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Global Crisis Is Back - Matière et Révolution
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Home page > 05 - ECONOMIC POLICY - ECONOMIE POLITIQUE > 5- L’économie mondiale en route vers une nouvelle crise systémique autrement (...) > Global Crisis Is Back

Global Crisis Is Back

Wednesday 20 January 2016, by Robert Paris

Global stocks plunge amid fears of a new financial crisis

Stock markets in the US and around the world ended the week with massive selloffs, rocked by fears that the slowdown in China and plunging oil and commodity prices will trigger a new financial crisis on the order of the 2007-2008 disaster.

Another sharp fall on Chinese markets, with the Shanghai Composite Index dropping 3.55 percent, followed by a 6 percent fall in oil prices to $29 a barrel, set off a wave of panic selling. The mood was summed up by the chief strategist at Federated Investors, who said, “Investors are scared to death, and the fact that it’s happening at the beginning of the year has some historical significance.”

A major factor in the Chinese selloff was concern that Beijing will report its weakest full-year growth figure in 25 years on Tuesday.

On Friday, Walmart announced that it will close 269 stores, 154 of them in the US, and eliminate 16,000 jobs. The Walmart statement, coming on the heels of multi-store closure announcements by Macy’s and Sears-Kmart, highlighted the worsening slowdown in the real economy globally and in the US that underlies the turbulence on stock and bond markets. It also reflected the reality of falling wages and mounting income insecurity affecting broad layers of the US population.

Also this week, BP announced 4,000 layoffs, pointing to the increasingly depressed state of the energy sector.

Friday’s selloff, with the EURO STOXX/50 index down 2.37 percent and all of the major US indexes lower by well over 2 percent, caps off the worst-ever yearly opening for Wall Street. The Dow Jones Industrial Average, which lost 391 points on Friday to crash through the 16,000-point level, has fallen by 8.24 percent so far this year. The Standard & Poor’s 500 index has fallen by more than 8 percent and the Nasdaq has lost more than 10 percent.

All three US indexes are officially in correction, having lost more than 10 percent from their recent highs. The Chinese stock indexes are officially in bear market territory, having shed more than 20 percent of their value. In just the first two weeks of the new year, global stock markets have lost $5.7 trillion in value.

The price of oil, a barometer of global economic activity, is down 20 percent so far this year. The first two weeks of 2016 have seen the steepest two-week decline for oil since the 2008 financial crisis.

Going into a three-day weekend, with the markets closed Monday for Martin Luther King, Jr. Day, there will be intensive behind-the-scenes discussions between Treasury and Federal Reserve officials and the major Wall Street banks and hedge funds over the spiraling crisis. The White House on Friday took the unusual step of commenting on market movements in an attempt to reassure investors. White House spokesman Josh Earnest said officials were closely watching market movements and their potential impact on the economy.

Since the financial crash of 2008, the world capitalist economy has been propped up by rapid growth in China and a number of emerging market countries and a huge run-up in stock prices, all of which has been engineered on the basis of an immense growth of debt. The Federal Reserve and the central banks of Europe and Asia have pumped trillions of dollars into the financial markets, fueling a further increase in financial parasitism and speculation. This, combined with ruthless austerity against the working class, has formed the basis for an unprecedented enrichment of the world’s rich and super-rich and a further transfer of wealth from the bottom to the top.

But in the US and the other older industrialized countries, there has been a sharp decline in business investment in the productive forces. Instead, the vast profits of banks and corporations have gone largely to parasitic activities such as stock buybacks, dividend increases and mergers and acquisitions.

Earlier this week, Albert Edwards, a strategist at Societe Generale, told an investment conference in London that global economic developments would “push the US back into recession.” Predicting that there will be a new financial crisis “every bit as bad as 2008-2009,” he noted, “We have seen massive credit expansion in the US. This is not for real economic activity; it is borrowing to finance share buybacks.”

Now, with China slowing rapidly, Brazil and Russia in deep recessions, and the other emerging market economies sinking under the impact of falling commodity prices and rising debt, the inherently unstable financial house of cards is beginning to collapse.

A measure of the growth of speculation is the fact that since 2009, the US junk bond market has increased by some 80 percent, to $1.3 trillion. The market for energy junk bonds has increased even faster, up 180 percent to more than $200 billion. In recent weeks, as oil and other commodities have continued to fall and China has continued to slow, the junk bond market has shown signs of imploding, with prices dropping sharply and a number of energy junk bond mutual funds collapsing.

Larry Fink, the CEO of Blackrock, the world’s biggest private investment fund, told the US cable channel CNBC Friday that the market crisis was likely to worsen. “I actually believe there’s not enough blood in the streets,” he said, adding that “you’re going to start seeing more layoffs in the middle part of the first quarter, definitely the second quarter…”

A battery of economic data released Friday indicated that the US economy is sharply decelerating. The Federal Reserve reported that industrial production fell 0.4 percent in December, primarily as a result of cutbacks in utilities and mining output, after declining 0.9 percent in November. Industrial production fell at an annual rate of 3.4 percent in the fourth quarter of 2015.

Last week, the Institute for Supply Management released its manufacturing index, showing a decline to 48.2 in December, the lowest reading since December 2009. Any number below 50 signals a contraction.

The New York Fed this week released its Empire State Manufacturing Survey index, showing a decline to minus 19.37 in January from minus 6.21 in December. “Business activity declined for New York manufacturing firms more sharply than at any time since the 2007-2009 recession, according to the January 2016 survey,” the New York Fed said.

These reports confirm the existence of an industrial recession in the US. And this week, Michael Ward, chief executive of the CSX railway, said in a television interview that the country was in the grips of a “freight recession,” with coal and other commodity shipments falling precipitously.

The Commerce Department reported on Friday that US retail sales fell 0.1 percent in December from the previous month. For all of 2015, retail sales rose just 2.1 percent, the weakest reading since 2009, after advancing 3.9 percent in 2014. The National Retail Federation separately estimated that holiday sales rose just 3 percent from the previous year, far below its projection of 3.7 percent growth.

The Commerce Department also reported that business inventories fell 0.2 percent in November, the biggest drop since September 2011.

The Labor Department released its Producer Price Index, showing a decline of 0.2 percent last month. Pointing to deflationary forces in the US economy, producer prices fell 1.0 percent in 2015, the weakest figure since the series began in 2010.

As a result of the weak data on the US economy, JPMorgan Chase cut its fourth quarter 2015 estimate for growth of the gross domestic product from a 1.0 percent annual rate to a mere 0.1 percent pace. Barclays trimmed its forecast by four-tenths of a percentage point to a 0.3 percent rate.

The sharp intensification of the economic crisis will further inflame geopolitical tensions and the drive of the US and other imperialist powers to war. At the same time, it will stoke internal social tensions that are already driving the working class into struggle in the US and internationally against austerity and social inequality.

The emergence of a major economic crisis takes place against the backdrop of a critical presidential election in the US, which has already revealed the growing alienation of the working population from the entire political system and the further lurch of the two big-business parties to the right. By Barry Grey

China’s deep economic malaise

The upheavals in global share markets since the beginning of the year have focussed attention on China amid fears that the slump in its stock markets and the falling renminbi (yuan) are symptoms of a far deeper economic malaise. The slowdown of the Chinese economy, which is exposing massive overcapacity in industry and the property market, and high levels of debt, is threatening to trigger an upsurge in the class struggle.

The official growth rate for 2015 has been put at 6.9 percent, with the target for the coming year of 6.5 percent—down from 10.6 percent in 2010 and the lowest level in a quarter century. However, numbers of analysts have cast doubt over the government figures. As reported last week in the Financial Times for instance, a poll by Consensus Economics of members of its China panel forecast growth of just 4.8 percent in 2016.

So questionable are the statistics that economic pundits turn to other indices, such as the so-called Keqiang index, reportedly created by Premier Li Keqiang, to provide a more accurate gauge of the state of the economy. The three elements of the Keqiang index—rail freight, electricity production and bank lending—are all in decline. The business magazine Caixin reported last week that rail cargo slumped in 2015 by 10.5 percent—the largest annual decline on record.

The downturn in China is the product of global recessionary trends. The restoration of capitalism and transformation of the country into the world’s premier cheap labour platform over the past three decades led to a colossal economic expansion. The Beijing regime responded to the 2008 global financial crisis, which hit exports and destroyed 20 million jobs, with a huge stimulus package and a flood of cheap credit that ensured continued high levels of growth. Investment did not take place in productive capacity, however, but in large infrastructure projects and above all, fuelled a speculative frenzy in property, then in the share markets.

This strategy, which was premised on a quick recovery from the global crisis and a return to high levels of global growth, has unravelled. Exports have continued to decline, revealing enormous overcapacities, particularly in basic industries. The property market is glutted and prices are stagnant. The Chinese share markets, which reached dizzy heights in the first half of 2015, have collapsed and are now another source of instability.

The Chinese government is seeking to “transition” the economy from one based on manufactured exports to a service economy built on domestic consumption. But the new “model” is fraught with contradictions, not least of which is the fact that boosting domestic consumption requires higher incomes for working people, thus further undermining China’s competitiveness as a low-wage export hub. Moreover, the regime is confronting mounting international pressure to accelerate pro-market reforms, including the closure or restructuring of large numbers of state-owned enterprises (SOEs)—a step that will lead to rising unemployment and falling domestic consumption.

For all the hype about China’s transition, the country’s function in the world economy remains that of a cheap labour platform. All the statistics for manufacturing are bleak. According to a business sentiment index released by Caixin last month, factory employment in China has fallen for 25 months. The official manufacturing purchasing managers’ index (PMI) for December was up slightly at 49.7 compared to November but still below the figure of 50 indicating growth. Caixin ’s own PMI for December was just 48.2, down from 48.6 in November—the 10th straight month below 50.

Premier Li told a seminar in Beijing in November that the government was determined to cut back on overcapacity in traditional industries as well as the large number of so-called zombie enterprises, pointing to steel and coal in particular. Up until now, however, little action has been taken out of fear at all levels of government of rising social unrest.

The New York Times last month focussed on the fate of the Longmay Group, the biggest coal company in northeastern China, which announced plans last September to slash 100,000 jobs, or 40 percent of its workforce, at 42 mines in four cities. However, the company, an SOE owned by the Heilongjiang provincial government, delayed the job cuts. Several hundred older workers were laid off but provincial authorities provided a short-term $600 million bailout to overcome the company’s immediate debt problems.

Deng Shun, an analyst at ICIS C1 Energy, told the New York Times: “They are quite worried about social unrest, so they delay. These layoffs should have happened two years ago.” The provincial government’s fears were well grounded, however, as protests had already erupted before any mass layoffs. In April, thousands marched in the city of Hegang to protest over delayed wages. The organisers were arrested and jailed. In October, the company management only averted another protest by locking workers in the mines on the day of a scheduled rally.

Mine workers are well aware that the prospect being held out of jobs in an expanding services sector is illusory. Heilongjiang is one of China’s most economically depressed provinces, already mired in recession. Economic output fell by 2.2 percent in the first three quarters of last year compared with the same period the previous year.

The resentment and bitterness in the working class was voiced by former mineworker now taxi driver, Mr Cui, who told the New York Times: “In the 90s, everyone was poor. Now the rich are too rich, and the poor are too poor. Because of the layoffs, everyone is worried. No one has a way to live outside the mines. With the New Year holidays coming, there will be chaos in Hegang.”

It is not just miners, nor workers in basic industry, who face large job losses. Writing in the South China Morning Post last month, analyst Andy Xie explained: “China may have overinvested up to 40 trillion yuan ($US6.1 trillion) since 2009. Its physical manifestation is in empty buildings and industrial overcapacity.”

After citing estimates that the steel industry has an overcapacity of 200 to 400 million tonnes—more than the total production of any other country—Xie continued: “The dire situation is common among all commodities industries. New industries like smartphone manufacturing already have a large overcapacity. Even power plants are hugely underutilised.”

The China Iron and Steel Association has reported that in the first 11 months of 2015, large- and medium-sized steel mills suffered losses of 53.1 billion yuan ($8.18 billion). Wuhan Iron & Steel, a major SOE, announced last month that it plans to eliminate 6,000 jobs within three months, while its parent company could cut 11,000 jobs and slash salaries by 20 percent in 2016.

Restructuring is already underway in other industries. China’s two largest shipping groups merged last month and its two largest train makers, CNR and CSR, came together earlier in the year.

Far greater job losses are being mooted amid a debate in Chinese ruling circles about the necessity of eliminating “invisible unemployment”—workers who are kept on the books of companies even though there is little for them to do. The government faces mounting levels of debt, much of it accumulated by local governments to fund infrastructure projects and keep “zombie companies” like Longmay afloat. The country’s debt to gross domestic product ratio has risen by nearly 50 percent over the past four years.

In its annual forecast, the Chinese Academy of Social Sciences urged the government to make the “invisible unemployment” more visible in 2016 by allowing more SOEs to go under. Wei Yao, a strategist at Société Générale, published a note in November saying 1.7 million workers would go in an initial round of sackings to address “China’s most pressing economic issues: capital misallocation, looming growth of non-performing assets and deteriorating productivity.” In other words, as is the case around the world, Chinese workers are to bear the burden of the crisis through the destruction of jobs and conditions.

The protests by Longmay workers in Heilongjiang Province last year are just one indication of sharpening class tensions. The latest figures from the Hong Kong-based China Labour Bulletin show that the number of strikes and protests more than doubled last year to 2,774 incidents, compared to 1,379 for 2014, with a marked increase in December. Most of strikes were over the non-payment of wages, which can often be months in arrears, a practice common in the construction industry but now spreading to manufacturing, mining and services.

The figures, which are by no means complete, give a glimpse of the seething discontent in the working class that the regime constantly seeks to suppress through state-run trade unions and police-state methods. The constant fear in the Chinese Communist Party leadership is that the vastly expanded working class—estimated to number 400 million—will break out of this straitjacket and destabilise the regime’s tenuous grip on power. By Peter Symonds

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