and Economic Depressions
to Alternative Reader Index
U.S. administration's obsession with war against Iraq may have as much to do
with a desire to control Iraq's vast oil reserves as with its need to combat
analysts today would argue with the proposition that the world economy is weak
and getting weaker in terms of immediate growth prospects. The United States
economy, which was the engine of growth for the rest of the world economy for
most of the past decade, continues to falter, despite the tax cuts as well as
expenditure increases related to the so-called "war on terrorism". The
European Union economies remain largely sluggish, while Japan's downward spiral
appears to be unabated.
systematic is the downslide in the major capitalist economies that there is now
serious discussion in the international financial press over whether the global
economy is entering an era of deflation of a kind not seen since the Great
Depression. In fact it is true that the risk of falling prices is now greater
than at any time since the 1930s. World trade prices in most important primary
and even manufactured commodities have been low and are still falling. (The only
exception is oil, the price of which varies daily with expectations of the
likelihood of imminent war.)
the U. S., deflation in goods prices has been evident since April this year. But
even services - which have traditionally been seen as being immune to the
problem of deflation since the prices of most services tend to be downward
sticky - have shown much weaker price increases, which have not been sufficient
to counteract the overall deflationary trend. Similar tendencies are evident for
Europe, while of course in Japan deflation has been raging for several years now
with no signs of recovery.
facile perception that falling prices are "good for consumers", is
still being voiced by some official policy spokesmen. But more and more
economists, even those untouched by the insights of Kalecki and Keynes,
recognise the basic problem with deflation in capitalism: that it reflects a
slump in effective demand, substantial underutilisation of existing capacity,
unemployment of labour and also depressed expectations that adversely affect
indicates downward pressure on profit rates, forcing firms to try continually to
cut costs if they are selling in a market where prices are falling. This in turn
has negative multiplier effects on the rest of the economy, pushing it into a
downward spiral. As early as 1933, the economist Irving Fisher had pointed out
the paradox that when individual firms attempt to reduce their debt burdens by
cutting costs, this could unleash a vicious cycle of falling incomes and asset
prices, and therefore rising real debt burdens!
addition, falling prices tend to play havoc with financial markets as well, with
banks and other financial institutions facing growing problems of liquidity and
even solvency as their investments fail to make good as anticipated. The World
Depression from 1929 onwards had its origin in output imbalances and falling
prices, but it was most dramatically expressed in the bank failures and stock
market crashes that made it public knowledge.
are signs that a similar (if not so extreme) process of sluggish real economic
growth accompanied by major problems in the financial sector, is already under
way in Europe's largest economy, Germany. The major German banks are on the
threshold of a financial crisis. In terms of share values in dollar terms,
German banks in the past year have performed worse than those of any country
except Argentina and Brazil. Central bankers in the rest of Europe are becoming
concerned about the state of German banks and the risks their weakness poses to
the whole financial system.
the U.S. economy is not immune to such pressures, especially as investors'
expectations are already depressed and consumer confidence seems to be brittle
and easily shaken, adversely affecting sales and therefore profits.
such a relatively worrying economic context, some observers have found it
strange that the Bush administration is using up so much of its time, energy and
machismo in fighting its most recently created bogey, Saddam Hussein, and not
addressing itself to the problems in the U.S. economy which have international
ramifications. But it could well be that the very moves towards war against Iraq
are in fact the U.S. government's way of trying to deal with the economic
problem as well.
what history tells us. Wars have been - and remain - a classic way of diverting
public attention from domestic problems and issues that governments are unable
or unwilling to address effectively. But also, wars have typically been seen as
powerful positive stimuli for economies that are suffering from unutilised
capacity and unemployment. They create employment, increase aggregate demand
because of enhanced public expenditure, and have positive multiplier effects.
More recently, defence expenditure has been seen as playing a key role in
productivity increases because of its impact on new technologies and their wider
such experience to learn from, perhaps George Bush (or his advisers) would not
be mistaken to believe that a dose of war, especially a war fought conveniently
far away from U.S. borders and involving the latest technology with minimum U.S.
human involvement, would be a positive economic stimulus that could guide the
economy out of the recession and divert the threat of deflation.
history may be an imperfect teacher in the current context. The economic
realities of today are more complex and less susceptible to easy manipulation of
the sort that allowed earlier wars to be so economically effective. To start
with, the type of war that the Bush administration is clearly anticipating is
one that will involve the minimum of use of troops, and therefore will certainly
create less direct employment.
the giant military-industrial complexes that power the U.S. economy and form an
important part of George Bush's constituency, no longer have need for actual
wars to keep them going and make them highly profitable; sufficient levels of
public expenditure in these areas is adequate. This might explain why the
Pentagon's bosses apparently have little enthusiasm for this planned war, with
all its uncertainties.
then the immediate economic effect of such a war would depend upon how it
impacts upon expectations. Of course, if the U.S. is able to defeat the Saddam
Hussein regime in a relatively short time, install a client regime in its place
and thereby acquire effective control over Iraq's oil reserves, this would
clearly make investors happy. It would not matter then how much damage the war
would wreak upon the Iraqi economy or how much devastation and slaughter would
be inflicted on its people. If expectations turn buoyant in such a context, then
the U.S. economy, and with it the international capitalist system, might well
experience a recovery of sorts, however short-lived.
if the war turns out to be longer and messier than anticipated, if it creates
widespread unrest and possible instability in other parts of West Asia, if it
involves snapping of trade routes or wide fluctuations in financial markets,
then the outcome in terms of expectations is much less predictable and more
likely to be negative. Such a war may then contribute to the wider economic
downslide, rather than prevent it, much the same way the First World War
indirectly contributed to the forces that eventually culminated in the Great
the two World Wars also provide some idea of how the closures of wars can change
the world economy. The First World War ended in triumphalism and revenge as
expressed in the Versailles Treaty, imposing penalties upon losers and
effectively denying the world economy the possibility of growth for the next two
end of the Second World War, by contrast, saw the Marshall Plan and U.S.
involvement in the reconstruction and rebuilding of the economies of the
defeated countries, which played an important role in the subsequent growth of
the world economy over two decades.
judge by its vituperative language over Iraq, and its callous attitude in
Afghanistan after that recent war, the model for the current U.S. administration
seems to be Versailles. This attitude of vengeance, bereft of any concern about
the havoc being wrecked by globalisation on the poor all over the world, may
more than anything else cause more serious instability and lack of growth for
international capitalism in the near future.
want to know what you think of this article.