Tale of Two Economies

Summary: The unfolding crisis in imperialist finance has the potential of plunging the world into unprecedented economic, political and social turmoil.

Millions of lives have already been negatively affected. For now, however, the crisis remains largely confined to the financial system. The production and exchange of goods and services worldwide continues substantially as before August 9, 2007, when the financial system suffered what is likely to be the first of several ‘heart attacks.’

It is still possible that the global stabilizing power of China and Vietnam will prevail, at least temporarily. The rapid, non-cyclical growth of China and Vietnam , the largest of the five existing states created by socialist revolutions, is at the base of any stability in the world economy.

Regardless of the immediate outcome, the current crisis is certain to impel capitalism into escalating its already-considerable challenges to the international working class – above all its states (China !), parties and unions. The financial crisis is also certain to result in lower living standards and to worsen inequality and oppression and to exacerbate conflicts and damage to the environment.

A struggle against the monopoly pricing of oil, food and other necessities has considerable potential in allying workers’ organizations with oppressed and consumers in defense against a weakened but immensely dangerous world capitalist class.

Organization of effective defenses against capitalism’s crisis will require the greatest unity of the workers of the world. This applies to international trade union unity and, above all, to international unity of communist and workers’ parties. Such unity, in turn, can make alliances between workers and all oppressed more effective.

The System

The present situation is the most unstable and complex that I have encountered in the 30 years that I have been studying the world political economy using the general model that I still rely on today.

That model, as you may know, is of a single world economy composed of two interacting, competing and conflicting social systems. Capitalism is not only cyclical, but its contradictions deepen with gains in science and labor productivity. Its inherent instability destabilizes the world economy as a whole.

The system created by socialist revolutions is essentially non-cyclical. It is at the base of any relative stability in the world economy. This system is potentially consistent with advances in science and productivity, and with human and physical nature.

The two systems do not and cannot exist in isolation; they interact, conflict and compete within the arena of a single world political economy, part of a global class struggle.

Ultimately only one or the other of the two modern classes, on which these two social systems are based, can rule the world economy. This is because the two classes have fundamentally incompatible methods and interests in organizing economy and society.


In mid-2006, as you may recall, Paul Krugman and other economists predicted a ‘hard landing’ (deep recession) for the US economy, based especially on the rapidly worsening conditions in the US housing market. His prediction was echoed in the US labor movement.

I have no interest in prettifying capitalism. But as you may recall, I disagreed with Krugman’s and several ensuing predictions. My analysis was that the stabilizing forces in the global economy, in particular China ’s and Vietnam ’s rapidly growing purchases (imports) from capitalist countries outweighed the destabilizing forces. In the US, business construction of new factories, warehouses and office buildings in the second and third quarters of 2006 more than made up for the decline in the residential construction. That business investment was ultimately to meet China ’s and Vietnam ’s demand, whether directly or indirectly.

Today, I would say that it is a close call whether the crisis in imperialist finance will bring down the world economy, or whether the stabilizing forces will prevail.

Finance Capital

A profound crisis is still unfolding in the empire of high finance. Huge losses have been recorded by banks and funds around the world. Even the largest banks are not confident lending to each other, not to mention lending to corporations or individual consumers.

Most loans now are either costlier than before the ‘heart attack’ in credit markets on August 9, 2007 (when Europe’s largest bank, BNP Paribas, froze three funds due to losses in US-issued speculative instruments), or not available at all. More heart attacks are likely to follow. Unless capitalism’s global ‘credit crunch’ is quickly resolved, a significant slowdown in economic activity is likely.

Regardless of whether this financial crisis spreads to the real economy – which is still uncertain, see below – the capitalist class is certain to escalate its efforts to weaken and cheapen labor and to control ‘overproduction.’ Capitalism’s single main target today is China, as the USSR and allied states had been in the 1970s and 1980s. Wall Street aims for nothing less than counter-revolution in China , although counter-revolution is by no means pre-determined. (History favors the working class, but not automatically.)

The unfolding financial crisis is also reflected in recent jumps in the monopoly pricing of oil, food and other necessities; in the escalated attacks on the UAW and on African Americans (ethnic cleansing in New Orleans!), on French public-sector workers and their unions, and on pensions everywhere; the escalated imperialist threats against Cuba, People’s Korea, Iran, Sudan, Venezuela, and so on.

This crisis can ultimately be traced to deepening imbalances between productive capacity and the income and demand of producers and consumers under capitalist rule. For lack of paying demand, 36% of the US’s massive industrial capacity lay idle at the end of 2001; 37% of this capacity was sitting unused at the end of 2002, 36% at the end of 2003, and even today, after six years of GDP expansion since the ‘short, mild’ 2001 recession, almost 30% of capacity remains unused. Shocks such as hurricane Katrina in 2005, the tsunami of 2004, and the destruction of the World Trade Centers in 2001 have exacerbated capitalism’s existing imbalances.

Two Economies

Under ‘normal’ circumstances, the crisis in finance should have rapidly spread to the ‘real’ economy, that of production and exchange of goods and services.

It hasn’t, yet. Industrial production remains up in all but five of the 43 national economies tracked in the ‘Economist,’ and GDP is up in all 43. As of October, industrial production in Japan was up 4.7% from a year earlier. Industrial production in Germany was up 5.9% from a year earlier; industrial production in the Euro area as a whole was up 3.8%.

More amazingly, perhaps, US GDP was up 4.9% in the third quarter, up from a 3.8% increase in the second quarter. This is especially remarkable considering that the turmoil in finance was breaking out during the second quarter and the housing bubble had already burst. US industrial production was up 2.1% in November compared to a year earlier.

For now, then, we have a tale of two economies – a genuine crisis in the world of finance capital, continued growth in the ‘real’ world of production and exchange of goods and services. This situation cannot continue indefinitely.

The Bad and the Ugly

Hundreds of thousands of US auto workers have already suffered or are facing wrenching losses of jobs, wage and benefit cuts of as much as 50%, and a terrible weakening of labor and rising inequality within their unions and workplaces. Millions of US residents face foreclosures or evictions and millions more face the terrible choice of ‘heating or eating.’ House prices are declining in most of the US , amid a huge glut of unsold homes. Home construction is down 55% from Jan..2006. Unemployment compensation claims have been rising significantly.

In the face of this, a credit crisis, and jumping oil, food and health costs, how could the US record a 4.9% increase in GDP in the third quarter, atop a 3.8% increase in the second? How could the (official) US unemployment rate remain below 5% through 2007? Were retail sales in November really up 1.2% from October, as recently reported?

Part of the answer lies in what is increasingly-dishonest accounting behind US GDP, unemployment rate, and even retail sales figures. Inflation is not properly accounted for in GDP reports. Unemployment figures do not include millions of undocumented workers, a significant portion of which labored in residential construction. Retail sales figures rose in November in part because gas prices climbed sharply that month.

But the US economy as a whole is not in crisis, even while the lives of millions here are in crisis. Similarly, the European and Japanese economies are not in crisis, while the lives of millions of their residents are in crisis, especially immigrants and youth.

What has kept the US , Japanese and European economies going? Above all – growing exports. US exports expanded at an 18.9% annual rate in the third-quarter – and exports now account for three times as much of US GDP as residential construction. Rising exports are also behind the growth in Japan ’s and Germany ’s production.

And if you carefully examine the growth in these exports, they can ultimately be traced, directly or indirectly, to China ’s and Vietnam ’s fast-growing purchases from the capitalist world, rising at approximately 25% and 40% annual rates, respectively.

In August, for example, ‘Fortune’ magazine reported that Caterpillar enjoyed $200 million in sales to a single, recently-opened copper mine in Peru, with another $200 million in revenues expected from servicing that mine. Where is the demand for that copper coming from? Directly or indirectly, China and Vietnam. The same with John Deere’s booming sales of agricultural machinery. The same with Boeing and Airbus’s booming sales of passenger and cargo jets. The same with southern Korea ’s booming production of cargo ships, and so on.

The growing purchases by these two non-cyclical economies, China and Vietnam, are keeping production and exchange going in the capitalist world. Without their demand, if capitalism was the only social system on earth, we may rightly have expected circulation to have frozen up, considering the magnitude of today’s financial crisis.

With every cycle of production and sale, imbalances keep mounting in capitalist economies. The debt burdens of governments and households continue to rise. The masses increasingly strain to pay for necessities – food, fuel, housing, transport, health care, and all that debt; the capitalists, on the other hand, increasingly suffer from ‘too much’ capital, and strain and struggle to rip each other off through increasingly rampant speculation and unequal exchange, simultaneously enslaving more and more in debt.

Look closely, and you will see speculation behind the unfolding crisis in finance. The most obvious is finance capital’s speculation on house prices, regardless of the human cost to hapless borrowers and their children.

In addition, the largest capitalists packaged and repackaged dubious speculative instruments – CDOs, SIVs, and the like – got them falsely stamped ‘investment-grade’ by credit rating agencies, and then sold them and re-sold to smaller capitalists, pension funds, even to each other.

As long as their Ponzi scheme was booming, they collected huge fees and interest in the process – until the music stopped late last June, when an attempt by Merrill Lynch to collect on a bad debt by actually selling some of these dubious instruments proved them unsellable. Merrill’s house of cards was built on a table with shaky legs.


Between March and November 2007, speculative buying fell more than 99.9% on one kind of toxic instrument, CDOs, that Citibank, Merrill Lynch and co. had been peddling, from $39 billion to just $23 million, according to a recent Wall Street Journal. “As frothy as the housing bubble got, the housing finance bubble was even more extreme,” the Journal reported, explaining how hedge funds and others sought the higher returns that Wall Street was promising for its toxic papers.

So has the speculation stopped? Hardly. Even with a possible crisis that would crimp demand, speculation since August has turned with a vengeance to – oil, wheat, soybeans, even rice. Between August and late December, the price of oil on speculative markets has climbed more than 50%, from $58 to over $90; the price of spring wheat, from $7 to over $10; of rice, from $10 to over $13; and on. Even the price of shipping some commodities, such as wheat, has tripled in these short months, as capitalist efforts escalate to plunder and destabilize China, in particular, in attempts to make up for all those losses.

Over 3 billion people depend on rice as the staple in their diet. It is hard to exaggerate the impact of the jump in rice, wheat and soybean prices, not to mention oil, on global poverty.

Blend capitalist economic imbalances and rampant speculation, and not only do millions in the US and elsewhere face foreclosures and evictions, but hundreds of millions around the world face hunger in the cold and darkness.

Never has it been more important for labor to lead consumers and all oppressed in a worldwide struggle against imperialism’s criminal pricing of food, fuel and other necessities.


It is possible that the financial crisis will soon infect the ‘real economy,’ and bring it down in a crisis that will make the Great Depression and the ensuing wars, including World War II, seem mild.

For now, I believe the stabilizing impact of China and Vietnam ’s growth may prevail to allow US GDP, in particular, to muddle on as it has since 2000, while the suffering of the masses deepens, unequally, under the weight of rising prices and debts.

The falling dollar and rising prices for necessities, and weakened unions, practically guarantee that the standard of living in the US will fall in coming months. US GDP is likely to slow down, but may not crash, or even record a significant decline, for now.

Europe and Japan may not fare as ‘well’ as the US . The relative appreciation of the dollar and the yen against the dollar, and the soaring price of energy, are combining to make it more difficult for producers in Europe and Japan to sell their goods, while increasing the pressure to cheapen labor there. The CEO of Airbus recently called the falling dollar ‘life threatening’ – and started efforts to shed huge divisions. Nicolas Sarkozy, France ’s US-friendly ‘Margaret Thatcher,’ warned of ‘economic war’ with the US if the US further depreciates the dollar. The dollar has continued to decline – Sarkozy is driving to weaken and cheapen labor at home.

The pressures from a declining dollar and a credit crunch will have different impacts on the widely-varied member countries of the European Union, and could cause its ‘single currency,’ the euro, to disintegrate, and the European Union to fracture.

On the other hand, the crisis in finance could spread to the real global economy in several ways. For one, instead of a controlled devaluation of the dollar, the US currency could suddenly spin out of control, choking much world trade, nearly all of which is still ultimately denominated in dollars.

Alternately, capitalism’s immense pressures on China – economic, political, military, cultural and other – could destabilize it, and with it most of the world economy. Counter-revolution is by no means inevitable, but the fall of the USSR and 11 other states in the face of similar pressures is ample warning. The larger the Chinese economy becomes, the more, not less exposed does it become to world capitalism’s crises. The greater the successes of the Chinese economy, the stronger, not weaker, will capitalism’s opposition become.

One thing we cannot lose sight of – capitalism’s growing challenges to China , Cuba and the world’s workers and masses ultimately stem from the old system’s deepening contradictions, its growing economic, social and environmental failures.

The way out of the present crisis demands developing international working class unity and our organized international capacity to defend workers and their states, parties and unions. With commitment and courage, we can take steps to educate and organize the world’s workers and their organizations, and provide direction for the toiling masses.

A particularly necessary struggle is against the ever-more-outrageous monopoly pricing of oil, food and other necessities. This struggle has considerable potential in allying workers’ organizations with oppressed and consumers in common defense against a weakened but immensely dangerous world capitalist class.

Organization of effective defenses against capitalism’s crisis requires the greatest unity of the workers of the world. This applies to international trade union unity and, above all, to international unity of communist and workers’ parties. Such unity, in turn, can make alliances between workers and all oppressed more effective, and point the way to historic victories in this global class struggle, victories such as we saw in 1871 (Paris Commune), 1917 (Russian Revolution), and 1949 (Chinese Revolution).

This in turn will end the tale of two economies, and our constant worry about tomorrow’s food, shelter, even air and water.


COMMODITY PRICES as of Dec. 28, 2007, vs. year-earlier:

OIL, $96 vs. $61; GOLD, $836 vs. $637; SPRING WHEAT, $11.10 vs. $5.51; SOYBEANS, $11.02 vs.. $6.41; RICE, $13.12 vs. $9.87. But some commodity prices have stabilized or declined, in part as China ’s demand has cooled.

DOLLAR’S DECLINE, Dec. 28, 2007, vs. year-earlier:

DOWN: 16.6% vs. Brazil ’s currency; down 15.9% vs. Canada ’s; down 6.4% vs. China ’s; down 10.6% vs. India ’s; down 5.3% vs. Japan’s; down 15.9% vs. Philippines’; down 15.2% vs. Thailand’s; down 10.3% vs. euro.

The Wall Street Journal (source for the above figures) is worth following daily in this turbulent period, especially the articles on the crisis on finance and on China , some of the articles on the US elections, and the daily reports on commodity and currency speculation (“trading”).

This note is based on a report on the world situation to the Economics Commission, Communist Party USA, December 15, 2007.