Brian Holmes, "Deflation, Anyone?"

According to today's Washington Post, the dollar has fallen by 14
percent with respect to the yen, and 16 percent with respect to the
euro, from the highs of earlier this year. These falls directly
reflect capital flight from the US, principally the US stock markets.
The spectacular rally of the Dow on Monday (hedge-fund pumping or the
PPT?) is just a sideshow.

For the past ten years and especially the past five, those markets
have concentrated the overaccumulated capital of the entire world,
sustaining and reinforcing the exceptional position of the US as both
a debtor economy (via its negative trade balance and its unparalleled
levels of consumer borrowing) and as a profit-maker, uniquely able to
offer 10 to 15% returns on investment. The Asian crisis of 1997-98,
prolonged in Russia and Brazil, saw the repatriation of American
capital and a general pull-back to the centers of the globalized
economy, leading not to the global krach that many had predicted, but
instead to the spectacular and euphoric heights of the hi-tech fever.
In other words, the new economy bubble staved off the
overaccumulation crisis that had declared itself with the Asian
krach. It was a "temporal fix" for capital, projecting the crisis
into the deferred world of new investment. With the tax inflows
generated by all those companies lying and cooking their books to
attract more investment, the US government was actually able to
eliminate the formerly huge budget deficit and the speculative bond
market that fed off it, effectively shifting that debt to a stock
market swollen with foreign capital, and thus privatizing the
Americans' propensity to live beyond their considerable means. But
now the krach is happening, in the center of capital accumulation and
therefore on a global, systemic scale. It is going to place enormous
political pressure on the post-89 world system.

Overaccumulation is that classic condition of capitalism at the end
of a boom cycle, where resources (what the corps call "capacity")
abound, even while markets shrink for lack of buyers. The typical
result, in recent years, has been a more-or-less manageable recession
(even if Japan, which was faced with the deflation of a speculative
bubble at the outset of the 1990s, has sunk into an ongoing
depression from which its government has been unable to extricate
it). And the classic response to this kind of recession is government
spending to jumpstart the economy. But since the neoliberals came in
to smash organized labor and the welfare state, the only legitimate
deficit spending is military expenditure - like Reagan's huge "Stars
Wars" program of military R&D, which doubled (or maybe tripled?) the
national debt in the eighties, and actually set the stage for the
technological deployments of the nineties. Following Reagan, Bush
senior staged the Gulf War as a perfect chance to drag the US out of
a recession (the one following the 1987 krach) and thereby, to
establish America as the single superpower in both military and
economic terms, dissipating the notion which had gathered in the
eighties that Japan might take the position of economic leader. Now
"little Junior" is gearing up for the same military-Keynesian
program, with a projected $165 billion deficit for next year - and a
projected invasion of Irak, whose people are again expected to pay
with their flesh for the good life in the USA.

Each time, the Americans get ideologically pummeled into accepting
the total contradiction of a government that claims to be against
intervention in the economy, while in fact it is only looking for the
right moment to channel huge resources to specific private sectors,
particularly military ones, which increasingly serve as the goons of
the oil companies. Each time, the Americans relish it, because they
know it's going to pay. But this time it may be a little different.
Two reasons why. One, obviously, is political: Bush is so close to
the corruption of the financial establishment that he may not be able
to avoid a rekindling of the tremendous animosity that existed
against him, after he stole the presidential election by fraud, and
before he seized the golden opportunity of Sept 11 to become
sacrosanct commander-in-chief of a country "at war" and the object of
all kinds of media-driven "patriotic sentiments." But the second
reason is that never (correct me if I'm wrong) has there been so much
foreign capital invested in the US stock markets, capital which now
may actually leave to take its chances elsewhere. Bush is so
disgusting and dangerous, American unilateralism has become so crass
under his rule, that the rest of the world may divest, for a while
anyway. And so the fundamental issue, right now - and this is surely
the explanation why the krach has been happening in slow-motion, with
attempts at every phase to prop up the markets, through
consumer-stimulation packages and probably also through interventions
by a covert "Plunge Protection Team" or PPT, whose existence is
widely suspected - is to retain the exceptional position of the US as
the necessary, functional and profitable repository for world
capital. If this cannot be done, the future is very uncertain.

On the one hand, who will pay for the US deficit? Interest rates will
have to go up in order to get the Treasury bond market back into
shape to attract enough capital, and rising rates will further dampen
the US economy. But worse: with a US recession, the black hole of
Argentina is likely to spread upward through Latin America (Brazil is
already in a recession, Mexico too), and political unstability may
spread. Meanwhile Japan will have a hard time selling its products,
as the yen rises against a sinking dollar, so it will have to
continue the compression of prices that's already underway. Because
given the general deflationary pressure that has existed in Asia and
in the less-developed world since the 1997-98 krach, what you have
had everywhere is competitive devaluation, countries lowering the
value of their currency so their goods can compete against those
produced by their neighbors. So that deflation is effectively
exported to the US and the developed economies, in the form of goods
that are being sold far beneath what production costs would be in the
rich countries. But the rich-country products that are supposed to
pay for all that cheap Asian production - hi-tech stuff like
telecommunications and computer applications, weapons systems, big
airplanes and nuclear power plants - can't be bought anymore as the
Asian and so-called developing economies engage in this downward
race. So the tendency is for deflation to beget deflation, in a kind
of plague scenario.

What about Europe then, and the Great White Hope of the Euro? Of
course every good European is rubbing their hands and hoping that
their chance is finally coming. For sure, Europe has to get some
financial independence from the US if it's ever going to be able to
pursue its supposedly more humanistic policies (but are they really
more humanistic?). Only a measure of economic autonomy would allow
Europe to escape the neoliberal vise-grip and pursue a different kind
of regulation, based (according to the rhetoric anyway) on regional
codevelopment programs extending to Africa and the Middle East.
Trouble is, the complicated, quarrelling, repression-prone EU is an
unlikely candidate to replace the centralized and perfectly
articulated US market as a machine for the accumulation of capital
(particularly to the extent that London is far more closely tied to
New York than to the Continent). It will really be interesting to see
if anything durable happens in the way of a shift of capital
accumulation towards Europe.

"Interesting" is not the word for what's on the horizon though. In a
world where only profit is sacred, deflation is basically hell on
earth. When you know that the overaccumulation of capital generated
by the last great round of industrial innovation and globalization,
in the late nineteenth and very early twentieth century I mean, could
only be absorbed by the "creative destruction" of two World Wars,
then you can measure the stakes of the game that's being played out,
right now, as the krach on Wall Street continues and spreads through
the world economy. Fifty years ago, only the literal destruction of
the developed world's productive capacity could get the whole system
rolling again, and defuse the tensions that had emerged, first from
inter-imperialist rivalry, then from massive deflation and the
long-term stall of the industrial system. What's variously known as
the Wirtschaftswunder, les Trente Glorieuses or just the Postwar
Boom, was built on the lovely void created by all those nice
explosions.

Fortunately the world has come a long way since 1914, 1929 and 1940.
Far more is known about the way crises unfold, and this more-or-less
shared knowledge makes very different kinds of negotiation possible
among the big players. But capitalism, as we can observe, is just as
irrational and corrupt as it has always been. And negotiation among
the big players, as we can observe, still involves all kinds of
belligerent posturing, all kinds of shooting in the dark, with real
bullets. And the present incoherence of the American political system
is hardly reassuring, in that regard. Already, what has been
happening in the world since Sept. 11 has all been part of the
globalized world system getting ready to face the first global
recession, which had already begun, in an obvious way, in the second
quarter of 2000. And we haven't reached the peak of the crisis yet.
Personally, I can't see any way to predict the outcomes. All I can
say is, get ready for a new ideology barrage, because there's a lot
of big reorganizing that's going to have to be done, one way or
another, over the next few years. Whether all that leaves any room
for intervention from the left or radical-democracy forces depends, I
guess - at least partially - on us. Be sure to enjoy the good parts,
kids.

Brian Holmes