Meltdown - the crash of '87
THEY ALWAYS SAID that it couldn't happen. Year after year right wing politicians and economists would claim that the western world had learnt the lesson of 1929, and that another stock market crash on that scale was impossible. Well it has happened, and socialists must grasp the sheer scale and enormity of it. In many ways it is going to change both the international and national political context in which we operate. For socialists it will open up both big opportunities but also important dangers. That will still be true even if the stock markets are temporarily rising by the time this is publ
Here we want to give provisional answers to three questions. Why did the crash occur? What will be the conscquences for the world and British cconomy? What will be the political consequences, particularly in Britain?
In order understand the background to the crash it is necessary to locate it within the framework of the historical development of the world capitalist economy. The long post-war boom began to wind down towards the end of the 1960s. Since then, the world capitalist economy has been caught in a long period of recession, which shows no sign of ending. But within the long recession there have been temporary upswings and downswings: the most dramatic downswing was in the 1974-5
Over the past live years, the US government abandoned financial constraints and boosted its economy by a simple device — running a huge budget deficit. Part of the deficit was used to finance the massive military build up. itself a product of the new period of capitalist crisis and cold war. But the vast levels of government spending all round boosted demand and made the US economy expand rapidly. Hand in hand with the budget deficit. the Us began to run a massive balance of trade delicit as the expanding economy sucked in forcign imports, especially from Japan and
The budget defieit had two important effects: first the United States has had to borrow huge amounts of moncy. making it the world's biggest debtor nation. Second, it has been under pressure to keep its interest rates high, to ensure that funds flowed into New
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York, rather than going to Germany or elsewhere, where money could be made out of higher interest rates. But herein lies the problem. In order to keep funds flowing into the US, they were under pressure to maintain high interest rates which made it difficult for capitalists in the United States itself to borrow money at cheap rates from the banks to invest, thus threatening a recession in
In other words, the United States Panic sets in at the New York commodities exchange economy and military kept expanding by ineans of deficit financing, building up huge debts. But like all delicit financing, the bill has to be paid some time. It became increasingly clear that to prevent a complete collapse in financial confidence in the dollar, it was going to be necessary to cut government spending, raise taxes, raise interest rates and in general go for economic deflation. A fall in the stock market was only a matter of time.
There is a sccond major reason for the crash. During the period of relative expansion of the US and world cconomy, financed by the US budget delicil, share prices have risen rapidly in a massive speculative boom. Now the value of shares on the stock exchange is in the first instance simply determined by the price other people are prepared to pay for them, and this involves a lot of subjective elements, especially during a wild boom or a big crash. But in the end, the real value of shares must be related to the dividend they are likely to pay — the income that can be received from holding them. Once it becomes clear that a boom in share prices has gotten completely out of hand, and that the price of shares bares no relation to the amount of dividend that can be made from holding them, prices start to go down; and in a period instability. decline can become panic and "free
Simply summed up, the crash is a product of the financial chaos caused by the US trying to get out of the recession by reckless borrowing, thus undermining international confidence in the world's leading capitalist econ nomys and the closely related phenomenon of the speculative stock market boom, itself fuelled by ES economic expansion, To put it another way, the crash is a typical result of the anarchy of capitalist production and finance. It is typical of the anarchic functioning of capitalist that in finding a short term palliative for recession the US government prepared the ground for an even bigger recession.
The second question to be answered is the likcly cconomic effect of the stock market crash. There is now no way that the capitalist class in Britain or internationally can avoid a new world slump as a result of the crash. Recently both Reagan and Chancellor Lawson have said that nothing has changed in the real economy?. That is nonsense and they know it. The stock market crash will lead to lower investment and hence a slowdown in the growth of the capitalist world economy. To try to bridge the deficit, the US government must deflate the US economy, including trying to claw back money from the US working class. A new recession will lead to heightened competition between firms in the fight for profits; attempts to raise the rate of exploitation of the working class: and increased inter-imperialist competition, including the possibility of a drift towards protectionism and new trade wars.
One thing which cannot be predicted SOCIALIST OUTLOOK SOCIALIST OUTLOOK Ap4 Nowamber/Decamher 1987
and the coming world slump with accuracy of course is the timescale and duration of the slump. There may be soon a temporary rise in the stock market — we should remember it took three years after 1929 for Wall Street to reach its eventual low point, and there were sevcral temporary rises. It will take some months for the full effects of the investment downswing to work their way through the system, Equally. we have no way of knowing whether the stock market crash will lead to the kind of banking crisis which occured in the Us after 1929. The evidence we have so far — of central banks pumping money into the financial institutions to shore them up - scems to suggest that we won't see a banking collapse of this sort.
Whatever the timescale and precise form that the slump takes, the fact that it is coming cannot be denied. In the end, slump and recession can only be got out of by making the working class pay — through lower wages and a higher rate of exploitation, and by a smaller "social wage - a cutback in the welfare state. In other words. a new and ferocious attack on working class living standards is inevitable.
How is all this going to change politics? The political consequences are going to be many-layered and complex, but the outlines can be sketched. The crash is a blow to all the myths of popular capitalism and a "