The Great Depression of the 21st Century:
Collapse of the Real Economy
By Michel Chossudovsky
Global Research, November 15, 2008
The financial crisis is deepening,
with the risk of seriously disrupting the system of international
payments.
This crisis is far more serious than
the Great Depression. All major sectors of the global economy are
affected. Recent reports suggest that the system of Letters of
Credit as well as international shipping, which constitute the
lifeline of the international trading system, are potentially in
jeopardy.
The proposed bank "bailout" under the
so-called Troubled Asset Relief Program (TARP) is not a "solution"
to the crisis but the "cause" of further collapse.
The "bailout" contributes to a
further process of destabilization of the financial architecture. It
transfers large amounts of public money, at taxpayers expense, into
the hands of private financiers. It leads to a spiraling public debt
and an unprecedented centralization of banking power. Moreover, the
bailout money is used by the financial giants to secure corporate
acquisitions both in the financial sector and the real economy.
In turn, this unprecedented
concentration of financial power spearheads entire sectors of
industry and the services economy into bankruptcy, leading to the
layoff of tens of thousands of workers.
The upper spheres of Wall Street
overshadow the real economy. The accumulation of large amounts of
money wealth by a handful of Wall Street conglomerates and their
associated hedge funds is reinvested in the acquisition of real
assets.
Paper wealth is transformed into the
ownership and control of real productive assets, including industry,
services, natural resources, infrastructure, etc.
Collapse of Consumer Demand
The real economy is in crisis. The
resulting increase in unemployment is conducive to a dramatic
decline in consumer spending which in turn backlashes on the levels
of production of goods and services.
Exacerbated by neoliberal
macro-economic policy, this downward spiral is cumulative,
ultimately leading to an oversupply of commodities.
Business enterprises cannot sell
their products, because workers have been laid off. Consumers,
namely working people, have been deprived of the purchasing power
required to fuel economic growth. With their meager earnings, they
cannot afford to acquire the goods produced.
Overproduction Triggers a String
of Bankruptcies
Inventories of unsold goods pile up.
Eventually, production collapses; the supply of commodities declines
through the closing down of production facilities, including
manufacturing assembly plants.
In the process of plant closure, more
workers become unemployed. Thousands of bankrupt firms are driven
off the economic landscape, leading to a slump in production.
Mass poverty and a Worldwide decline
in living standards is the result of low wages and mass
unemployment. It is the outcome of a preexisting global cheap labor
economy, largely characterized by low wage assembly plants in Third
World countries.
The current crisis extends the
geographic contours of the cheap labor economy, leading to the
impoverishment of large sectors of the population in the so-called
developed countries (including the middle classes).
In the US, Canada and Western Europe,
the entire industrial sector is potentially in jeopardy.
We are dealing with a long-term
process of economic and financial restructuring. In its earlier
phase, starting in the 1980s during the Reagan Thatcher era, local
and regional level enterprises, family farms and small businesses
were displaced and destroyed. In turn, the merger and acquisition
boom of the 1990s led to the concurrent consolidation of
large corporate entities both in the real economy as well as in
banking and financial services.
In recent developments, however, the
concentration of bank power has been at the expense of big
business.
What is distinct in this particular phase of the crisis, is the
ability of the financial giants (through their overriding control
over credit) not only to create havoc in the production of goods and
services, but also to undermine and destroy large corporate entities
of the real economy.
Bankruptcies are occurring in all
major sectors of activity: Manufacturing, telecoms, consumer retail
outlets, shopping malls, airlines, hotels and tourism, not to
mention real estate and the construction industry, victims of the
subprime mortgage meltdown.
General
Motors has confirmed that "it could run out of cash within a few
months, which could prompt one of the biggest bankruptcy filings in
U.S. history". (USNews.com,
November 11, 2008)) In turn this would backlash on a string of
related industries. Estimates of job losses in the US auto industry
range from 30,000 to as much as 100,000.(Ibid).
In
the US, consumer retail companies are in difficulty: the share
prices of JC Penney and Nordstrom department store chains have
collapsed. Circuit City Stores Inc. filed for Chapter 11 protection.
The shares of Best Buy, the electronics retail chain, have plunged.
The
Vodafone Group PLC, the world's biggest mobile phone company not to
mention InterContinental Hotels PLC are in difficulty, following the
collapse of stock values. (AP, Nov 12, 2008). Worldwide, over two
dozen airlines have gone under in 2008, adding to a string of
airline bankruptcies in the course of the last five years. (Aviation
and Aerospace News, 30 October 2008). Denmark's Second
commercial airline Stirling has declared bankruptcy. In the US, a
growing list of real estate companies have already filed for
bankruptcy protection.
In
the last two months, there have been numerous plant closures across
America leading to the permanent layoff of tens of thousands
of workers. These closures have affected several key areas of
economic activity including the pharmaceutical and chemical
industries, the automobile industry and related sectors, the
services economy, etc.
US factory orders have declined
dramatically. Research firm Autodata reported in October that "sales
of cars and light trucks in September had declined 27 percent
compared with a year earlier."(Washington
Post, October 3, 2008)
Unemployment
According to the US Bureau of Labor Statistics, an additional
240,000 jobs were lost during the month of October alone:
"Nonfarm payroll employment fell by
240,000 in October, and the unemployment rate rose from 6.1 to 6.5
percent, the Bureau of Labor Statistics of the U.S. Department of
Labor reported today. October's drop in payroll employment
followed declines of 127,000 in August and 284,000 in September,
as revised. Employment has fallen by 1.2 million in the first 10
months of 2008; over half of the decrease has occurred in the past
3 months. In October, job losses continued in manufacturing,
construction, and several service-providing industries...
Among the unemployed, the number of
persons who lost their job and did not expect to be recalled to
work rose by 615,000 to 4.4 million in October. Over the past 12
months, the size of this group has increased by 1.7 million." (Bureau
of Labor Statistics, November, 2008)
The official figures do not describe
the seriousness of the crisis and its devastating impact on the
labor market, since many of the job losses are not reported.
The situation in the European Union
is equally disturbing. A recent British report points to the
potential plight of mass unemployment in North Eastern England. In
Germany, a report published in October, suggests that 10-15% of all
automotive jobs in Germany could be lost.
Job
cuts have also been announced at General Motors and Nissan-Renault
plants in Spain. Sales of new cars in Spain plummeted by 40 percent
in October in relation to sales in the same month last year.
Workers of Nissan automaker protest
in front of the Japanese company's building in Barcelona (AFP)
Bankruptcies and Foreclosures: A Money-spinning Operation for the
Financial Giants
Among the companies on the verge of
bankruptcy are some highly lucrative and profitable operations. The
important question: who takes over the ownership of bankrupt giant
industrial corporations?
Bankruptcies and foreclosures are a
money-spinning operation. With the collapse in stock market values,
listed companies experience a major collapse of the price of their
stock, which immediately affects their creditworthiness and their
ability to borrow and/ or to renegotiate debts ( which are based on
the quoted value of their assets).
The institutional speculators, the
hedge funds, et al have cashed in on their windfall loot.
They trigger the collapse of listed
companies through short selling and other speculative operations.
They then cash in on their large scale speculative gains.
According to a report in the
Financial Times, there is evidence that the plunge of the US
automobile industry was in part the result of manipulation:
"General Motors and Ford lost 31 per cent to $3.01 and 10.9 per cent
to $1.80 despite hopes that Washington may save the industry from
the brink of collapse. The fall came after Deutsche Bank set a
price target of zero on GM." (FT, November 14, 2008, emphasis
added)
The financiers are on a
shopping-spree. America's Forbes 400 billionaires are waiting in
limbo.
Once they have consolidated their
position in the banking industry, the financial giants including JP
Morgan Chase, Bank of America, et al will use their windfall money
gains and bailout money provided under TARP, to further extend their
control over the real economy.
The next step consists in
transforming liquid assets, namely money paper wealth, into the
acquisition of real economy assets.
In this regard, Warren Buffett's
Berkshire Hathaway Inc. is a major shareholder of General Motors.
More recently, following the collapse in stock values in October and
November, Buffett boosted his stake in oil producer ConocoPhillips,
not to mention Eaton Corp, whose price on the NYSE tumbled by 62% in
relation to its December 2007 high (Bloomberg).
The target of these acquisitions are
the numerous highly productive industrial and services sector
companies, which are on the verge of bankruptcy and/or whose stock
values have collapsed.
The money managers are picking up the
pieces.
Ownership of the Real Economy
As a result of these developments,
which are directly related to the financial meltdown, the entire
ownership structure of real economy assets is in turmoil.
Paper wealth accumulated through
insider trading and stock market manipulation is used to acquire
control over real economic assets, displacing the preexisting
ownership structures.
What we are dealing with is an
unsavory relationship between the real economy and the financial
sector. The financial conglomerates do not produce commodities. They
essentially make money through the conduct of financial
transactions. They use the proceeds of these transactions to take
over bona fide real economy corporations which produce goods and
services for household consumption.
In a bitter twist, the new owners of
industry are the institutional speculators and financial
manipulators. They are becoming the new captains of industry,
displacing not only the preexisting structures of ownership but also
instating their cronies in the seats of corporate management.
No Reform Possible under the
Washington-Wall Street Consensus
The November 15 G-20 Financial Summit
in Washington upholds the Washington-Wall Street consensus.
While formally presenting a project
to restore financial stability, in practice, the hegemony of Wall
Street remains unscathed. The tendency is towards a unipolar
monetary system dominated by the United States and upheld by US
military superiority.
The architects of financial disaster
under the 1999 Gramm-Leach-Bliley Financial Services Modernization
Act (FSMA) have been entrusted with the task of mitigating the
crisis, which they themselves created. They are the cause of
financial collapse.
The G20 Financial Summit doesn't
question the legitimacy of the hedge funds and the various
instruments of derivative trade. The final Communiqué includes an
imprecise and blurred commitment "to better regulate hedge funds
and create more transparency in mortgage-related securities in a bid
to halt a global economic slide."
A solution to this crisis can only be
brought about through a process of "financial disarmament", which
forcefully challenges the hegemony of the Wall Street financial
institutions including their control over monetary
policy. "Financial disarmament" would also require freezing the
instruments of speculative trade, dismantling the hedge funds and
democratizing monetary policy. The term "financial disarmament" was
initially coined by John Maynard Keynes in the 1940s.
Obama Endorses Financial
Deregulation
Barack
Obama has embraced the Washington-Wall Street consensus. In a bitter
twist, former Congressman Jim Leach, a Republican who sponsored the
1999 FSMA in the House of Representatives is now advising Obama on
formulating a timely solution to the crisis.
Jim Leach, Madeleine Albright and
former Treasury Secretary Larry Summers, who also played a key role
in pushing through the FSMA legislation, were in attendance at the
November 15 G-20 Financial Summit, as part of President-elect Barack
Obama's advisory team:
"President-elect Barack Obama and
Vice President-elect Joe Biden announced that former Secretary of
State Madeleine Albright and former Republican Congressman Jim
Leach would be available to meet with delegations at the G-20
summit on their behalf. Leach and Albright are holding these
unofficial meetings to seek input from visiting delegations on
behalf of the president-elect and vice president-elect. (mlive.com,
November 15, 2008)
