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International Socialism, January 1975


Sean Treacy

The State of the Economy


From Notes of the Month, International Socialism, No.74, January 1975, p.3.
Transcribed & marked up by by Einde O’Callaghan for ETOL.


Sean Treacy writes: Anyone who doubted the rapidity with which the crisis of British capitalism is developing must have had a rude awakening last month. December saw just about everything which could go wrong for the economy do just that. Having shown some signs of moderating earlier this year the British foreign trade deficit rocketed to a massive £530 millions in November. When all the so-called ‘special factors’ are allowed for the current balance of payments is now running in the red to the tune of about £4,000 millions. What worries the government most is the unmistakeable evidence that exports are now falling away rapidly as the world recession hits hand at export markets. To make matters worse British export firms have now exhausted virtually all the competitive advantage they got from the devaluation of the pound after it was floated three years ago. From here on things can only get worse. The December figures showed inflation running at 18.3 per cent and (according to the influential National Institute) due to rise to an annual rate of about 25 per cent before many more months. Only Italy – among the major industrial economies – has a worse record. British capitalism enters the worst trade recession since the Second World War in worse competitive shape than almost any of its rivals. Bourgeois economics teaches that recession should eliminate inflation. In practice this is most unlikely. Firstly primary product prices, while they have fallen back somewhat from the record levels of earlier this year, remain high. Producers stockpiles may well now be financed by the oil states to enable them to hold up prices. And while real wages are falling (thanks to recent ‘Social Contract’ pay settlements and the inadequacy of threshold payments while they lasted, productivity is falling faster than real wages. Therefore the unit cost of output is actually going up. And, encouraged by the provisions of Healey’s November budget, big business is passing on the cost of its under capacity working in higher prices. To add to this we now know that massive price increases are coming from the state industries as subsidies are withdrawn. Even assuming the government and trade union leaders succeed in holding down real wages the National Institute forecast of 25 per cent annual inflation may prove to err on the side of optimism.

The prospect then is of simultaneous world recession and inflation. Faced with this, the ruling class internationally is showing signs of fearing the recession even more than the inflation. In one country after another governments are attempting to reinflate their economies fearing the social consequences of mass unemployment and the likely response of the working class to it. In addition wholesale recession is seen by the ruling class as threatening some industries they just dare not let go to the wall if they are to survive in world markets. Only the US government is so far holding back from reflation. The longer it does the deeper and more prolonged will be the present recession and the greater the consequential rise in unemployment in other countries. But before many more months are past, pressure from Congress and industrialists is likely to push the Ford administration in the same path.

With good reason they fear the outcome will be even worse inflation in 12 to 18 months time and the danger of an even bigger depression as a result of that. This is the line of Powell/Joseph here. In spite of this the ruling class as a whole does not feel confident enough to ride out a serious recession in the face of working class resistance this time round.

But a perspective suggesting recession in 1975/76 – with inflation, shortlived recovery with even worse inflation followed by a possible slump in two years or so has to be qualified. The most important reservation concerns the consequences of the massive oil price increases. The oil states, while trying to develop capitalism, are inhibited by the social alliance the local capitalist ruling classes have with feudal and quasi-feudal forces. As a result for the coming years, the oil state ruling classes will be amassing huge sums which they are incapable of spending. Unless these are re-lent to the oil using capitalist world a slump now will be inevitable. For the moment there is a chaotic re-lending process taking place via the private banking system. But it cannot cope with the strains of such sums nor carry the risks involved in re-lending to chronically indebted states such as Italy. Unless an international agreement among the Western and oil state ruling classes is reached financial chaos and slump could follow quickly. For the moment the British ruling class are, paradoxically, not badly placed. London is on the receiving end of much more oil money than is justified given the chronic crisis in the British economy. But because the prospect of North Sea oil places the British ruling class closer to the Arabs on the question of high prices, than the Americans, the OPEC governments are happy to deposit huge sums in sterling. For the moment this is sufficient to finance the British balance of payments and finance much of the government’s reflationary economic strategy. As a result Britain is building up massive debts and will of course be in the front line when continued world inflation sunders the fragile structure of the financial recycling mechanism. It is a measure of the loss of confidence of the British establishment that many of them fear this may prove to be sooner rather than later.

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