With this column 'Left Hand Drive' completes six years. Thank you very much, dear readers, for your indulgence.
This week, panic grips the global economy as it wakes up. In the first one hour on Monday, the top 250 companies listed on the London Stock Exchange saw a steep loss of their capitalisation. Last week, the turbulence in the global markets saw more than $2.5 trillion wiped off from investors' wealth. The sensex in India lost over R4 lakh crore in the last four trading sessions. Last week ended with the unprecedented downgrading of US sovereign long-term credit rating by Standard & Poor's from 'AAA'. The simultaneous sovereign credit crisis in the Eurozone has seen the virtual insolvency of Greece, Ireland and Portugal, which had to be bailed out by huge packages. The crisis is now threatening Spain and Italy and is unlikely to stop there.
However, it will be wrong to characterise these developments as a new phase of the global economic crisis. In a sense, this is a continuation of the financial crisis that began in 2007 leading up to a recession. This was only to be expected given the manner in which global capitalism sought to overcome the 2007 crisis. By undertaking huge and unprecedented bail-out packages for those very corporate bodies that, in the first place, caused the financial meltdown, developed countries incurred huge amounts of debts surpassing their GDPs. Global capitalism sought to overcome the crisis by converting corporate insolvencies into sovereign insolvencies. This, in turn, has intensified the crisis today plunging the world economy into a state of uncertainty.
The Special Inspector General for the US government's financial bail-out programmes, created to serve as an auditor of the federal bail-out, in a prepared testimony to be delivered to the US Congress House oversight committee says, "Since the onset of the financial crisis in 2007, the federal government, through many agencies, has implemented dozens of programmes that are broadly designed to support the economy and the financial system. The total potential federal government support could reach up to $23.7 trillion." Compare this with the US' GDP that is just over $14 trillion. The US Treasury spokesman, however, denies the veracity of this figure.
The truth, however, is that as of May 16, 2011, the total US debt was pegged at $14.3 trillion. Now, the US has an anachronistic law adopted in 1917 that puts a ceiling on the magnitude of debt in absolute terms. This is unlike in Europe or in India where the size of the fiscal deficit (different from debt) is fixed as a percentage of the GDP. This ceiling, however, was routinely revised upwards in US history. Given the current debt crisis, it was presumed that the tradition of this routine will continue. However, this was not to be.
The Republicans, whose concurrence was essential to raise the ceiling, demanded their pound of flesh. While insisting that the tax benefits for the rich that began during the George W Bush era be continued, the Republicans put a condition for agreeing to increase the debt ceiling only if severe cuts were effected in expenditures that were essentially aimed at benefiting the poor and the needy such as in Medicare.
Similar is the logic of the sovereign bail-out packages offered by the International Monetary Fund and the European Union in the Eurozone. Countries like Greece had to undertake massive 'austerity measures' to cut expenditures. This has imposed an unprecedented burden on the working people, whose remunerations, among others, have been drastically cut. During the last two years, the popular protests in Greece have seen 17 general strikes nationwide.
In other words, what is happening is the following: the capitalist State mobilises resources for huge bail-out packages. In the process, it accumulates massive sovereign debt. The burden of this debt is transferred on to the shoulders of the working people through massive cuts in welfare and social security expenditures. This is the logic of capitalism, pure and simple: maximise profits by intensifying exploitation.
In the US, data from 2009 corporate tax returns shows that the estimates of corporate profits grew from 8.3% to 10.8% in 2010. Corporate profits accounted for 14% of the total national income in 2010, the highest ever recorded. At the other end of the spectrum, the US has today an unprecedented unemployment rate of close to 10%.
This situation is not confined only to turbulence in global finance. It has sowed the seeds of a more fundamental crisis. As the burden of sovereign debt is passed on to the common people, their purchasing power correspondingly declines. Combined with the growth of unemployment, this leads to a sharp contraction in domestic demand. Further, this global crisis has drastically reduced global trade. With the contraction of domestic demand in all the major economic powers, save China, the contraction of GDP is inevitable. This, in turn, will lead to a contraction in governmental revenues, imposing further debt. The servicing of this would lead to imposing further burdens on the people. This vicious cycle has been set in motion.
For us in India, it is important to draw the correct lessons. Given the global financial turbulence, India must not be fool- hardy to rush into 'Gen Next' financial reforms. In the first place, if India could protect itself from the devastating effects of the global meltdown in 2007, it was because the Left parties had prevailed upon UPA 1 not to proceed with such financial reforms that were waiting to be legislated. Such wisdom must prevail to protect our economy and people from this global turbulence.
Sitaram Yechury is CPI(M) Politburo member and Rajya Sabha MP. The views expressed by the author are personal.