The Basis For A New Recession

[IMPress Polly]

We have all doubtless noticed the recent increase in stock market volatility that's developed over the last couple weeks, which saw U.S. stocks enter full correction mode this last week and international stocks generally fare even worse. No one knows whether this is a sign of impending recession (as stock markets are not per se the real economy so much as wealthier people betting on what will happen next in the real economy), but investors do have real reason to worry about that possibility. Why? Because the much-touted economic recovery from the Great Recession that we have seen finally begin to reach real working people and the poor over the last few years has been built more on the superficial foundation of debt than on actual production.

At the root of Wall Street's worries are concerns that the Federal Reserve will soon raise interest rates. The reason investors find that prospect as worrying as they do is because they know that 12% of American corporations are what they call "zombie" companies, meaning that they cannot cover their interest payments as things are and any sudden rise in interest rates would send them into bankruptcy. Were interest rates to rapidly move above 3%, the economic impact would be far-reaching. This concentrates the reality that the so-called economic recovery that we have seen over the last decade, in truth, has been fueled by cheap credit and that its continuation is entirely dependent on the continuation of that regime. Revisit the interest rates of 2008 and 2008 will happen all over again. That's just how "sound the fundamentals" of the economy actually are; so sound that they cannot withstand any notable interest rate hike from the Federal Reserve! The same principle applies globally. In the past decade, the overall ratio of global debt to economic output has increased by some 40%. It is, in other words, a debt-fueled recovery globally, not just here in the United States.

What's more sinister than this though are the reasons why the Federal Reserve is expected to soon raise interest rates. The particular impetus for the recent stock market volatility, you see, has been an influx of positive news for workers: a new report last week finding that jobs are being created at a faster-than-expected pace and another report this week finding that worker's wages have are rising a bit faster than previously expected. Why would this be bad news? It winds up being bad news because of the warped logic that the capitalist system is built upon. You see, the purpose of federal interest rate hikes is, in essence, to combat the economic impact of higher payouts to workers. The terrifying prospect of workers becoming too powerful -- gaining too much leverage in pay and benefit negotiations with their employers -- is what bourgeois economists refer to as "the economy overheating", and when the economy "overheats" you have to do something about that, lest fundamental class relations begin to break down and workers start to forget who the boss is. Wall Street fears that such a point has now been reached in our class relations. Workers are getting out of control with their demands upon their employers. They're forgetting who the boss is and that has to be forcibly stopped with a curbing of the money supply. (Or, to use the official, conveniently-ethereal jargon about all this, "the Fed may soon move to combat inflation by raising interest rates". Note what the source of the feared inflation is.) And that curbing of the money supply, in turn, could send 12% of American companies into bankruptcy, touching off another recession, so strong a foundation does our economy currently rest on!

Of course, there is also the real possibility that the Federal Reserve will raise interest rates by only a small amount in the near future, thus avoiding the worst possible impacts highlighted above. It is impossible to tell just how much "correction" the Fed will deem necessary. But if we do enter a new recession at some point this year, what I have highlighted here will be its basis for occurring. This basis highlights the irrational nature of the capitalist system; the illogic of basing a global economy on production for exchange instead of production for use. The alternative is the creation of a democratically-organized socialist system driven by the planning of production and distribution by producers and consumers themselves in place of the existing profit-driven system. Such an economy would have a real, material foundation and no motive to combat improvements in the living standards of working people.

[gamewell45]

We have all doubtless noticed the recent increase in stock market volatility that's developed over the last couple weeks, which saw U.S. stocks enter full correction mode this last week and international stocks generally fare even worse. No one knows whether this is a sign of impending recession (as stock markets are not per se the real economy so much as wealthier people betting on what will happen next in the real economy), but investors do have real reason to worry about that possibility. Why? Because the much-touted economic recovery from the Great Recession that we have seen finally begin to reach real working people and the poor over the last few years has been built more on the superficial foundation of debt than on actual production.

At the root of Wall Street's worries are concerns that the Federal Reserve will soon raise interest rates to combat inflation. The reason investors find that prospect as worrying as they do is because they know that 12% of American corporations are what they call "zombie" companies, meaning that they cannot cover their interest payments as things are and any sudden rise in interest rates would send them into bankruptcy. Were interest rates to rapidly move about 3%, the economic impact would be far-reaching. This concentrates the reality that the so-called economic recovery that we have seen over the last decade, in reality, has been fueled by cheap credit and that its continuation is entirely dependent on the continuation of that regime. Revisit the interest rates of 2008 and 2008 will happen all over again. That's just how "sound the fundamentals" of the economy actually are; so sound that they cannot withstand an interest rate hike from the Federal Reserve. The same principal applies globally. In the past decade, the overall ratio of global debt to economic output has increased by some 40%. It is, in other words, a debt-fueled recovery globally, not just here in this country.

What's more sinister than this though are the reasons why the Federal Reserve is expected to soon raise interest rates. The particular impetus for the recent stock market volatility, you see, has been an influx of positive news for workers: a new report last week finding that jobs are being created at a faster-than-expected pace and another report this week finding that worker's wages have are rising a bit faster than previously expected. Why would this be bad news? It winds up being bad news because of the warped logic that the capitalist system is built upon. You see, the purpose of federal interest rate hikes is, in essence, to combat the economic impact of higher payouts to workers. The terrifying prospect of workers becoming too powerful -- gaining too much leverage in pay and benefit negotiations with their employers -- is what bourgeois economists refer to as "the economy overheating", and when the economy "overheats" you have to do something about that, lest fundamental class relations begin to break down and workers start to forgot who the boss is. Wall Street fears that such a point has now been reached in our class relations. Workers are getting out of control with their demands upon their employers. They're forgetting who the boss is and that has to be forcibly stopped with a curbing of the money supply. (Or, to use their conveniently-ethereal jargon about all this, "the Fed may soon move to combat inflation by raising interest rates".) And that curbing of the money supply, in turn, could send 12% of American companies into bankruptcy, touching off another recession, so strong a foundation does our economy currently rest on.

Of course, there is also the real possibility that the Federal Reserve will raise interest rates by only a small amount in the near future, thus avoiding the worst possible impacts highlighted above. It is impossible to tell just how much "correction" the Fed will deem necessary. But if we do enter a new recession at some point this year, what I have highlighted here will be its basis for occurring. This basis highlights the irrational nature of the capitalist system; the illogic of basing a global economy on production for exchange instead of production for use. The alternative is the creation of a democratically-organized socialist system driven by the planning of production and distribution by producers and consumers themselves in place of the existing profit-driven system. Such an economy would have a real, material foundation and no motive to combat improvements in the living standards of working people.

Nice post. Very informative.

[Chris]

The alternative is to get the government out of the economy, why let it set interest rates, not give it even more control with a socialist system that we know from history has failed everywhere it's been tried.



For a comparison of economic models used today, Keynesian, Monetarist, Real Business Cycle, and Austrian economic schools--socialism hasn't been considered for decades, see Game of Theories.

[IMPress Polly]

Chris wrote:
For a comparison of economic models used today, Keynesian, Monetarist, Real Business Cycle, and Austrian economic schools--socialism hasn't been considered for decades, see Game of Theories.

And yet, at a conceptual level, it is more popular today than it has ever been in American history before. Perhaps as much reflects a divorce between what general types of ideas bourgeois economists are willing to legitimize and what types of ideas actual working people themselves can instinctively gather to be in their own interests.

[Chris]

And yet, at a conceptual level, it is more popular today than it has ever been in American history before. Perhaps as much reflects a divorce between what general types of ideas bourgeois economists are willing to legitimize and what types of ideas actual working people themselves can instinctively gather to be in their own interests.

Socialism has been a failure everywhere it was tried. Not really even sure what you mean by "at a conceptual level, it is more popular today than it has ever been in American history before". Why would economists legitimize a failure? How is socialism, a failure, in working people's interests?

[IMPress Polly]

I think it is worth reiterating something that I have said on many threads now: that there are plenty of individual communities on this globe that currently use the general type of economy that I would favor, but there is no, and by definition cannot be any, nation-state that does so. The communes that I refer to, be they those located in Syria, in Mexico, or wherever they may be found, have certain things in common: they do not feature rapid economic growth, but conversely feature much more sustainability and stability, including the guarantee of basic material human needs to all. That, to my way of thinking, is a worthwhile trade-off. In any event, they are not dystopian nightmares.

[Chris]

I think it is worth reiterating something that I have said on many threads now: that there are plenty of individual communities on this globe that currently use the general type of economy that I would favor, but there is no, and by definition cannot be any, nation-state that does so. The communes that I refer to, be they those located in Syria, in Mexico, or wherever they may be found, have certain things in common: they do not feature rapid economic growth, but conversely feature much more sustainability and stability, including the guarantee of basic material human needs to all. That, to my way of thinking, is a worthwhile trade-off. In any event, they are not dystopian nightmares.

I, too, have pointed out small-scale, local communities, like Marinaleda, Spain, and companies, I forget the name of the company, as well as local co-ops. I have no doubt any system can work on such small scales. But let us note that each of these operates in the context of a broader free market. And the OP is about a nation as big as the US. Everywhere socialism has been forced on the people on that scale has turned into a dystopian nightmare.

[IMPress Polly]

Chris wrote:
I, too, have pointed out small-scale, local communities, like Marinaleda, Spain, and companies, I forget the name of the company, as well as local co-ops. I have no doubt any system can work on such small scales. But let us note that each of these operates in the context of a broader free market. And the OP is about a nation as big as the US. Everywhere socialism has been forced on the people on that scale has d turned into a dystopian nightmare.

What I would seek to propose is the reorganization of our current global system into a giant, loose network of relatively small communes that are structured in the kind of democratic socialist way I have described and alluded to.

[Chris]

The OP also lacks logic. There's a big long argument about how government intervention into the economy doesn't work. Let's accept that, I do. From that, there's an illogical leap to calling that capitalism for exchange and proclaiming socialism for use the alternative. If the failure of capitalism is government intervention then how can more intervention in the form of socialism succeed? It's a false dichotomy when a solution with less government intervention exists.

And capitalism for exchange, socialism for use? In all economic systems, goods and services are exchanged for use. And doesn't "a democratically-organized ... system driven by the planning of production and distribution by producers and consumers themselves" actuallt describe the free market? It's not socialism for all implementations of socialism on a large scale, from the USSR to Cuba, entail central planning by an elite few who profit greatly from their exploitation of the people.

[Chris]

What I would seek to propose is the reorganization of our current global system into a giant, loose network of relatively small communes that are structured in the kind of democratic socialist way I have described and alluded to.

I am fine with that as long as you let the people organize from the bottom up and decide what type of government to adopt in their neighborhood and community. Sort of the way it's being done in Rojava. There's no need to top-down impose socialism.