Brian Holmes on Wed, 17 Jul 2002 08:28:59 +0200 (CEST)

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<nettime> Deflation, anyone?

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 

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, 

Brian Holmes

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