The last few weeks have seen the beginning of a new imperialist war, this time against the small oil-rich country of Libya. The war began on March 19, when the United States, Britain and France launched a missile attack against Libya’s air defenses.
The opening of this new U.S.-led imperialist war of aggression occurred on the eighth anniversary of the U.S.-led invasion of Iraq. To add to the irony, the first missiles began to fall during U.S. West Coast anti-war demonstrations timed to mark the beginning of the imperialist invasion of Iraq—a first in the history of anti-war demonstrations, I believe.
I had been asked what is my opinion of the current economic conjuncture. I had intended to devote a reply to this question, since I have not written about this for some time and there have been some interesting developments on this front. However, the explosive events in North Africa and the Persian Gulf region combined with the Japanese earthquake, tsunami and nuclear disasters are raising a different set of questions that should be dealt with first.
What will be the effects of these events on the world capitalist economy? These events are external to the industrial cycle, though they will no doubt exert an influence on the evolution of the current global industrial cycle that began with the outbreak of the last general crisis of overproduction in 2007. Therefore, this month I will examine the effects of the North African and Persian Gulf events and the Japanese disasters on the capitalist world economy. I will postpone until next month an examination of the current conjuncture in the global industrial cycle.
The new Arab revolution and the war against Libya
The war against Libya is part of the much broader effort by “the West”—U.S. imperialism and its imperialist satellites, especially Britain and France—to contain and eventually crush the revolution that has been sweeping the Arab world since the downfall of the Ben Ali dictatorship in Tunisia this past January.
Particularly alarming to the leaders of U.S. imperialism has been the spread of the revolution to the tiny country of Bahrain. Demonstrators inspired by the Egyptian and Tunisian revolutions have staged mass protests against the absolute monarchy that rules this country on behalf of the American empire. This has threatened the much more powerful absolute monarchy next door, Saudi Arabia.
A few days before the imperialist attack on Libya, Saudi Arabia and the monarchical United Arab Emirates invaded Bahrain in a move to crush the incipient revolution.
Saudi Arabia is no democracy, not even in theory. There is no parliament, only an advisory council that is not elected but appointed by the king. Women do not even have the right to drive a car. Despite the fact that demonstrations are strictly illegal, some demonstrations have already occurred, though they have been put down by the security forces.
The war in Libya, therefore, represents not only a grab for Libyan oil—Libya is the biggest oil producer in Africa—it is part of a much broader effort by imperialism to prop up monarchies and dictatorships—especially the monarchies—in order to crush the new Arab revolution. (1)
Disaster in Japan and the new energy crisis
On March 11, a massive earthquake (9.0 on the Richter scale) occurred in a major subduction zone—an area where a part of the Earth’s crust is sinking into its mantle—off the coast of Japan. The earthquake caused a major tsunami, which devastated coastal northeastern Japan leading to more than 10,000 deaths.
The effects of the quake brought much of Japan’s industrial production to a momentary standstill. It also caused power to be cut off at the Fukushima nuclear power plant that the Tokyo Electric Company had built in the earthquake-prone area. Since backup diesel generators were knocked out by the tsunami and batteries provided only a few hours of emergency power—not as long as the battery backup in many laptop computers—the flow of cooling water to both reactor cores and to the highly radioactive waste materials that needed cooling as well was soon cut off. Without a flow of water to carry away the heat created by the nuclear fission in these radioactive materials, it was only a matter of time before the radioactive elements heated up to their melting points and began to eat through the inadequate containment vessels and escape into the external environment.
If this process is not quickly checked, large areas around the plant will remain radioactive for decades as happened at the Chernobyl plant in Ukraine following the accident there in 1986, shortly after Mikhail Gorbachev came to power the year before. (2) In addition, radioactive particles have been injected into the atmosphere that can cause an increase in cancer deaths for decades to come.
The new energy crisis
The revolution-war crisis in the Arab world and the Japanese nuclear crisis—though they have different causes—are together creating a growing “energy crisis” for the global economy. It seems that the Fukushima complex of six reactors is a total loss and will have to be entombed in concrete in order to finally end the release of radioactive elements. At a stroke, Japan’s ability to generate electricity has been reduced by about 3 percent. This means that the Japanese capitalists have suddenly become more dependent on fossil fuels imported from abroad.
There is also a danger that this entombment will be postponed by the Fukushima complex’s capitalist owners, the Tokyo Electric Power Company. If Tokyo Electric can pretend that the Fukushima complex is at least partially salvageable, it can continue to carry a portion of its value on its balance sheet. As is the case with any commodity, the destruction of the six-reactor nuclear complex as a material use value—the generation of electric power—automatically destroys its exchange value.
If Tokyo Electric is allowed by the Japanese government to get away with such a maneuver—perhaps allowing the big stockholders to unload their shares at prices that don’t fully reflect the loss of capital that Fukushima represents for the company—and entombment is postponed—more radioactivity will keep leaking into the environment increasing cancer deaths for decades to come.
The threat of global warming rises
The effects of the nuclear accident at Fukushima will almost certainly slow down if not halt the construction of new nuclear power plants. Already, governments from China to Germany have announced either a suspension of plans to build nuclear plants or the accelerated shutdown of existing ones. The inevitable result—at least in the short run—will be increased dependence on fossil fuels that release greenhouses gases such as carbon dioxide into the atmosphere.
We can be sure that the capitalists who own and refine the fossil fuels will not let this unexpected opportunity escape them. They will push for more reliance on fossil fuels while the world is distracted from the long-term dangers of global warming by the Japanese nuclear crisis.
The Middle East is for now the main source of fossil fuel. However, we shouldn’t forget that in the longer run it is North America that is potentially an even bigger source of fossil fuels in the form of coal deposits and shale oil. (3)
The automobile industry and peak oil
Concerned about an approaching peak in oil production—the source of gasoline—the world’s automobile industry is in the early stages of a transition from the internal combustion engine to the electric car. Many see the electric car as a “green,” environmentally friendly technology.
However, the batteries that power the motors in electric cars do not produce the energy needed to power the cars, they merely store it. Ultimately the batteries used in electric cars, just like batteries used to power cell phones and laptops, draw their energy from the electric power grid. If the electricity is generated by coal plants, electric cars depend on the energy stored in fossil fuels. (4)
However if, the electric power is generated by the fission reactions that occur inside a nuclear reactor, the ultimate source of the electric power that is stored in the car batteries is atomic energy. When the uranium or plutonium atoms are split in the chain reaction within the nuclear reactor, a portion of the mass of the nucleus is converted into energy in the form of heat as described by Einstein’s most famous equation: E = MC^2
The heat energy that is generated by nuclear fission is used to produce steam, which drives a turbine that transforms the heat energy into electrical energy. This electrical energy is then stored in the battery of an electric car—or in the battery of a cell phone or laptop. In an electric car—or bus or truck—the electric energy stored in the battery is converted into mechanical energy by the electric motor that powers the car.
The auto capitalists, foreseeing the depletion of cheap oil and therefore cheap gasoline approaching, have counted on nuclear power to increasingly replace oil as the main source of energy used to power their commodities—cars. However, the renewed concerns about the dangers of nuclear power plants threaten to slow this whole process down, making the dwindling supply of oil all the more important for the auto-centered economies of the imperialist world.
New recession in Japan?
The Japanese earthquake has forced large sectors of Japanese industry, from automobile manufacturers to “high tech” semi-conductor and computer disk drive manufacturers to suspend production. There is some speculation in the media that the sharp decline in industrial output in Japan induced by earthquake damage might cause the Japanese GDP to decline over the next several quarters, which would meet the definition of a “recession” used by bourgeois economists.
It is important to realize that such a “recession” would not be a crisis of generalized overproduction but rather would represent a crisis within capitalist expanded reproduction caused by physical damage to the fixed capital of Japanese factories combined with the reduction of power generation capacity by roughly 3 percent caused by the Fukushima nuclear power plant “meltdowns.”
The short-term economic crisis caused by the earthquake
Let’s examine the effect on the world capitalist economy of the temporary reduction of Japan’s physical ability to produce due to damage to the fixed capital of Japanese industry.
“Japan’s earthquake and nuclear crisis,” AP business correspondent Erika Kinetz writes, “have put pressure on the already fragile global economy, squeezed supplies of goods from computer chips to auto parts….” What is involved here is not a crisis of generalized overproduction relative to money material—monetarily effective demand—but rather an underproduction of commodities, whether finished goods like automobiles or commodities that serve as inputs to produce other commodities.
A crisis of disproportionate production
This kind of underproduction caused by a natural disaster causes disproportionate production. For example, if a computer manufacturer cannot get computer chips or perhaps disk drives from Japan and cannot immediately find alternative sources of supply, there will be an overproduction of the other commodities that are necessary to assemble computers. The same thing is occurring in the automobile industry, where shortages of automobile parts are causing a wave of plant shutdowns. This is the kind of underproduction of some commodities relative to the production of other commodities that is allowed by Say’s Law.
Let’s look at this more carefully, since it is important to distinguish this
type of crisis from a crisis of generalized overproduction.
While Japanese manufacturers—industrial capitalists—have been hit hardest with sectors of industrial production brought to a standstill, the negative effects of this crisis on production are by no means limited to Japan.
“General Motors Co.,” AP auto correspondent Dee Ann Durbin writes, “on Monday [March 21] is halting some production and temporarily laying off workers at a Buffalo, N.Y., engine plant, another sign that Japan’s disaster is affecting auto makers around the globe.” These layoffs are not caused by a slump in sales—a shortage of effective demand—but a shortage of parts produced in Japan.
“GM said Saturday [March 19] it is cutting unnecessary spending companywide as it assesses the impact of production disruptions from the earthquake and tsunami in Japan,” writes Janna Herron, another Associated Press business writer.
What the “new” General Motors (5) is concerned about is that the shortage of a few or even a single part imported from Japan could prevent the company from successfully transforming its circulating capital—both constant and variable—into commodity capital in the form of finished automobiles. If GM transforms its money capital into only partially produced cars, it will not be able to sell these cars.
Partially produced automobiles represent circulating constant capital, not commodity capital. Imagine trying to sell a car that is missing a necessary engine part. Such a car will not be able to function as a means of transportation—the use value of a car—and thus would not find any buyers.
If General Motors only partially transforms its circulating capital—both variable and constant—into commodity capital, it will suffer a drain of money capital. Instead of converting M into C’, the reproduction process bogs down at P—the production process where capital absorbs surplus value.
To avoid such a drain of money capital, General Motors is hoarding its money and waiting until it is sure that conditions that enable it to allow its productive capital to successfully absorb newly produced surplus value and complete its transformation into commodity capital are restored.
But this means that other industrial capitalists who sell parts to GM and have themselves experienced no reduction in their physical ability to produce auto parts will for a certain period of time be unable to transform their commodity capital into money capital C’—M’. If this continues for any period of time, they will lay off their workers and cut orders to their suppliers just like they do in a general crisis of overproduction. Therefore, a crisis that began as a shortage of some commodities that are necessary inputs in production is transformed into a a crisis of the overproduction of other commodities. (6)
One factor that is working to worsen the earthquake-induced short-term crisis is the much vaunted “just-in-time” inventory system that was pioneered by Japanese capitalists and has been spreading to industries throughout the capitalist world. The idea is not to allow circulating capital to lie idle in the form of parts and raw materials.
From the viewpoint of the industrial corporations, idle parts and raw materials are just like idle money that is not earning interest to a money capitalist. Except since here we are dealing with real capital and not interest-bearing money capital, the capital represented by idle parts and raw materials is expected to yield not only interest but at the very least the profit of enterprise as well.
To prevent circulating industrial capital from lying idle, only parts and raw materials that are immediately needed are kept on hand. Therefore, if production of the parts and raw material is even momentarily suspended (7) by some extra-economic shock, the production of the industrial consumers of these parts and raw materials is suspended, which in turn leads to other disruptions elsewhere in the process of capitalist (re)production.
Among the consequences is a shortage of consumer goods and a consequent rise in prices already being reported from Japan and affecting auto buyers worldwide. We see here that the process of expanded capitalist reproduction can suffer many types of crises other than crises of generalized overproduction.
Effect of crisis on competition between Japanese capitalists and rival capitalists in other countries
The longer the physical ability of the Japanese industrial capitalists to produce is curtailed, the greater the chances are that the Japanese industrial capitalists will lose customers to their rival capitalists in the U.S., Europe, China, South Korea and other countries. For example, if you cannot buy a Toyota, perhaps you will buy a Ford instead. You may find you love your new Ford, and when you again have to buy a new car, a Ford rather than a Toyota might be your first choice. If this becomes widespread, it could make the difference between whether Toyota or Ford survives the inevitable next crisis of overproduction.
Therefore, what is a disaster for Japanese capitalists is an important profit opportunity for automobile manufacturers located in other countries—assuming that they are not as crippled by the loss of Japanese-made auto parts as the Japanese capitalists are. Part of the skill of being an active industrial capitalist is precisely the ability to move quickly to take advantage of such unexpected opportunities when they arise.
Positive effects of the Japanese crisis on the world capitalist economy
“A weaker Japanese economy,” Erika Kinetz writes, “could help ease global commodity prices because Japan is a major importer of fuel, agricultural products and other raw materials, notes Mark Zandi, chief economist at Moody’s Analytics.”
Indeed, the price of oil, which had been climbing due to the combined effects of the current recovery phase of the industrial cycle, the depreciation of the U.S. dollar, and the concern about the revolution-war crisis in the Middle East and North Africa, did briefly drop after the Japanese earthquake. If a factory is forced to shut down due to physical damage or supply shortages, it won’t be consuming so much energy and needs less oil to lubricate its machinery. But this particular favorable effect for the world capitalist economy is expected to soon turn into its opposite once the reconstruction boom in Japan begins.
Coming reconstruction boom
“The reconstruction expected along Japan’s northeastern coast,” AP correspondent Kinetz writes, “could even provide a jolt of economic growth.” Indeed, it not only could but it will. A similar “jolt” to economic growth was observed in the wake of the Hurricane Katrina disaster along the U.S. Gulf Coast in 2005. Though on a far smaller scale, these reconstruction booms are similar to the reconstruction booms that occurred after World Wars I and II.
Nor will it be only Japanese capitalists that benefit from the reconstruction boom. The AP’s Kinetz writes: “The reconstruction of Japan’s northeastern coast might also provide business opportunities for foreign countries. Malaysian timber, for instance, will likely be needed to rebuild homes and other buildings. IHS [an energy research company—SW] predicts that the quake will ‘ultimately boost’ U.S. exports to Japan.”
However, as the reconstruction booms sets in, the downward pressure on oil prices and other sensitive commodity prices brought about by the momentary standstill of so much of Japanese industry and the more limited production disruptions in other countries will turn into its opposite. If this were to coincide with major supply disruptions from the Middle East and Persian Gulf regions, oil prices could soar to incredible levels. I will examine the effects of such a possible development below.
The pent-up demand effect
If a would-be automobile buyer is unable to purchase an automobile due to a lack of supply of automobiles as opposed to a lack of money or credit, the would-be buyer will purchase an automobile as soon as one becomes available. This is what the economists call “pent-up demand.”
The classic case of pent-up demand was after World War II. During World War II, automobile plants were converted to war production and auto production fell to zero. In the meantime, autos in use continued to wear out with no possibility of replacement. After the war, the automobile manufacturers were able to sell huge numbers of automobiles to people who had plenty of money and credit and needed to replace their worn-out, pre-war automobiles.
Of course, the current disruption in automobile production is a tiny fraction of the complete halt in automobile production that occurred during World War II, and it certainly won’t last nearly so long. Still, we will likely see a brief surge in automobile sales when normal levels of production resume in Japan and elsewhere.
Assuming that there is no major disruption in oil supplies caused by the unfolding revolutions and wars in the oil-producing regions—a big if—the reconstruction boom and “pent-up demand boom” will temporarily reduce unemployment. These effects, however, will only be a very pale reflection of the effects of reconstruction booms and pent-up demand booms after World Wars I and II.
While the coming Japanese reconstruction boom will absorb the extra unemployment created by the current disruptions in production and create some additional jobs as well, it will do so only on a modest scale. Therefore, the reconstruction “boom” that will develop later this year—assuming no big disruptions in oil supplies and prices—will absorb only a very small part of the huge industrial reserve army that exists in the world today.
Short-term financial effects of the crisis
Japanese insurance companies will have to make major payments on their “contingent insurance liabilities,” and these payments will mostly have to be made in yen-denominated currency. In addition, as we saw above, the sudden suspension of so much industrial production in Japan meant that Japanese industrial capitalists who had converted money capital into circulating capital—both variable and constant—found they were unable to complete the process and convert the circulating capital into commodity capital that had absorbed surplus value. To the extent that they were counting on the proceeds from the sale of these commodities to meet debts, they are in something of a jam.
While the capitalists cannot always find buyers for commodities they produce, they cannot sell commodities that they have not produced. Therefore, we can assume that many Japanese industrial capitalists are facing debts that they cannot immediately meet. The result just like in the case with a crisis of overproduction is a rush for liquidity. In both types of crises, cash is king.
In the days following the crisis, Japanese capitalists withdrew money they had been holding in dollars and other currencies and converted it into yen to meet the demand for yen payments. This caused the exchange rate of yen to soar relative to other currencies as well as gold. Indeed, in the days immediately after the crisis, the sudden demand for liquidity worldwide caused the dollar price of gold to fall briefly below $1,400 per ounce.
The sudden rise in the value of the yen resembled the sharp rise in the gold value of the dollar that occurred during the panic of 2008, though the effects are far less both in extent and time. In both cases, a crisis in capitalist reproduction led to a sudden rise in the demand for money as a means of payment. Central banks of the G-7 imperialist countries were forced to sell yen for dollars and other currencies in order to halt the momentary but disruptive rise in the value of the yen.
The Japanese central bank responded to this sudden rise in the demand for yen by “running the printing press.” Because the demand for yen as a means of payment had suddenly risen, the Japanese central bank was able to flood the money market with yen without the depreciation of the yen that would be expected if the Japanese central bank did this in the absence of a crisis in capitalist expanded reproduction—just like the U.S. Federal Reserve System was able to expand the quantity of dollars during the far greater crisis in capitalist expanded reproduction associated with the panic of 2008.
Instead, the sudden increase in the demand for yen not only caused the value of the yen, and to a lesser extent the currencies of other countries as well, to soar against gold, it also led to a panic on the Japanese stock exchange with lesser selloffs in other world stock markets. These stock market selloffs were a reflection of the scramble for cash caused by the earthquake-tsunami natural disaster.
However, if Japan loses export markets as result of the temporary standstill in production and its chronic trade surplus is reduced or even turns into a deficit, the yen will come under downward pressure. During the reconstruction boom, Japan’s need for imports will increase putting downward pressure on the yen. If the yen’s value falls substantially, this will not only end the deflation of the general price level denominated in yen that has been occurring within Japan, it might lead to surging inflation and considerable upward pressure on what has been very low Japanese interest rates.
We should, however, keep in mind that the reconstruction boom and the possible loss of customers by Japan’s industrial capitalists as a result of the temporary disruptions in Japan’s industrial production will only be one of many factors that will determine the evolution of the value of the yen, the evolution of the yen-denominated general price level within Japan, Japan’s balance of trade and payments, and Japanese interest rates.
The effects of the energy crisis
The emerging global energy crisis is likely to have far more long-term effects than the short-term damage to the fixed capital of Japanese industry caused by the quake. With nuclear power likely to be on hold for the foreseeable future, the world becomes that much more dependent on fossil fuels. In addition to the long- term increase in greenhouse gases, there is the prospect of increased reliance on biofuels that tend to reduce food supplies and put upward pressure on food prices. I will examine the food price situation next month.
What will happen if oil prices soar?
Here I want to explore what would be the effect of a major disruption in the supply of oil and a consequent sharp rise in oil prices. A sudden rise in the price of oil would quickly push up the price of gasoline and other fuels. The result of the rise in the price of these commodities is that more of the world’s money—the quantity of which is ultimately determined by the quantity of monetary gold available for sale on the world market—will have to be used to purchase fuels and less purchasing power will be left over to purchase other commodities.
To the extent fuel costs and energy costs in general rise, there is also a drop in the rate of profit for most industries—the producers of scarce fuels excepted. Keynesian economists will put pressure on the Federal Reserve and other central banks to expand the money supply in order to make up for the loss of effective demand caused by rising oil prices. Very likely the Fed will comply, since it has been following the advice of Keynesian economists of late.
However, the effects of such a move would be highly inflationary. This would create some short-term additional demand as both industrial and commercial capitalists increase their purchases of commodities before prices rise even more. However, such an increase in demand cannot be sustained, though it might last awhile under current conditions because of the huge amount of cash that the capitalists are hoarding due to the lingering effects of the crisis of 2007-09.
In addition—though this is actually more of a long-term effect—rising fuel costs that reduce the profits of the gold mining industry work in the direction of reducing the rate of growth of money material. In turn, the rate of growth in the quantity of money material—monetary gold—determines in the long run the rate of growth of monetarily effective demand.
A sudden disruption of the supply of the central energy commodity oil that cannot be quickly substituted for—especially in the wake of the Japanese nuclear crisis—would also produce a crisis of disproportionate production. There would be a crisis of underproduction of oil relative to other commodities, including the money commodity gold.
Here we get a hybrid type of crisis, a crisis of the underproduction of one crucial commodity relative to all other commodities, which tends to lead to an overproduction of all—or most—commodities relative to the money commodity.
This is true because so much purchasing power is absorbed by a necessary commodity —oil—leaving less purchasing power for other commodities. A sharp rise in the price of food has the same effect.
In addition, the downward pressure it puts on the profits of the gold mining companies and thus production of money material just when more money is needed to circulate other commodities undermines the growth of effective monetary demand. Here we see how the different types of crises to which expanded capitalist reproduction is prone can occur not only in their “pure” forms but in interaction with one another to produce hybrid types of crises.
Therefore, the growing energy crisis works in the direction of more severe crises of overproduction and higher unemployment in the years to come. If Washington continues to escalate its wars in the Middle East and opens new war fronts as it has just done in Libya, and this leads to major disruptions in oil supplies and higher oil prices, the chances increase of a new major global recession before the next purely cyclical crisis is due around 2017—assuming a 10-year industrial cycle. I will examine this more closely next month.
Saudi Arabia and the dollar system
There are obviously concerns among the imperialist leadership that if the movement against the monarchies in the Arab world is not put down, Arabia—it wouldn’t be Saudi Arabia anymore—could experience a republican revolution.
In 1971, U.S. President Richard Nixon suspended what was left of the convertibility of the U.S. dollar into gold. This raised a question whether the prices of primary commodities would continue to be priced in U.S. dollars on the world market now that the dollar had lost its quality as credit money and been converted into a pure token money.
The Saudi monarchy by agreeing to continue pricing oil in terms of dollars played a crucial if not decisive role in establishing the dollar system. Remember, the dollar system allows U.S. imperialism to run up huge debts and then periodically devalue its currency, in effect reducing its debt burden in terms of gold at the expense of its creditors.
If, in contrast, the price of oil were quoted in gold itself, it would mean that prices of other commodities, and therefore world market debts, would increasingly be denominated in gold, not U.S. dollars. The U.S. would lose its ability to run up huge debts and then repay them in devalued paper dollars.
The crisis of the dollar system
The crisis of 2007-09 showed how badly the dollar system has been working for the world capitalist economy of late. As I explained elsewhere, during the first phase of the crisis—August 2007 to July 2008—the world’s money capitalists had assumed that “the Fed” would respond to the crisis by flooding the banking system with newly created dollar token money. In expectation of this, the dollar fell sharply against gold, and the price of oil skyrocketed from about $70 in July 2007 to $147 at one point in July 2008. The prices of primary food commodities also soared in that period.
This led to growing protests against the skyrocketing cost of eating, especially in poor countries where many people face starvation. There was also a growing threat of a collapse of the dollar system.
But much to the surprise of the speculators, the Federal Reserve System did not flood the banking system with dollar liquidity at that time. The Fed held back because it feared the consequences of the rush from the dollar into gold and the resulting speculative price rises—in dollar terms—of other commodities such as oil and food.
As a result of the failure to provide the expected dollar liquidity, the commodity price bubble burst and a mad demand for dollar liquidity ensued. Credit dried up worldwide causing industrial production, world trade and employment to contract across the globe.
The price of oil fell by more than $110, falling to barely above $30 a barrel in December 2008! And the crisis of high food prices for the moment disappeared as food prices fell. The Fed then took advantage of this sudden huge increase in the demand for dollars as a means of payment and flooded the banking system with dollars. Because of the huge increase of demand for dollars as a means of payment brought on by the panic of 2008, it could do this without an immediate risk to the dollar system.
However, as the panic subsided the huge increase in dollar liquidity engineered by the Fed soon led to a new fall in the value of the U.S. dollar and a new commodity price boom, including the prices of food commodities. The resulting rise in the price of food and the hunger it created played a crucial role in triggering the Arab revolution that began in Tunisia last January. (8)
Increasingly, the capitalist world has either faced a plunging dollar with the inevitable soaring oil, food and other prices that threaten the purchasing power of the monetary reserves of countries that hold their reserves in U.S. dollars—which the dollar system forces all countries to do—or they face sudden shortages of dollars when the demand for the dollar as means of payment suddenly rises as occurred during the panic of 2008.
It has become a cliché in the international financial press that the dollar system is not working anymore and a “new international monetary system is needed.” However, U.S. imperialism does not want to give up the advantages that the dollar system gives it. (9) This is where Saudi Arabia comes in.
Oil, gold and Saudi absolutism
Saudi Arabia is the largest producer by far of sweet oil. In 1971, when the Nixon administration finally ended all convertibility of the dollar into gold, there was a question whether the dollar could continue to function as the world’s main means of payment. Under the Bretton Woods system that preceded the current dollar system, the dollar was defined as 1/35th of an ounce of gold. The U.S. promised to redeem dollars at this rate on the demand of the central banks and treasuries of other countries. Therefore, under Bretton Woods, international debts—in the final analysis world debts—were denominated in terms of gold, just as was the case under the classical international gold standard.
Saudi Arabia by continuing to price oil in dollars after the convertibility of the dollar ended therefore was crucial in the success of the Nixon administration’s plan to impose the dollar standard on the world.
If the current revolutionary tide in the Arab world sweeps away the House of Saud at a time when the contradiction between the dollar standard and the needs of the world economy is becoming ever more obvious, the end of the dollar standard would draw much nearer and with it the end of the U.S. world empire. More on this next month.
1 Dictatorships are far more unstable than monarchies. Unlike monarchies, present-day dictatorships are democracies in theory if not practice. Let’s examine the case of one of the most reactionary dictatorships, that of the recently disposed Hosni Murbarak. Under Murbarak, Egypt had an elected president—though elections were a farce—and there was a parliament—now disbanded—though elections to parliament were rigged, and the parliament had no real power anyway.
However, the fact that Egypt was a democracy in theory and there was no monarchy made it easier for the people to demand that the fake “democracy” be replaced by real (bourgeois) democracy with genuine multiparty elections, which includes the right of the working class to organize its own party side by side with the bourgeois parties.
One conquest of the 1952 Egyptian revolution that had survived the Murbarak dictatorship was the abolition of the monarchy and the establishment of a republic. This is why U.S. imperialism is doing all it can to save the remaining monarchies in the Middle East and if at all possible reestablish the Libyan monarchy that was overthrown in 1969.
2 The Chernobyl accident would not have happened if the safety rules had been followed. All the same, the reactor was of unsound design and lacked a containment structure. The Soviet authorities who approved this unsound design therefore share responsibility for the disaster. However, in March 1985 the Central Committee of the ruling Communist Party had elected a new leadership headed by Mikhail Gorbachev. While it wasn’t apparent at the time—at least for those who were not well informed about the internal politics of the CPSU and perhaps even for those who were—this new leadership soon proved to be pro-capitalist in practice.
True, in 1986 when the Chernobyl accident happened, capitalism had not yet been restored in the Soviet Union. However, the Gorbachev leadership had launched a so-called acceleration program that deemphasized centralized control of the economy—something extremely dangerous when it comes to nuclear power plants—while encouraging plant managers to take shortcuts when it came to safety, just like they do in a profit-driven economy. Indeed, the whole “economic reform” movement that formed Gorbachev’s political base had been arguing for years that the Soviet economy should be shifted from a system of production for use to a production for profit basis. Therefore, the road from Gorbachev’s acceleration campaign in 1985-86 and the full restoration of the capitalist mode of production for profit turned out to be a very short one.
3 We shouldn’t forget NASA climate expert James Hansen’s warning that if all the fossil fuels, especially shale oils, are burned, the Earth will in about 500 years experience a runaway greenhouse effect like happened on the planet Venus. If this were to happen, all life on earth would perish. Hansen may be wrong on this question, of course—not all climatologists agree with him—but it is not a question that can be treated lightly considering the stakes
4 The ultimate source of the energy stored in fossil fuels is the nuclear fusion reactions that occur in the sun. These reactions fuse hydrogen atoms into heavier helium atoms during which some of the nuclear mass is transformed into energy. Therefore, in the final analysis most of the energy that is available to us comes from nuclear reactions, whether fission or fusion.
5 Remember, the General Motors Corporation declared bankruptcy and was liquidated. Its stockholders were wiped out. However, a new corporation misleadingly also called General Motors was organized with its stock largely owned by the U.S. government. The new General Motors is paying far lower wages and pensions than the “old” General Motors, in a bid to achieve profitability. Much more surplus value is being squeezed out of its workers than was the case with the “old” General Motors. The U.S. government has been selling off its shares in the “new” General Motors to money capitalists who hope to share in the profits they are betting the “new” General Motors will make due to the much higher rate of exploitation of its workers.
6 In examining crisis theories, I wrote about the disproportionate production theory of crisis. This theory tends to see crises as accidents and therefore in principle not inevitable. The current crisis caused by the Japanese earthquake, tsunami and nuclear disaster is an example of just such an accidental crisis. It did not arise out of the contradictions of the capitalist mode of production such as is the case with a cyclical crisis of generalized overproduction but from an accidental shock that originated outside the economic system.
This illustrates an important characteristic of the cyclical crises of overproduction. The cyclical crises are the crises that occur under capitalism when there are no other crises, whether natural disasters, depletion of raw materials, or wars or revolutions. The inevitable cyclical crises interact with the “accidental” crises to create the concrete crises that occur in the real world.
7 This potentially increases the power of the unions, since a strike in a plant that provides a crucial input can very quickly bring other sectors of capitalist production to a halt. This is one of the reasons why the capitalist governments are doing everything they can to further limit the right of unions to strike.
8 The Fed doubled the supply of dollar token money in 2008-09 because it was attempting to limit the inevitable post-panic depression and its political effects. It didn’t want a repeat of the events of 1847-8, where the crisis of 1847 led to the European revolutions of 1848.
However, because the Fed expanded the supply of dollar token money so much—much more than it would have been able to do if the international gold standard were in effect—the dollar soon resumed its depreciation and the food price crisis, which had temporarily vanished due to the panic of 2008, quickly reappeared. The skyrocketing price of food, along with both the lingering structural unemployment and the additional joblessness created by the 2007-09 crisis, then led straight to revolutions in Tunisia and Egypt, the very thing that the Fed was trying to prevent in the first place.
9 The dollar standard has not only hurt the economies of other countries, it has done tremendous harm to the U.S. economy as well. Because the dollar is the main means of international payment, there is a much stronger demand for dollars than is justified by the level of U.S. exports. This enables and indeed forces the U.S. to purchase huge amounts of commodities made in other countries and thus run massive chronic trade deficits. The dollar standard has therefore contributed to the steady erosion of U.S. industrial production—deindustialization—that has occurred since 1971.
However, the huge trade deficits—the ability of the U.S. to exchange depreciation-prone dollars for real wealth in the form of imported commodities—has also enabled it to maintain an artificially high standard of living for large sectors of the “middle class”—including the upper layer of the working class. This is the material basis for the relative political stability of capitalist rule in the U.S. This stability is, however, coming under increasing stain as the events in Madison, Wisconsin, and elsewhere are showing. The collapse of the dollar standard would likely end this stability altogether.