conflicts of horrific proportions and bare-knuckle fights to corner the
shrinking markets, sources of raw materials and avenues for investment and
export of capital.

And it cannot be otherwise, for whatever its manifestation and superficial
appearance, the crisis engulfing the world capitalist economy is a crisis of
overproduction, brought about by the contradiction between social production
and private appropriation. During each such crisis, including the current
one, this contradiction comes to a violent explosion. This has been the case
since 1825, the year of the first general crisis of capitalism, since when
these crises have broken out periodically and during which production and
exchange suffer violent dislocation. In the words of Engels:

"In these crises the contradiction between social production and capitalist
appropriation comes to a violent explosion. The circulation of commodities
is for the moment reduced to nothing; the means of circulation, money,
becomes an obstacle to circulation; all the laws of commodity production and
commodity circulation are turned upside down. The economic collision has
reached its culminating point: The mode of production rebels against the
mode of exchange." (Engels, Anti-D�hring).

The fact is "that the social organisation of production has developed to the
point at which it has become incompatible with the anarchy of production in
society which exists alongside it and above it"; that during crises, the
entire "mechanism of the capitalist mode of production breaks down under the
pressure of the productive forces"; that during these crises, capitalism is
no longer able "to transform the whole of this mass of the means of
production into capital." And this for the reason that in capitalist society
"the means of production cannot function unless they first have been
converted into capital, into the means for the exploitation of human labour
power. The necessity for the means of production and subsistence to take on
the form of capital stands like a ghost between them and the workers, it
alone prevents the coming together of the material and personal levers of
production, it alone forbids the means of production to function, the
workers to work and live." (ibid, p.379).

The tendency towards an unlimited expansion of production is inherent in
capitalism, but this tendency comes up against a barrier, that of a limited
market because of the impoverishment of the masses - a reflection of the
basic contradiction between social production and private appropriation.
Pending the removal of this contradiction through proletarian revolution,
and society taking over the means of social production and using them
consciously for the benefit of its members, capitalist crises cannot but
continue periodically to wreak havoc with a vengeance.

In the words of Lenin, "Gigantic crashes have become possible and inevitable
only because powerful social productive forces have become subordinated to a
gang of rich men, whose only concern is to make profits."

The deliverance of the expansive force of the means of production from the
bonds imposed on it by the capitalist mode of production is the precondition
for getting rid of the crises of overproduction which bring society "face to
face with the absurd contradiction that the producers have nothing to
consume, because consumers are wanting. Their deliverance is the one
precondition for an unbroken, constantly accelerated development of the
productive forces, and therewith for a practically unlimited increase of
production itself." (ibid, p. 387).

It is the job of Marxist-Leninists to imbue the proletariat with the
knowledge and understanding contained in the above-quoted observations of
Engels', to convince it that only a proletarian revolution can end this
filthy system, which starves and degrades, which subjects it to
unemployment, homelessness, destitution, brutalisation and war.





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