PSUV document: Crack in the accumulation of world capitalism (march towards the global depression)

The following document was produced by the United Socialist Party of Venezuela (PSUV) national leadership. It has been translated from the Spanish-language original by Federico Fuentes for Links International Journal of Socialist Renewal.

On March 21, all PSUV battalions met to discuss the document, together with an article written by Venezuela’s President Hugo Chavez (read it HERE). The day after, Chavez announced his government’s anti-crisis measures (see http://www.venezuelanalysis.com/analysis/4314).

The document is significant not only for what it says, but also because it is the beginning of a mass discussion on how to confront the crisis in Venezuela in the lead-up to the PSUV’s August congress (for more see http://www.escambray.cu/Eng/news/Wvenezuela090320434.htm).

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Document of the United Socialist Party of Venezuela

I. Starting point: Capitalism is responsible for the crisis

The citizens of the world are witnesses to the new crisis in the capitalist mode of production, universal in scale. No one doubts that what we have, in its origin and foreseeable development, is a complex and deep crisis that for sure, by generating structural changes and re-accommodation of productive forces, will allow for the opening up of a new historic stage of human civilisation.

During a fraternal discussion with compatriot Alberto Müller, he warned of the danger of what he called “economistic bias” in analysing the world crisis. Undoubtedly, this crisis, more than economic, was already a historic one in the sense that it questions the paradigm of modernity that sustains capital accumulation and the reproduction of the system through the most grotesque financial speculation, explained by state deregulation, dominant under the neoliberal format; the accelerated deterioration of the world environment, particularly through climate change; the starvation of millions of human beings in Asia and Africa, not because of “scarcity” of food but rather the lack of opportunity to access it; the insecurity generated by an energy model that concentrates its use for the wellbeing of a minority of the population of the planet; the disproportionate, wasteful and inhumane spending on weapons of mass destructive that feed local wars, consumerism sustained on credit, the deepening of the scientific-technological gap in favour of the inhabitants of the developed countries, among others.

The inherent contradictions of capitalism – a system based on production for profit and not needs – remain, with the economic cycle of boom and crisis over the last two decades, masking the unprecedented funding of the system through the massive use of credit. In fact, since the decade of the 1980s, the growth rate of financial capital was greater than that of the real economy (industry, agriculture, agro-industry).

The financial “bubble” originated out of the most unusual speculation with the value of goods, that is, the housing market, led the US into a devastating financial crisis that, in one foul swoop, wiped out the investment banking sector, provoking an enormous destruction of capital on the world scale, first, in finance, and afterward in manufacturing.

From this we can extract our first major conclusion: the capitalist crisis of the 21st century is a crack in the accumulation of its global financial sphere. That is why we are marching towards another economic depression that is much deeper, graver and longer than that of the 1930s.

Deep down, and with the rigor of historic time we have lived through, we are in a crisis of the model of capitalist neoliberal monetary accumulation, dominant since the decade of the 1980s, when, under Margaret Thatcher and Ronald Reagan, rejection of state intervention or regulation mechanisms became hegemonic in the sphere of economic policy.

Capitalism, and only capitalism, is responsible for the crisis. Its internal contradictions that aim to centralise and concentrate capital, to sustain a historic tendency that leads towards over-accumulation (excess of capital), to produce what Karl Marx called “the conflict between the expansion of production and valorisation”, as well as the insufficiency of workers’ purchasing power that generates underconsumption in the midst of wealth generation, are the scientific explanations of cyclical capitalist crises. Therefore, what is occurring today with global capitalism is not the responsibility of the workers of the world, nor of the oil-producing countries, nor the so-called Third World countries. There is no such thing as capitalism without crisis. Capitalism is responsible for the current crisis.

Unfortunately, we will have to live with a global recession for at least three years. We are not confronting a brief temporary pause in the process of economic development, this could be the most important crisis of the capitalist model of exploitation since its genesis. We cannot be indifferent to the global economic crisis, because it dominates everything. The “collapse” of consumption and investment in the US, Europe and Japan, will impact on their energy needs, which is the umbilical cord of the Venezuelan economy.

The destiny of our revolution, its persistence, measured by the satisfaction of needs that raise the wellbeing of our families, is inexorably tied to the responses we offer to the problems posed by the capitalist economic crisis.

And the responses will be conditioned by an understanding of its dimensions and its demands. There is abundant historic experience to demonstrate that the loss of material wellbeing due to a capitalist crisis has only one result: social unrest, protests, strikes. Venezuelan socialist militants have an obligation to deepen our capacity to comprehend, explain and foresee the unfolding of the world economic crisis and its impact on our country, and play a vanguard role in the ideological struggle, in the social and class battles, something that is demanded of us in order to persist in our project for a socialist society that is egalitarian, libertarian and just, and capable, at the material level, of resolving, of attending to basic human needs necessary for a life filled with greatness and wisdom.

II. The character of the financial crisis in the US

Economic policy in the US and financial accumulation

In 1988, economics Nobel Prize winner Maurice Allais warned in time that the US economy “seems to have been abandoned to a sort of financial speculative delirium, where enormous profits appear without any real foundation, whose demoralising effect are truly underestimated” (Capitalism Against Capitalism, p.69). This appreciation corresponded with the dominance of neoliberal thought in the sphere of world economic policy, whose principal expression was the conservative current headed by [then-British Prime Minister] Margaret Thatcher and [then-US President] Ronald Reagan, who were against state intervention.

US economic policy favoured capital accumulation in the financial sphere over the last three decades.

Its sustenance was the total absence of rules, short-term profits and the preponderance of the virtual economy over the real economy (industry). The US financial system multiplied to 3.3 times from what it was after the post-war period. Before the current world crisis exploded, “finance” represented 30% of the profits of capitalist corporations.

A state that turned its back on regulation of financial markets permitted the emergence of a highly speculative financial capitalism, concentrating the process of capital accumulation in the financial sphere, given that they were guaranteed, on the one hand, US growth based on credit-based consumption, and on the other, the obtaining of “immediate profits”.

The finance ‘industry’ and the housing bubble

Low interest rates fuelled indebtedness, consumption and housing demand by US families. The price of housing shot up to 70% above the rate of inflation (1996-2006). The growth in value of these between 1997 and 2007 was 401% in South Africa, 220% in Ireland, 195% in Spain, 174% in Australia, 150% in France and Sweden and 100% in US. To give us an idea of what this means, let’s look at the following figures: in January 2000, the average price of a house in the US was US$163,500; by May 2007 it reached $262,600. In this country, there was a “boom” in housing construction: in 2002, 1.5 million homes were built. In 2006, this figure reached 2.3 million. A gigantic housing bubble had been born, lifting the value of these goods far above their real value.

From 1996 to 2006, the bubble created $8 trillion* in fictitious wealth.

The US banking sector, taking advantage of this unprecedented expansion of the property market, sought out liquidity by creating structured financial instruments structured on low-quality credits (sub-prime) that ended up representing 12.5% of the housing market by 2007.

In this way, what would become a grave problem dramatically expanded. Over these years of lack of regulation, capitalism made phenomenally more sophisticated all products and markets, by turning into securities (packaging) practically all types of assets and cash flows.

Speculative capitalism invented its own finance “industry”, capable of “producing” so-called products or derivatives that were nothing more than paper, complex, diverse, non-transparent securities, with extremely risky underpinnings.

The banks transformed high- and low-risk mortgages into products or derivatives called MBSs (mortgage backed security) and CDOs (collateralised debt obligations). It’s incredible, but true. They converted 15 million mortgage credits into “securities” (transferable bonds). When the bubble burst, 10 million of these credits turned bad.

It is worth noting that in 1999, the US Congress approved allowing companies holding banking shares to convert themselves into society holdings, which in turn could carry out any financial activity.

In this way, the investment banking sector was equated with commercial banking sector that since the Great Depression (1933, Glass-Seagall Law) were clearly separated in regards to their activities and operations. That is how the gigantic investment bank Lehman Brothers speculated with total US neoliberal legality until abruptly collapsing in 2008.

The New York Stock Exchange (Wall Street) became overloaded with these complex and deregulated financial instruments that had mortgaged debt as collateral (type of guarantee) and which, once interest rates began to rise, made housing mortgages unpayable (insolvency) for millions of families. At the same time, at the end of 2007, investment banks and other financial services companies adjusted their accounting books in order to include the loss of value of securities, unleashing the collapse of share markets and credit market in the US. The crisis was formally beginning, not long after reached Europe, Japan and Asia and, what is the most delicate aspect of it all, crossed into the real economy more rapidly than was expected. The neoliberal platform trembled, and the International Monetary Fund (IMF) submerged itself in silence.

III. State intervention and recession

Is Keynes the answer?

The surprise disappearance of the totality of the investment banking sector, more than 10 million bad mortgage credits referred to as “toxic”, unleashed not only a fall in share prices on Wall Street but also a generalised panic in the financial system that helps explains the grave contraction in credit activity in the US and the rest of the world.

As a consequence, we can affirm with historic rigor that the initial de-acceleration of the US economy in 2008 is directly tied to this contraction of credit that was the result of the collapse of share markets backed by mortgages. Now no one wants to lend to anyone, inside or outside the country. Neoliberalism is on the run and the US state returned to deal with what could be the greatest crisis of the capitalist productive system.

Both [former US President George W.] Bush and [current US President Barack] Obama approved what they call rescue and stimulus programs, meaning a fiscal policy or expansive spending. To date, March 2009, the financial rescue in the US is of the order of US$2.6 trillion. A truly spectacular figure that implies the largest intervention and most quantitative transfer of debt in world history.

The world financial rescue (2008-2009) reached the astronomical figure of $6.2 trillion*.

Additionally, all the central banks of the developed capitalist countries have substantially cut interest rates in order to attempt to counteract the freezing of loans and have made available addition credits with the intention of maintaining the financial markets functioning. All of this is the reason why the world of economic science has asked itself if this means a return to Keynes or neo-Keynesianism. We believe that this question is not the most transcendental. What is important is to understand where these resources have been directed towards.

We can affirm that until now the character of these interventions have been in favour of big capital and not the affected society.

For example, why haven’t the debts of people or families whose housing mortgages exceeded their capacity to pay been renegotiated, instead of buying damaged “toxic” securities from bankers or injecting capital?

What has happened is that the multimillion dollar attempt to “salvage” the banks of the developed countries has not detained the contraction of the global credit markets, meaning that the world economy deepens its path towards a global depression. The truth is that the majority of the large global banks are completely insolvent despite this multi-million dollar assistance.

In the current conjuncture, a preliminary conclusion can be draw: the biggest effort ever of fiscal stimulus in capitalist history, the largest reduction in interest rates and the biggest plan to aid the banking sector in order for them to resume lending credit to the markets has dramatically failed. This is the beginning of a vicious universal cycle that is leading us towards various years of tremors in global capitalism.

Towards the global depression

The economies of the US, Europe and Japan have been strongly weakened. It is not just due to the insolvent banks that the recession has reached the real economy in a brutal form. This year the world will have negative results in growth, something that was unexpected.

World trade will decrease by 6%. The collapse in the accumulation of finance capital will drag the real economy along with it, without any clemency. We are at a point where more is being produced than consumed, implying a lowering of the rate of profit in real production and increases in the rate of unemployment. There is not a single large capitalist corporation that has not announced a reduction of investment and therefore of personnel.

This unemployment in the real economy is a demonstration of the disastrous nature of this world crisis. It has been conservatively estimated that there are currently 241 million unemployed workers in the developed world. Overall, 12.5 million of these unemployed are in the US (of which 4.4 million lost their jobs between December 2007 and February 2009, a rate never before seen in this society) and 17.5 million unemployed are in the European Union. This growth in unemployment reinforces the similarly dramatic fall in consumption, strengthening the negative expectations for real investment, which if it continues to fall, will impact again on employment.

What is grave is that in matters of monetary policy, there is no space to make cuts in interest rates in order to reanimate credit and, by doing so, lift the economy by way of consumption and investment. We are faced with a cycle of large contraction. The worst is yet to come. Remember that the US economy sustained its growth in the growing indebtedness of families and companies. The first led to a per person saving rate of zero and, will the fall in demand for credit, consumption and savings contracts, further sticking the boot into the economy.

In its most recent report, in March 2009, the World Bank predicts that industrial production across the planet will be 12% less than the year before and the Third World financial needs will be between $270-700 thousand million. The character of the crisis measured in all its depth (index of economic activity and employment, deterioration of private and public company patrimony, credit, world trade, and peoples’, family and company expectations), graveness (contemplating its duration, temporality and its return to a normal state) and reach (world, regional or local) surpasses the initial previsions of 2007 and 2008.

In the US alone, the amount of production below full potential is estimated, in academic circles, to be $2.9 trillion* and unemployment will reach 10% by the end of the year.

We hold the position that we are marching towards another capitalist depression, deeper than that of the 1930s in the 20th century. That is why we have to be prepared to defend the libertarian and just project involved in the socialist proposal for Venezuela, living together with a world crisis with its epicentre in 2009, and which will extend to 2011 and have a period of minimum recuperation of 10 years.

All of this in combination with high grades of dependency that we continue to have on cash flows originating from oil industry activity, which has converted itself into one of the transmission belts of the crisis. The revolutionary government and the organised people can confront the world capitalist crisis, placing the maximum level of social awareness, in order to be able to come out of this historic episode of ruinous capitalism.

IV. Preliminary conclusions

First. The world crisis that is making capitalism tremble originated in a crack in the accumulation of capital in a sector of financial capitalism.

It is the contradictions of capitalism that explain the crisis, particularly those that place emphasis on accumulation and reproduction of the system in the sphere of easy and quick profits, in the finance sector. We are identifying a historic bankruptcy of investment banking sector that unashamedly speculated for decades.

Second. We are heading in an accelerated manner towards a grave, deep economic depression, with worldwide reach. The fall of credit drags with it consumption and investment. The conventional anti-cycle mechanisms or instruments of economic policy have become impressively exhausted. We should prepare ourselves for a minimum of three years of fall of production and employment.

Third. Long-term crisis of neoliberal economic thought. The fundamentalism of the “free market” has failed. There is a resurgence of Keynesian schemas (fiscal policy converts itself in the principal tool for anti-cyclical policies). A relevant role for the state in economic material.

Fourth. Loss of US influence in the world economy. The discrediting of the IMF and World Bank. The crisis must serve to attempt to lay the foundations of a new international financial economic order. We need to back the dissident efforts of the BRIC group (Brazil, Russia, India and China) within the G20, that is demanding changes to the IMF and World Bank, as well as the possibility of creating “a supranational currency reserve” and the obligatory diversification of the structure of currency reserves and operations of national banks and international financial organisations.

Fifth. The revolutionary government and the organised people of Venezuela will confront the backlash of the world crisis remaining loyal to the programs of equality (social spending) and attempting to preserve investment in order to sustain growth and employment in the current conjuncture and, in the medium and long term, to the strategic, sustaining the project of a socialist society that will allow us a superior arena to be able to live in freedom and with justice, based on equality and solidarity of the human species.

[* Translator's note: The original document referred to these figures as billions, using the formula of 1 billion = 1 million million more common in Spanish, rather than the increasingly standard English-language formula of 1 billion = 1 thousand million. It has been changed here to trillion to match the latter usage.]