FRFI 210 August / September 2009
Since Spring we have been hearing about the economic ‘green shoots’ sprouting forth, supposedly announcing an anticipated recovery. Yet, month after month, something seems to be just preventing them from turning into vigorous new growth. Sure, stock market prices have risen – but that’s just people guessing about and gambling on the future. What is really going on with the US economy? US correspondent STEVE PALMER reports.
First, domestic production has been in decline for the last three quarters and prices have generally been falling too. After peaking at 10.5% in 2006, rates of return for non-financial companies fell to 9.4% in 2007 and to 8.1% in 2008. This decline in profitability is reflected in a fall in the amount of profit too: after hitting $1.59 trillion in the first quarter of 2008, profits fell to $1.26 trillion in the fourth quarter. Although they rose slightly to $1.31 trillion in the first quarter of 2009, this was only due to a huge drop in repatriation of profits by foreign capitalists. This collapse in profitability is reflected in a drop in productive investment which has been declining, at a steadily faster pace, since the beginning of 2008. This decline in capital accumulation expresses the steady decline of capital.
Second, as well as the profitability crisis, we still have a banking crisis: the famous ‘toxic assets’, which are the core of the problem, are still on the balance sheets of the banks. Officially sanctioned accounting tricks have made them seem to disappear, but these time-bombs still lie in the vaults, ticking away. Right now Citigroup is teetering on the edge of bankruptcy, threatening to introduce fresh instability into the financial markets. In addition, the commercial real estate market is heading for deep trouble. The decline in retailing and financial services means that many commercial landlords no longer have the income needed from shops and offices to service their loans and are starting to default. There is $3.1 trillion of commercial real estate debt and 4.1% of all these loans are now delinquent (more than three months late on payments). This may not sound much, but it is 2.2 times higher than in March 2009 and 3.5 times higher than in December 2008. In addition, there are maturing loans, estimated at some $450 billion, which are unlikely to qualify for refinancing. A total of $2 trillion will mature over the next four years. This is going to create another financial crisis in the not-too-distant future.
US government borrowing on the hook
Third, the US government is creating financial problems of its own. Including the stimulus efforts as well as the various banking rescue packages, the US Government has spent, lent or committed $12.8 trillion – almost as much as the entire US domestic production last year. Much of this has to be financed by borrowing. This year, in order to finance these commitments as well as to refinance existing government debt which is falling due, the US government must borrow some $3.25 trillion, a colossal and unprecedented sum – almost $9 billion a day.
This borrowing is so large that there has been considerable uncertainty about whether the US Treasury can sell all its bonds at a good price. A bond generally is a financial instrument which pays a fixed amount of interest – the ‘coupon’ – at predetermined intervals. Bond prices move in the opposite direction to interest rates. If interest rates are up, bond prices are down; if interest rates are down, bond prices are up.
The Treasury sells its bonds by auction and there has been uncertainty over its ability to get a good price for the huge amounts of securities it has to get rid of. Since the interest rate on US Treasury Bonds moves in an opposite direction to bond prices, if the Treasury gets higher prices for its bonds, then the yield will be lower; a lower price gives a higher yield. If there is a lack of demand, prices will be lower and yield higher.
Since US Treasury Bonds are generally treated as if they are risk-free, with no chance of default, their rate is treated as if it is a ‘pure’ interest rate, untainted by any risk premium, unlike corporate or financial bonds. Many other interest rates are therefore defined by so many percentage points difference from the rate on, typically, 10-year Treasury Bonds. This difference, called a ‘spread’, exists because these securities are thought to be more risky than government bonds. So, the success or otherwise in financing government borrowing has effects on much of the rest of the financial markets. If the Treasury can’t get good prices for its bonds, then interest rates on mortgages, corporate bonds and other loans will increase, making recovery more difficult. In recent weeks, the US central bank, the Federal Reserve, has stepped in and purchased Treasury Bonds with the effect of putting a floor under their price and thus helping keep interest rates down. Ahead lie shoals of uncertainty – will the Treasury be able to sell its securities? Will former lenders switch to Euro securities? Can the Fed effectively keep interest rates down?
And the really big question is: how, in the longer term, will all this borrowing be paid for, since this sort of borrowing has limits, even if the borrower is the US Government. To pay it all back supposes that first, the economy has been restored to health, second that it is so healthy that it can produce sufficient to pay off the massive debt presently propping it up. What will be necessary for the economy to recover?
Attacking the working class
The ruling class talk about a ‘crisis of confidence’: if only people believed that the economy was improving, it would improve. Others, apparently more ‘objective’, are expecting ‘emerging markets’ (China, India) to pull the US economy out of the recession. In fact there is nothing psychological about this crisis, nor is it a matter of restoring demand: the problem lies much deeper as we have seen – in the decline of profitability. It is the lack of profitability which has created the crisis of confidence and which accounts for the decline in accumulation and the resulting lack of demand. To restore profitability, capital will try to cut costs which don’t ‘contribute to the bottom line’ – that means pushing down wages, intensifying the working day and firing workers.
This process is already underway:
• Since December 2007, employment has fallen by 6.5 million. Since June 2008 employment has fallen by 4.1% - the largest yearly decline for 50 years.
The average working week has fallen to 33 hours – the lowest since records began in 1964.
• Construction employment has fallen by 1.5 million from its peak – the largest decline in this sector since 1939.
• Manufacturing employment has fallen by 1.9 million since the recession began and is now less than 11.9 million – the lowest since April 1941.
• The total of registered unemployed, those forced into part-time work, and others who want to work is now 16.8% of the total workforce.
States in crisis
As a result of the crisis and recession, State revenues have fallen by almost 12%. However most States, unlike the Federal government, have constitutional provisions which mandate a balanced budget. This means that most States have to trim budgets or increase revenue to achieve this. This means increasing taxes, cutting services or some combination of the two. Even in cases where States can borrow, the cost of borrowing has risen dramatically.
State Budget Share of
California $53.7 billion 58%
New York $17.9 billion 32%
Illinois $9.2 billion 33%
New Jersey $8.8 billion 30%
Oregon $4.2 billion 30%
Connecticut $4.1 billion 23%
Arizona $4 billion 41%
Washington $3.6 billion 23%
Alaska $1.35 billion 30%
California has started issuing IOUs in place of cheques, cutting state aid to school districts, cutting student enrolment in the State’s universities by 10,000, wiping out opticians and dental services for many elderly residents, closing 220 State parks and many, many other cuts. Similar cuts are being enacted elsewhere - pay cuts for State employees, cuts in school spending. In some States, even if you drop dead, you won’t get a break – Illinois has stopped paying $1,655 per funeral for indigents.
The combined effect of the crisis and these cuts is horrific. Recently released figures show that the number of homeless families has increased from 473,000 in 2007 to 517,000 in 2008. A growing proportion of the homeless are in rural areas – 32% in 2008, up from 23% in 2007.
Along with homelessness and unemployment comes poverty and hunger. In New York, 1.3 million residents have to resort to emergency food – soup kitchens, food pantries and similar programmes, according to the New York Food Bank. Worse, some 4 million residents – half the city’s population – are having difficulty affording basic food. In Los Angeles, a quarter of the city’s population is living in poverty. Throughout the country there has been a rise in the proportion of school children receiving free school meals.
In the US, loss of a job means loss of any health insurance that came with the job. Some public hospitals are reporting 15-20% increases in patient load in their Emergency Rooms. Many of these are not emergencies and include cases which would normally be seen in a family doctor’s surgery such as coughs, colds and sore throats. Yet the loss of insurance also has a paradoxical effect: some uninsured patients resist going to hospital until they can no longer continue without treatment. What might have been an easily manageable condition may now have matured into an illness which is difficult, expensive or even impossible to treat.
The effects of the crisis extend beyond the US. Money sent home by immigrant workers is very important to some countries and regions. According to the Bank of Mexico, these remittances were down 20% in May compared with the previous year. Some areas of Mexico are so dependent on this money that the people are no longer able to afford eggs, milk or meat, and are reduced to eating beans – or even boiled cactus leaves. Although these remittances ran to $25 billion last year, that was just 2% of the country’s production. Other countries are far more dependent: remittances to El Salvador run to over 18% of total production, in Honduras to over 21% and in Haiti to a staggering 30%.
If the ruling class is seeing ‘green shoots’ it is because its arrogant delusions blind it to the realities of the capitalist crisis which are being experienced in the worst possible form by workers throughout the US. The crisis is preparing a stinging backlash which, when it comes, will shake this country to its roots.