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Peter Hadden

World Economy – Will there be a slump?

(December 1988)

From Militant Irish Monthly, December 1988.
Transcribed and marked up by Ciaran Crossey.

It is now over a year since the October 1987 stock market crash wiped-two billion dollars off share prices in just three days. This event created panic among serious capitalist economists who feared a rerun of 1929 when the Wall Street crash was followed within a year or so by a collapse of production firstly in America and then in Europe.

The material published in Militant analysing the 1987 crash explained the contradictions within the world economy which had brought this about. The analysis and general prognosis remains absolutely correct. But, along with most of the capitalist commentators, we made a mistake in the difficult issue of the tempo and timescale or developments.

We expected that October 1987 would be followed by a slump or at least a slowing down in the real economy probably starting in 1988. Events have turned out somewhat differently. Instead of a slowing down there has been an acceleration of growth in most of the advanced capitalist economics. Between September 1987 and September 1988 the United States economy grew by 3.7%, its highest growth since 1984. 


World trade grew by a dramatic 11% in the second half of 1987 and a bigger rise is likely in 1988. The present boom has now lasted since 1982. In America it has been the longest period of continuous expansion this century. Undoubtedly this has given rise to some confusion in the labour movement internationally.

Does this, as Reagan and Thatcher would have us believe, represent the dawn of a new period of capitalist expansion such as occurred between 1945 and 1975? Is the Marxist analysis of an organic crisis of capitalism still valid? Is it correct to characterise the period opened up by the recession of 1974 to 1975 as the beginning of an epoch of stagnation and crisis?

Thatcher and Reagan in their mutual praise of each other’s “economic achievements” are parading an illusion. The weak and inflationary boom of the 1980s represents no return to the post war upswing. The figures given in Table 1 clearly show this. As the Financial Times put it: “the fact that economic growth rates of anything over 3% can be hailed as an economic boom perhaps underlines just how far expectations have been lowered during the austere 1980s. ” (28/9/88)

The difference between the present boom and the post war expansion can be clearly seen in its social effects in the advanced countries. During the 1950s and 1960s there was virtual full employment. There was a general rise in living standards, although those at the bottom benefited least.

Generally speaking the present boom has brought all improvement in living standards only for the already better off, the middle class and the better paid workers, especially those in the private sector. After the US Presidential election the Sunday Tribune gave figures which indicated that the top 40% of Americans were better off after the Reagan years. The middle 20% were about the same but the bottom 40% were worse off. Obviously such figures are only a rough approximation but they give some measure of the effects of the boom in America.

Despite the continuous growth since 1982 there are still 30 million unemployed in the OECD (the leading capitalist powers). Outside of America the fall in the levels of unemployment has been marginal. It is true that in America millions of jobs have been created. But only a small percentage of these have been in manufacturing. What of the rest? The Economist (6/2/88) gives the answer.

“Since 1981 more than l00% of new American jobs have been in tiny firms with fewer than 100 employees which is usually called dynamic but is better called scary. That percentage has been achieved because big firms have been running their payrolls down. Nineteen out of each twenty new jobs have been service jobs, which 70% of American jobs now are. ”

Of the retail sector (including eating houses) where many of these service jobs are found the same article comments: “Reformers growl that these are junk wage jobs, filled by the 30 million Americans who now earn less than half of America’s median wage. Actually over 92% of those 30 million are part-year or part-time workers, many with second jobs. ”

TABLE 1 – Average annual GNP growth













Western Europe




There are particular reasons for the protracted nature of this boom – and for its reinforcement after October 1987 – all of which point to its weakness. Capitalist governments internationally still advocate monetarism in words. As the figures in Table 2 show they have long since abandoned it in deeds. Its strongest advocates, Thatcher and Reagan, have been by their own standards the worst culprits.

Reagan came to power advocating balanced budgets. Instead, largely because of his programme of massive spending on armaments, he has created the biggest budget deficit in U.S. history. He has so unbalanced the books that his accumulated deficit is almost as great as that of all past presidents combined.

This policy of deficit financing on an enormous scale has stimulated the world economy and is a key reason for the extended nature of the boom. The U.S. budget deficit has brought in its wake huge problems or the American economy and ultimately for the world economy.

The Federal Government has had to borrow the money to pay for the deficit. In doing so at home it has absorbed, since 1980, 3/4 of the savings of American families and businesses combined. And this has not been enough.

It has been forced to borrow money abroad by selling government bonds. In so doing Reagan has turned the U.S. from the number one lender to the number one debtor nation.

The total Federal debt owed both at home and abroad, at 2.6 thousand billion dollars, is greater than the combined debts of the colonial world. The foreign portion of this debt is growing, standing now at $8,000 for every family in the U.S.

The pressure on domestic lending plus the need to offer attractive rates to foreign investors forced the administration to maintain high interest rates and a strong dollar. In turn this left American goods less competitive both at home and abroad. So the trade deficit widened dramatically creating huge global imbalances in world trade which if not corrected would inevitably lead to open protectionism and slump.

The stock market collapse came because of the speculative nature of share trading which had led to rises in share prices way ahead of rises in the real economy, and because U.S. trade figures at the time indicated that, despite the efforts of the administration, the trade deficit was not shrinking. The panic of the speculators grew out of their fear of imminent recession. One year on the problem of the U.S. deficits is unresolved.

The budget deficit remains at an unsustainable $150 billion. A lowering of the dollar in the months after the crash did produce a slight improvement in the visible trade balance. But the rise in the foreign debt has more than negatively compensated for this and the current account deficit (visible and invisible trade) has risen. Rising interest rates will worsen the current account deficit by raising the debt repayments.

Two other reasons for the prolonged nature of the boom up to October 1987 continue in force at present. First there has been a huge increase in credit. Consumer spending has been increased by a rise in personal credit, that is the spending of tomorrow’s wages today.

Corporate indebtedness has also risen to staggering levels. Expansion based on credit today must mean contraction tomorrow as the individual’s capacity to borrow further reaches its limits. In a new recession the high level of corporate debt will probably lead to wave of liquidations and bankruptcies.

Secondly the boom continues be at the expense of the colonial countries. The prices of primary products on which these countries depend for practically all of their income have fallen by 30% since 1979. Despite a slight rise in the first months of 1988 the downward tendency has recommenced. What the poorer countries have lost the big corporations in the West and in Japan have gained in the form of cheaper raw material and thereby higher profits.

Had it been a question solely of these factors – deficit financing, credit and the super-exploitation of the colonial world – the boom would most likely have run out of steam in 1988. After October 1987 the main capitalist powers were terrified of the prospect of a new 1930 to 1932 depression. This fear led them to partially put aside their differences and apply corrective action.

At the end of 1987 the leaders of the seven main capitalist powers (the G7 countries) met and agreed to lower interest rates in order to give a boost to the world economy. As the dollar fell and it became increasingly difficult for the U.S. to finance its deficit the other powers stepped in with $100 to $140 billion to finance the deficit and prop up the dollar. This huge injection of liquidity helped stave off recession at that time.

The world’s capitalist governments were prepared to sacrifice some of the fat accumulated during the post-war upswing in order to preserve their system from what they saw as an approaching economic disaster.

Does this mean that governments are now able to manipulate and manage the system and prevent recession? The experience of the past twelve months demonstrates the opposite, despite the fact that recession has been postponed.

The extra liquidity pumped in did stimulate demand, boost production and increase world trade. There has been a certain but still only slight increase in investment in a number of countries. In Britain investment has risen quite sharply but this has only brought it back to the level of 1979, and has come too late to restore the manufacturing base destroyed by Thatcher in her first years.

Borrowed time

Just before the U.S. election the Financial Times gave its verdict on the Reagan “boom”.

“The prosperity Americans are enjoying today is a false prosperity based on borrowed time and borrowed money. With so little of U.S. private savings left after the Government finances its deficit, the U.S. is not investing in the plant and equipment it will need to deliver advances in the average citizen’s standard of living. In the 1980s the US has devoted a smaller share of national income to new business investment than at any time since the Second World War.”

The Financial Times (28/9/88) expressed the fears of the capitalists world-wide.

“No major economy has yet managed to correct a trade deficit on the scale of that faced by the US without a sharp slowdown in its economic growth. More frequently the medicine prescribed by the financial markets has been recession. ”

The bourgeois are on an economic tightrope. Uncorrected, the present situation of global trade imbalances will force protectionism and slump. A precipitate fall in the dollar would allow the US to partially unload its foreign debt burden owed in dollars and to increase competitiveness but would lead to competitive devaluations and slump.

There are qualifications which need to be made. The capitalists still have reserves built up during the 1950s and 1960s which they will try to use to buy themselves time or to soften the impact of a recession. The Japanese capitalists in particular have some room to manoeuvre with their present position of very low inflation, a budget surplus and a current account surplus.

Nevertheless the dominant features of world capitalism are of a system which has gone beyond its limits and is set to fall back. The US accounts for over 35% of world G.N.P. The crisis of US capitalism alone is sufficient to drag the world into recession. It is not possible to predict exactly when a new recession will begin.

Timescale on this issue is very difficult given the complexity of the data to be weighed and the fact that even the most up to date statistics still lag behind current developments. It may begin in 1989 or may possibly be delayed a further year or so.

Likewise the depth of this recession is uncertain. The longer it is delayed the more severe it probably will be. A 1930 to 1932 depression cannot be ruled out as one possibility.

      TABLE 2 – Money Supply






Britain (£)

   133 b

   217 b



France (French francs)

2,988 b

3,612 b


West Germany (Deutschmarks)

   542 b

   645 b


Italy (Lira)

   516 t

   667 t



115 last year

b = billion; t = trillion

There is no doubt that the boom has had an effect on the consciousness of a layer of the working class internationally. Workers are sceptical and doubtful of the capitalist propaganda but some of those who have benefited are prepared to wait and see if things continue to improve. This, plus the blindness of the leaders of the workers organisations who have been mesmerised by the boom and have done little more than second the capitalists propaganda, explains the election victories of Thatcher, Reagan, Bush and others.

In Ireland, the effects of the boom have been marginal, hardly detectable in the North and only significant in the South from 1987 when the increase in world trade boosted exports quite dramatically. Nevertheless this export boom has fed through to the consciousness of a layer of the population and is an important factor in bolstering Fianna Fail in the opinion polls.

The situation is many sided. While temporarily bolstering right wing governments, the boom is now starting to give a new impetus to the class struggle. Across Europe there is the detectable beginnings of a wave of strikes begun from below by rank and file bodies rather than the union leaderships.

In general the money pumped into the world economy has gone into consumption, not investment. Extra demand has been met by the capitalists by extra hours, new shifts, speed-ups, etc., that is by raising the rate of exploitation of labour using existing capacity rather than investing in new capacity. The capitalists have given themselves a short term fix in the form of higher profits but in their failure to reinvest in production this is at the expense or the future of their system.

The consequence of the measures taken to avoid recession has been a rise in inflation. The capitalists have ended up back where they started when they moved to monetarist methods in order to stamp out inflation in the 1970s.

Inflation has reached 6% in Britain and the underlying trend has been rising in virtually every major economy. Fearing that the inflationary boom would quickly lead to a bust, as in 1974, the G7 countries have done an economic somersault. Whereas at the end of 1987 they lowered interest rates to stimulate growth, by the early summer of 1988 they began to raise them dramatically in order to curb inflation.

Now the raising of interest rates brings its own headaches. It increases the US debt repayments and so worsens the current account deficit adding a further strain on the world economy. It adds to the burden of misery of the peoples of the underdeveloped world who find themselves caught in a vice of falling revenues through worsening terms of trade, and now higher interest repayments on the money their countries have had to borrow in order to survive.

Above all it restricts credit and makes investment more expensive and so threatens to choke off the boom The capitalist governments are now caught on the horns of a dilemma. Either they adopt tight monetary policies which will bring about a slump or else they pump in more money and end up with inflation and slump, a situation referred to as “slumpflation”.


The main capitalist powers have been prepared to co-operate to a certain extent in order to avert catastrophe. But there are limits to this co-operation. When the limits are reached each will seek to protect its corner at the expense of its rivals.

The problem of the twin U.S. budget and current account deficits remains unresolved and threatens to bring this fragile boom and with it the intergovernmental co-operation to a halt. The capitalist class internationally wanted a Bush victory in the U.S. Presidential election. How ironic it therefore was, that when they got their way in November, to quote the Economist (19/11/88)

“Wall Street celebrated his victory by falling 100 points, the international money markets by briskly wiping 10% of the value of the dollar.”

The capitalists see that the new administration of Mr “watch my lips, no more taxes” Bush will be forced to take corrective action in the form of tax rises or spending cuts or both to cut the budget deficit. He will also be seeking to increase U.S. competitiveness at the expense of its rivals, and they fear that the medicine may be more painful than the disease.

The Economist (12/11/88) commented

“Because of heavy foreign borrowing Mr Reagan was able to give the Americans the chance to spend more than they earned and they liked that. Under Mr Bush they will have to earn more than they spend and they won’t like that.”

The boom is increasing the tempo of the class struggle. Likewise recession will have dramatic repercussions on both the industrial and the political organisations of the working class. Over the next period of booms and slumps the true character of this period as one of economic stagnation will become clear. 

Socialist plan

The illusions of workers and of the middle classes in capitalism will be stripped away. The ideas of the Marxists, of nationalisation under democratic workers’ management, and of a socialist plan of production to take society forward will take on flesh.

Huge class battles will take place in all countries including Ireland, North and South. These titanic events will create the conditions for the development of Marxism as a mass force and then as the leading force within society.

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