The recent stock market downswing in India and the world, in the aftermath of the downgrading of US credit rating by Standard & Poor (S&P) has graphically shown the irrationality of the economic world built around finance capital led globalization. Let us elaborate.
To say that the US economy is in the midst of a crisis is stating the obvious. Currently, the growth rate of the US economy, in the second quarter of 2011, is 1.3%, with an unemployment rate of 9.1% in July 2011. However, the downgrading of the US economy comes not because of the ill-health of the US economy. Rather the S&P says,
“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
In other words, the credit rating US was lowered because of the perception by S&P that the US government will not contain the growth in public spending meant for the poor and middle class and there seems to be a problem of consensus on this issue.
The fact of the matter is that the US debt has indeed increased since the beginning of the crisis. This increase in the US debt has simply failed to have any impact on reducing the unemployment problem or increasing the growth rate of the economy to a reasonable extent. This is because a large part of the US public spending has been in the form of tax concessions to the rich and the corporate sector, which has very little impact on employment and growth. Secondly, during the immediate aftermath of the financial crisis of 2008, the US government bailed out banks and other financial institutions, which further increased the US debt. When all these concessions to the rich and finance capital were being given, the markets as well as credit rating institutions like S&P did not downgrade the US credit rating. The moment, the interests of finance capital and the rich has been ensured through the bail outs, noises started that the US deficit should be reduced, the political manifestation of which was the Tea Party and ultra-right Republicans.
Now, deficits can be reduced either by raising taxes or by cutting expenditures. The interests of finance capital are ensured if taxes are lowered and public expenditure is cut. That is precisely what the Republicans wanted. With the controversy regarding the debt ceiling in the USA, the Republicans managed to get a commitment from the Obama administration that public spending will also be cut. This has no economic logic in a situation in which the US economy is showing sluggish growth and high unemployment. But still this was agreed to, since finance capital demanded it. Even then, the US economy credit rating was downgraded, showing the degree of power that finance capital enjoys in today’s world. This becomes even starker, if we look at the statistics of the US economy. Even with such public spending, the rate of interest on long term bonds of the US (10 year treasury bonds) is around 2% and on short term bond it is around 0%. In other words, there is at present no perceptible threat on the credit-worthiness of the US in the market.
Even then, it is true that with the downgrading of US credit rating by S&P, there were shocks in the world stock markets. It is the same S&P which gave AAA ratings to sub-prime mortgages, which was the trigger of the financial crisis. Still, the markets responded to the downgrading. Why? In order to understand this, we need to go back to the example of the beauty contest that John Maynard Keynes had described in 1936. Imagine that a newspaper has announced a beauty contest with the proclamation that prizes will be announced for those who correctly judge the most beautiful face (to be based on maximum number of votes), within a given number of pictures. In such a scenario, when one is voting, she is not thinking about her idea of beauty. Rather, she is thinking about what others think to be beautiful. Therefore, she goes on with the ‘herds’ and votes for the photo which she thinks most other people will vote for. Similarly, in the financial assets market, if a powerful firm like the S&P declares that US no longer remains a AAA country, then immediately people start thinking that others must be thinking that it is safer to withdraw money from the US stock markets and other financial assets. As a result, most of the people end up withdrawing money from the markets, resulting in a real fall in the stock prices. Even if the downgrading of the US by the S&P is not correct, such a fall in the stock market becomes a reality.
A natural question might arise at this point. Are the investors in the stock markets not aware of the economic theory just proposed? The point is not whether one knows the theory or not. The point is that in a world of uncertainty, it is important for the individual agents to play the game according to their assessment of what others are going to do. Since capitalism is a spontaneous anarchic system, there is no way in which these actions of the agents can be coordinated. Therefore, in the event of such announcements by the S&P, the markets crashed, no matter what hard facts say about US bond markets.
This is not to argue that the US economy does not have any problems. Rather, the problems of the US economy are very real. But both the problems as well as the solutions have a class dimension. The problem of the US economy is of low growth and high unemployment, the clear victims of which are the unemployed and the poor, whose numbers have increased in the USA. The solution which would benefit them, as well as the US economy as a whole, is that the government should increase its expenditures to pump up demand in the economy. This however is strongly opposed by Republicans and finance capital. The solution for them is that deficits should be reduced and taxes cut, which is basically saying that public expenditures should be reduced. While this adversely affects the poor and the unemployed, it benefits the rich and finance capital. What finance capital essentially wants is to make up another asset price bubble to ensure growth, which will again fill their coffers. But any such bubble is doomed to crash one day. So in effect, finance capital sponsored growth strategy will land the US in another crisis.
The only way to come out of this quagmire is to challenge the hegemony of finance capital and to go for an alternative strategy of growth, based on government expenditure. But the debate in the USA as well as in much of Europe shows that such a re-orientation is not on the horizon. This is because at a fundamental level, the hegemony of finance capital has remained unchallenged for a very long period of time in the West. To build up the counter hegemony against this dominance requires a re-alignment of political and class forces. That is a protracted struggle. In the meantime, capitalism’s crisis will continue to devastate millions of people across the globe. The political fall out of this will be the rise of extremist and violent movements. The riots in London, the rise of neo-fascism in Europe and the Tea Party in the USA shows the concrete manifestation of rise of desperation in the youth and ultra-right ideology in the advanced capitalist countries. What will be the final outcome of these complex processes are yet to be seen. The last chapter on the on-going crisis in the advanced capitalist countries is far from being written.