by Zelig Stern -

Capitalism today is in the midst of the most serious crisis since the great depression. The big question is if this crisis, is the crisis? As capitalist economies grow, inner contradictions which are inherent to the system begin to grow more severe. The two most serious contractions of the capitalist system are the tendency for the rate of profit to fall, and the tendency for supply to outpace demand. As these contradictions intensify capitalism is faced by a series of crises which tend to intensify in turn. As the crises intensify they tend to lead toward an 'ultimate' crisis in which capitalism will enter a state of permanent depression or permanent stagnation . It is still not clear whether or not this crisis will be the crisis.

In the '60s and '70s capitalism faced a major crisis in which both major contradictions grew to significant proportions. In order to arrest the falling rate of profits, the capitalist class launched a major attack against the wages of workers. They successfully reduced the rate of growth of wages enough compared to the rate of growth of productivity to halt the falling rate of profit, shifting the burden of crisis from capitalists to workers. This solution to the first contradiction only intensified the second one. In the midst of a crisis of over production the reduction of wage growth also meant a reduction of demand. The only way for the capitalists to create enough demand to insure the sale of their produce while keeping wages down was to use their increased profits to loan money back to the workers. This debt financed demand stimulated growth, but over time, as consumers began to use debt not only to make new purchases but also to service old
debt, more and more debt was needed to stimulate the same amount of demand. This is illustrated in Chart I where it is clear that the mass of debt grew much faster than consumer demand. As the debt service to household income ratio grew the system faced an increasing threat of massive default, which could lead to the collapse of the financial system and debt financed demand. The fact that capital resisted so fervently any increase in wages for two decades in the face of the growing precariousness of debt financed demand illustrates how great the threat of any fall in the rate of profit was. When such a massive default does happen, it is unclear how capitalism would be able to pull itself out of permanent crisis, ie the “ultimate” crisis. Without easy credit for the working class, the only way to stimulate demand would be to raise wages, which would reignite the rate of profit crisis.

Since the '70s capitalism faced a number of small yet increasing crises of debt deflation. In each case the government was able to quickly bail out the major financial interests and get credit flowing quickly, thus preventing major crisis. The question became when would debt deflation happen too quickly, or too intensively for the government to bail the economy out. This may have happened during the great financial crisis of 2007. The 2007 crisis was far larger, and far faster than any of the previous crises. It is still uncertain whether or not the most recent bail out will be sufficient to jump start the flow of credit. If it is not, this crisis may yet turn out to be the crisis.

Without a doubt, the bailout prevented the economy from falling into a significantly more serious depression. Additionally the economy is showing real signs of recovery. Not only have profit levels nearly fully recovered, but consumer demand is also showing signs of recovery. Admittedly, it seems increasingly likely that the economy will recover, and safely return to its now normal debt financed consumption. However there are two ominous signs that indicate that recovery is still not certain and permanent depression or stagnation may be the very near future of capitalism. The first sign is that while consumer demand has been steadily recovering, its growth has been significantly slower than normal recovery rates. The second is that the availability of consumer credit continues to fall.

The first sign that the system may not be out of the woods yet is the menacingly slow recovery of consumer demand. As seen in Chart I, despite steady growth since its low in the first quarter of 2009, consumer demand was still as of the second quarter of 2010 nearly $850 billion short of where it would have been if it had retained per-crisis levels of growth. The 2007 crisis marked the largest drop in consumer spending since the great depression. The major factors in the contraction of consumer demand were, layoffs and a sudden unavailability of credit. However the effects of these two factors were greatly amplified by consumer uncertainty in the moment of crisis. With a massive wave of layoffs and foreclosures consumers where unsure of how much money they would have in the future, and as a result increased savings at the expense of consumption. Consumer saving as a portion of disposable income increased from an average of 2.7% between 2003 and 2007, to a high of 7.2% in the the second quarter of 2009. This amplification of the effects of layoffs and credit freezes on consumer spending can also help to explain a large part of the recovery of consumer spending since the height of the crisis. As layoffs and foreclosures have slowed, consumers have regained confidence and began spending more again, personal savings as a portion of disposable income has fallen down to 5.9%.

Another cause for the slow but steady recovery of consumer demand is the the end of mass layoffs. Between November of 2009 and May of 2010 the economy gained jobs in every month but one. The private sector has continued to rehire workers and employment has grown in the private sector each month through the present. However, two factors prevent this recovery in private sector jobs from leading to adequate growth in consumer demand. The first is that private sector hiring has been too slow to make up for jobs lost in the initial crisis, let alone to lead to increased consumer demand. This is due to the cyclical relationship between employment and consumer demand. With low consumer demand at the height of the crisis, private firms laid off masses of workers. As demand recovered, due to consumer confidence and the bailout, and as reserve stocks of commodities were sold off, firms began rehiring. However as demand remains well below previous levels, hiring remains well below previous levels. The other problem is that government austerity measures have lead to massive layoffs in the public sector, so that while the private sector increased jobs, the economy as a whole lost jobs from June to September.

More ominous than the slow recovery of consumer demand is the credit situation. As described above, the increasing consumer demand needed to sustain a growing economy has been made possible since the mid seventies only by a more rapidly increasing mass of consumer debt. However, as seen in Chart I, the availability of consumer credit since the crisis has been rapidly decreasing. Whatever tepid increases in consumer demand have developed since the crisis will be short lived unless the the credit situation is reversed. Given the level of wages necessary to ward of a crisis of profitability, especially considering the current job situation and reduction of wages since the crisis, renewed availability of consumer credit is a necessity for the system.

When the housing bubble burst in 2007 it caused a chain reaction of debt defaults which threatened to bankrupt the entire financial system. To prevent this the U.S. government provided the massive multi-billion dollar bailout to the banking industry; cash, no strings attached. This bailout was enough to secure the financial giants from bankruptcy, however by the time the financial system was stabilized the real economy was in turmoil. The banks, having learned their lesson from the massive defaults, are no longer willing to lend to risky debtors. The problem is that in a system based on financial bubbles and debt financed demand, every debtor is a risky debtor. The banks have now regained profitability through loaning to a small handful of secure debtors including the U.S. federal government. While non financial profits have rebounded and layoffs have significantly slowed (both more the result of cut backs than of increased sales), the foundation of the real economy is shaky at best. The only remedy to this instability is renewed access to credit, but the banks, interested in private profit not macro economic stability, are refusing to grant credit until after the economy regains stability. The question is, have things leveled off enough that slowly the economy will gain a little stability, banks will begin to loan a little, therefore increasing stability and further increasing debtor reliability, or is the catch 22 the economy faces too great to overcome. If the latter is the case, consumer demand will be unable to continue its recovery leading to a second crisis in the real economy which the financial sector may not be able to survive. This may be the 'ultimate' crisis.

Two factors indicate that the former scenario is more likely than the latter. The first is that, though the bailout did not get credit flowing again as mainstream economists and law makers had hoped, it did manage to rescue the financial system from total meltdown. With the financial system still in place it is only a matter of time before credit starts flowing again. Financial firms only make profits when they are making loans. And since no firm is ever satisfied with their current level of profits, but rather always seeks greater profits, it is impossible that these firms will remain content with the limited supply of relatively risk free debtors. Eventually their memory of the housing crisis will fade and they will begin making risky loans again. Since for the moment consumer demand is rising, it appears that the financial sector has a little bit of time to forget before it is too late.

The second factor indicating the greater likely hood of recovery than 'ultimate' crisis is the continued submissiveness of the working class in the class war. The state of class struggle plays an decisive factor in the course of economic crisis. It is the lack of resistance to cutbacks, layoffs, speedups, etc. on the part of the working class that has allowed profitability in the non financial sector to recover, thus enabling relative recovery of stability in the real economy. With no signs of an increased offensive on the part of the working class, this situation may be able to persist for a while.

>Given these two factors it seems quite likely that slowly but surely the real economy will gain stability, and the banks will begin to make credit available again, before the current lack of consumer credit causes a stagnation in the recovery of demand great enough to throw the real and financial economy into the depth of permanent crisis. That being said, it must be kept in mind that recovery is not guaranteed, especially if some form of workers resistance can be cultivated. Additionally, even if the economy is able to recover, it will not be a quick process. High unemployment, austerity, low wages, and speed ups will be the norm for at least a number of years. Finally, recovery means nothing more than returning to the situation which existed before the crisis. If there is a recovery it is only a matter of time before the next major default, and next time the government may not be able to rescue the financial system from meltdown. It is yet to be seen
if this round of bailouts was enough to fend off the 'ultimate' crisis, let alone the next one.
Appendix: Counter Factual Demand Curve
The counter factual demand curve is calculated by plotting the the quarterly increases in consumer demand between 2003 and the last quarter of 2007. Then calculating their corresponding regression equation to extrapolate what the increase in consumer demand would have been each quarter from the first quarter in 2008 through the present if trends had remained the same. The regression equation turns out to be y=134.4325-0.91853x where x= 1 corresponds to 2003 quarter I, x=2 corresponds to 2003 quarter II, etc.