A reader wants to know how the crisis that has developed in European and world financial markets will affect the current economic and political situation.
In the first week of May, renewed panic hit world financial markets. This time the crisis was centered in Europe and the European government debt market. The immediate cause of the crisis was the fear that the government of Greece would not be able to meet payments on its bonds that were coming due later in the month.
The resulting panic drove the interest rate on Greek government bonds well into the double digits, while stock markets plunged around the world. The crisis began to spread from the bonds of Greece to the bonds of other weaker European powers such as Portugal, Spain and Ireland.
Both Washington and the European governments fear that a major new contraction in credit could set in that would end the weak economic recovery that has been visible since the middle of last year, and renew the worldwide economic downturn—perhaps transforming the “Great Recession” into Great Depression II.
After a round of frantic emergency meetings over the weekend of May 8-9, the European Union, the International Monetary Fund and the U.S. Federal Reserve announced a round of emergency measures to raise almost a trillion dollars aimed at propping up the global credit system and bailing out the holders of Greek government debt—not the Greek people—while preventing the collapse of the euro.
The situation was so grave that French President Nicolas Sarkozy canceled a scheduled visit to Moscow to celebrate the surrender 65 years ago of Nazi Germany. During the frantic meetings, German Finance Minister Wolfgang Schauble collapsed and had to be hospitalized.
Class war
The measures adopted have been described as “shock and awe.” Shock and awe was the phrase used by the Bush administration to describe its massive unprovoked March 2003 invasion of a disarmed and virtually defenseless Iraq. This time, however, it is not an oppressed nation that is the target but the working class of Europe, starting with but not ending with the Greek working class.
The weekend meetings were characterized by clashes between Germany and other members of the European Union, as well as arm-twisting calls from Washington to come to some sort of agreement before financial markets opened on Monday, May 10.
Basically, the Germans were afraid of a provision that allows the European Union to raise money on the open market. The Germans, who due to the strength of the German economy have a much lower government debt relative to their GDP than do other European countries, had wanted governments to individually borrow money to finance the bailout.
The German ruling class fears that the growing debts of the eurozone countries and a possible downward spiral of the euro could destabilize German capitalist society. During the prolonged economic crisis of the 1970s and early 1980s, the German Deutsche mark—the successor to the old Reich mark—was considered one of the world’s strongest currencies. The Deutsch mark depreciated against gold less than the currencies of most other countries during the 1970s. Or what comes to exactly the same thing, the German currency rose in value against both the dollar and most of the other European currencies over that inflationary decade.
As a result, Germany—where memories of the disastrous hyper-inflation of 1923, which wiped out the savings of the middle class and helped prepare the way for the Nazis, linger—experienced less inflation than most other capitalist countries, including the United States.
Under the current euro system, however, the Deutsche mark is no more. Instead, Germany shares the now very weak euro with weaker European capitalist powers such as Greece. This means that if the euro should plunge in value against the dollar—and gold—the resulting inflation, unlike in the 1970s, will hit Germany just as hard as it hits other countries of the eurozone. (1)
Berlin fears that Germany’s relatively stable capitalist economy and society will be dragged down by the weaker European capitalist countries. Therefore, the Germans are playing the “hard cop.” German Chancellor Merkel is warning governments of other European countries—not just Greece, Portugal and Spain—that they will have to cut their budget deficits. This means they must launch massive drives against their own working classes. For those with long memories, this evokes the days when Nazi Germany was the terror of Europe—though this time Merkel is talking in financial terms and not—or not yet—in military terms.
The new “shock and awe” campaign represents a massive escalation of the class war by the capitalist class of not only Europe but of its master, the capitalist class of the United States, against the world working class. The only question is, will this be a one-sided class war of neo-liberal measures by the capitalist class? Or will it be a two-sided class war with the workers fighting back? It is here that the Greek workers and their allies among the working farmers and the urban middle classes are showing the way forward.
Tax increases for the poor, tax cuts for the corporations
During the preceding week, the Greek government and parliament under “socialist” Prime Minister George Papandreou had agreed to a series of vicious attacks on the Greek working and middle classes. These include a cut in the wages of state employees and the pensions of retired workers by 20 percent. Labor laws are being revised to make it easier for Greek bosses to lay off workers. In addition, a regressive tax on cigarettes, liquor and gasoline is being increased by 10 percent. But for the bosses, there are no austerity measures. Instead, for the corporations taxes are being cut.
Deflationary fiscal policies and more recession for Greece
The deflationary fiscal policy—Greece has no monetary policy of its own under the euro system—is widely expected to mean renewed recession in Greece. The idea is that by reducing the buying power of the Greek people, Greek businesses will be forced to export more while Greeks will buy less imports at home. In this way, Greece will run a trade surplus that will draw in enough money to gradually pay down its debts.
The Greek crisis and the the fate of the global economic recovery from the ‘Great Recession’
Since the middle of 2009, the U.S., European and Japanese economies have shown signs of a cyclical recovery from the “Great Recession” of 2007-09. This recovery, like is true of all recoveries in the capitalist industrial cycle, is based on the rebuilding of inventories by commercial and industrial capitalists. However, considering the severity of the preceding recession in global industrial production, employment and world trade—by far the worst since the 1930s—the recovery has been unusually weak. As a general rule, the history of the industrial cycle is that severe crises are followed by sharp recoveries, while mild recessions are followed by weak recoveries. But not this time.
For example, the current recovery doesn’t even seem to match the strength of the recovery that began in 2003 from the far milder economic downturn of 2000-03 that affected the United States, Europe and Japan. If the current recovery had come about through the natural forces that bring about a cyclical recovery in the capitalist economy that I examined in my main posts, this would not be so alarming.
The recovery phase in the industrial cycle begins with just the sort of rebuilding of depleted inventories on the part of the commercial and industrial capitalists that we have begun to see over the last 10 months or so. As excess capacity is absorbed over a number of years of weak industrial investment, industrial investment rises and a new industrial boom develops. Eventually, the new boom ends in a new crisis of the generalized overproduction of commodities.
It generally takes about 10 years for the entire capitalist industrial cycle—also called the business cycle or trade cycle—to unfold. Since the crisis began in 2007 with what was originally called the “sub-prime mortgage crisis” in the United States—it was really much more than that—the next crisis will be due in 2017, give or take a year or so. (2) Between now and then, economic conditions should gradually improve—at least this will be the case if we have a normal full industrial cycle.
The real problem is that during the “Great Recession” governments, following the advice of the famous British economist John Maynard Keynes, ran large deficits, pumping huge amounts of purchasing power into the world capitalist economy. The U.S. Federal Reserve flooded the world money markets with its dollar-denominated token money—in effect, paper dollars. For awhile, it looked as though this tremendous expansion in the quantity of paper dollars had finally broken the panic.
A new reformist era?
The return of Keynesian economics after decades of eclipse caused many liberals and social democrats to announce the end of the “neo-liberal” period and a revival of “New Deal”-type social reformism—without any need for a revival of the class struggle on the part of the workers. According to these sages, the capitalist governments had finally come to their senses and realized that the reactionary policies associated with the economic theories of Milton Friedman simply didn’t work. Behind these ideas is the belief by middle-class liberals and social democrats that the capitalist class and the working class have common interests. But these reformist illusions are now being rudely punctured by a new wave of “shock and awe” austerity measures. As far as the bosses are concerned, neo-liberalism is far from dead.
Sovereign debt
Now, as recovery from the “Great Recession” seemed to be finally setting in, the governments in the eurozone began to have problems repaying debts they had incurred during or before the recession. Under the euro system, each European government has no “monetary authority” of its own. The position of European governments is more like a U.S. municipality facing possible bankruptcy than the U.S. central government, which under the dollar system can always repay its debts in its own currency.
No other country can do this, least of all countries like Greece that don’t issue their own currencies. Even if a government does issue its own “legal tender” currency, it usually has to issue bonds that specify repayment in dollars or perhaps euros. For example, the governments of Latin America cannot repay their debts in their own currencies; they have to repay them in U.S. dollars.
But the federal government of the United States can repay its debts in the currency it issues itself. If you have a paper dollar at hand, take a look close look at it. You will notice that it is signed by the U.S. secretary of the treasury—the U.S. finance minister. Imagine if you could repay your debts not with “hard cash” but simply a piece of paper that bears your signature!
Is the U.S. government immune from bankruptcy?
The ability of the U.S. government to repay its debts in its own “paper currency” did not always exist. Once upon a time, U.S. government bonds often carried “gold clauses” that specified that the bonds were payable in a certain amount of gold. If the U.S. dollar was devalued, the payment would have to be made in either a larger amount of devalued dollars or in gold itself. But no more.
While the U.S. government can’t go legally bankrupt, a kind of economic bankruptcy is possible. If the dollar were to collapse against the money commodity gold—that is, if the dollar price of gold were to rise dramatically from the current price of about $1,200 an ounce to a far higher price over a short period of time—private money capitalists would begin to demand drastically higher interest rates on U.S. governments bonds.
In an extreme case, the private money capitalists—the market—might say to the U.S. government: We will only buy your bonds at prohibitive rates of interest. Only if you denominate them in old-fashioned hard cash—gold—will we lend you money at reasonable interest rates.
Something like this almost happened at the end of the 1970s, which led to the Volcker Shock. In the days of the Volcker Shock of 1979-82, interest rates on U.S. federal government bonds soared into the double digits.
However, as a result of the Volcker Shock, money capitalists were willing to continue to buy U.S. government bonds denominated in paper dollars—and not in gold—at gradually declining interest rates. In return, the U.S. government agreed to stabilize the dollar against gold.
Indeed, between the end of the Volcker Shock in 1982 and the turn of the century, the dollar—though it fluctuated—climbed in value against gold. As this process continued, world money capitalists were willing to lend money to the U.S. government at progressively lower rates of interest. The credit of the U.S. government and the Federal Reserve System was gradually restored.
Therefore, while under the dollar standard the ability of the U.S. government to borrow is far greater than any other government—or bank or private corporation—in the world, it is not unlimited. If the United States were to “abuse” its borrowing privileges beyond a certain point, the money capitalists might refuse to lend it any more money unless it agrees to pay in gold. And if the U.S. government had to pay in gold, the United States could go bankrupt.
The great trillion dollar rescue
Normally capitalist central banks limit themselves to purchasing only short-term government securities—called treasury bills—where the government must repay the loan within three months. If the central banks start to purchase long-term bonds, the situation can easily degenerate into one where the government is not really borrowing money but simply printing it. This is why under normal conditions central banks generally confine themselves to purchasing only short-term government debt.
The decision of the European Central Bank to begin purchasing the long-term bonds of various governments of the eurozone raises the specter that the quantity of euro-denominated token—paper—money will rapidly increase leading to a rapid depreciation of the euro against the dollar and gold.
The current crisis of the euro represents quite a turnabout from the situation that prevailed during the first phase of the “Great Recession”—from August 2007 to July 2008, when it was the dollar that was plunging against the euro as well as gold—leading to rather ill-informed speculation that a euro system, or at least a joint dollar-euro system, was about to replace the dollar system.
However, when full-scale panic broke out on world financial markets following the collapse of the giant Wall Street investment bank Lehman Brothers, the dollar suddenly soared in value against the euro. (3) Since far more debts are denominated in dollars than in euros, in the crisis the dollar was still king.
In a bid to ease fears of a rapid explosion in the quantity of paper euros, Jean-Claude Trichet, president of the European Central Bank, promised that extra euro paper money created by the massive bond purchases would be offset—or “sterilized” as the central bankers say—by the sale of other assets by the ECB. (4)
The U.S. Federal Reserve followed just such a strategy between August 2007 and August 2008, which represented the first phase of the “Great Recession.” But that policy ended when panic hit the New York—and world—credit markets in September 2008 as the giant Lehman Brothers investment bank collapsed. At that point, the Federal Reserve suddenly began to “run the printing presses” as it scrambled to meet the sudden increase in the demand for dollars as a means of payment.
Therefore, the markets fear that the move by the European Central Bank to purchase long-term government bonds will, either immediately or in the near future, lead to a massive expansion of the European euro-denominated paper money monetary base. And when the supply of a token—or paper—currency is rapidly expanded, a fall in the value of the given currency against gold and other currencies that are not devalued against gold (or are devalued to a lesser extent against gold) is—sometimes immediately and sometimes with a lag—accompanied by massives rises in commodity prices expressed in terms of the devalued currency.
What will happen if the euro is drastically devalued against the dollar?
A massive devaluation of the euro against the dollar could be a disaster for not only the European economies—especially for the workers whose real wages would be hit hard by the inflation that would follow a massive euro devaluation—but also for the U.S. economy. (5) First, a massive devaluation of the euro against the dollar would temporarily lower the costs in terms of dollars of European businesses relative to U.S. businesses. That is, the wages of European workers would be sharply cut in dollar terms.
In the long run, a greater rate of inflation in Europe as opposed to the United States would tend to cancel the advantages that Europe would gain from a devaluation of the euro against the dollar, but that would take time. In the meantime, European exports to the United States would rise while U.S. exports to Europe would tend to decline. The result would be similar to the so-called Asian crisis of 1997.
Back then, the massive devaluation of the currencies of many Asian countries was followed by a huge growth in the U.S. trade deficit, which accelerated the long-term shift of industrial production from the United States to Asia. There is every reason to assume that a euro devaluation would have similar negative effects on the U.S. economy.
There is another danger to the U.S. economy lurking in a major devaluation of the euro against the dollar. We can assume that many capitalists have assets in euros but debts denominated in dollars. Indeed, capitalists were encouraged to accumulate assets in euros and debts in dollars by the widespread belief that prevailed before the fall 2008 panic and again more recently that over the long run the euro was likely to rise against the dollar. If instead, the euro suddenly were to fall against the dollar—even if only temporarily—a lot more euros would suddenly be necessary to repay these debts. This could lead to a global credit crisis that would renew the Great Recession.
The U.S. Federal Reserve Board was able to a certain extent to get away with the doubling of the dollar monetary base during the 2008 panic because the dollar is the main means of payment not only within the United States but worldwide. When the panic hit, capitalists demanded repayment—and the medium they demanded repayment in was dollars. This is why the devaluation of the U.S. dollar against gold since 2007, though considerable, has not been greater than it has been. However, with far fewer debts denominated in euros, the ECB has far less room to maneuver than does the Fed.
Real money
When the capitalist media talk about the rise and fall of currencies, they talk about the rise and fall of currencies relative to each other. By definition, all currencies can’t fall against each other at the same time. But neither euros nor dollars are what Marx called “real money.” Real money, Marx explained, must be itself a commodity with a definite material use value of its own. The main role of the commodity that serves as money is to measure the exchange value of other commodities in terms of its material use value measured in units of weight. Dollars, euros, yen and so on merely represent real money in circulation. Real money has long been and continues to be the commodity gold bullion.
The main thing propping up the dollar since the massive increase in the U.S. dollar monetary base that has occurred since the fall of 2008 to the present has been the fear that full-scale panic will resume generating once again a soaring demand for dollars as a means of payment. For this reason, banks and industrial and commercial capitalists have been building up their dollar reserves rather than lend or invest them. If the panic resumes—like has begun to happen this month—the dollars will be needed to meet panicky demands for repayments—in dollars—on the part of creditors.
Swaps
The United States hopes to prevent a renewed credit crisis—and renewed global recession—and/or euro collapse against the dollar by loaning great amounts of dollars to Europe through so-called swaps. In plain language, the U.S. Federal Reserve makes a short-term loan in dollars—short term means three months or less—to the European Central Bank on euro collateral. The ECB can then use the borrowed dollars to pump liquidity into European banks in need of dollars or sell dollars for euros if it needs to prop up the value of the euro against the dollar.
At the end of the three months, the ECB repays the dollar loans plus interest to the Federal Reserve System, and in return the Federal Reserve returns the euro collateral to the ECB. Of course, the Fed dollar loans can always be rolled over through the granting of new dollar loans against euro collateral.
Weak dollar to prop plunging euro
Therefore, the weak—though not yet collapsing—U.S. dollar is being mobilized to save the plunging euro. But what happens if the dollar itself starts to collapse? What will happen if the dollar price of gold starts to soar like it did, for example, between August 1979, when it was below $300, and then spiked to $875 in January 1980? The only thing that saved the dollar—and the dollar system—back then was the infamous Volcker Shock, which ushered in the neo-liberal era.
Can it happen again? Of course it can. Indeed, the huge expansion of the dollar monetary base that has occurred since the panic of the fall of 2008 far exceeds any increase in the monetary base that occurred in the devaluation/inflation-ridden decade of the 1970s.
The Federal Reserve System—the world central bank
Under the dollar system, world commodity prices are quoted in dollars, and many more debts are denominated in dollars than any other currency. This makes the U.S. Federal Reserve System in effect the global bank of issue. Indeed, more Federal Reserve notes circulate outside the United States than circulate within its borders.
Marx explained that loans from a central bank can moderate a crisis as long as the credit of the central bank itself has not been shaken. Unfortunately for the world capitalist economy, the credit of the Federal Reserve System has been shaken. Whether it has been shaken so much that the Fed as the world’s central bank has lost its ability to moderate the crisis that flared up this month remains to be seen.
In the short run, the rescue could fail in two ways. First, credit could become so seized up that not even a trillion dollars coming off the Fed’s “printing presses” will be enough to prevent a massive credit collapse—and the renewal of the “Great Recession” and its transformation into Great Depression II. It was just such a seizing up of credit that transformed the “ordinary” recession of 2007 into the “Great Recession.”
Second, it could fail if the U.S. dollar starts to plunge against gold—that is, if there is a sudden and dramatic increase in the dollar price of gold bullion from the current price of around $1,200 an ounce to something more like $3,000 over, let’s say, the next six months. If this happens, prices will soar, not only prices in terms of dollars but also prices in terms of other paper currencies more or less linked to the dollar under the dollar system.
Then in a last-ditch attempt to save the dollar system, the Fed would have little alternative but to impose a new Volcker Shock—which would also renew the “Great Recession,” transforming it into something like Great Depression II, or face the prospect of the financial collapse of the American empire accompanied by an even greater collapse of the world capitalist economy.
Even if these worst-case alternatives for the world capitalist economy are avoided for now and the global economic recovery continues—renewed recession being confined “only” to the weaker capitalist economies such as Greece—the world capitalist economy will still be far from out of the woods.
What economic recovery is and what it isn’t
Suppose the global economic recovery is saved. Exactly what would this mean? When the capitalist media talk about “economic recovery” under capitalism, they always forget to mention that at best a recovery—the expansionary phase of the industrial cycle—is a prelude to the next economic crisis. As I explained in my main posts, the global capitalist economy tends to experience cyclical crises of the generalized overproduction of commodities of greater or lesser severity at about 10-year intervals.
For example, the so-called Asian crisis that led to a wave of recessions in both imperialist and oppressed countries between 1997 and 2003 began in July 1997 with the devaluation of the Thai baht. Ten years and one month later, in August 2007, the sub-prime mortgage crisis led to the initial freezing up of U.S. and global credit markets ushering in what became the “Great Recession.”
Assuming that the current global economic recovery manages to survive the European financial crisis of May 2010 and any financial crises that follow, the next general crisis of global overproduction will as I mentioned above be due around the year 2017, give or take a year or two.
But will the current upturn—based on the rebuilding of inventories by commercial and industrial capitalists—blossom into a full-scale industrial cycle that will go through all the stages, leading from the current tentative recovery back to average prosperity, and then to a new boom before ending in a new crisis around 2017?
While only time will tell, there are many reasons to doubt it. Even if the current recovery survives the European financial crisis of May 2010, the global capitalist economy will still very likely “double-dip” back into recession well before the next crisis is due around 2017.
The reason to suspect this will be the case is that the current recovery has been largely achieved through the massive increase in the quantity of dollar token money. The history of the industrial cycle shows that recoveries that begin this way tend to double-dip into renewed recession rather then develop into full industrial cycles that pass through the stages of average prosperity and boom before a new crisis develops.
Some examples from the 1970s
In May 1970, the U.S. stock market plunged, the giant Penn Central Railroad Company went bankrupt and the commercial paper market began to seize up. The great economic boom of the 1960s was ending in an old-fashioned bust.
The U.S. Federal Reserve Board responded by moving to radically increase the quantity of dollars—much like it did in 2008—if to a far lesser extent, because the crisis of 1970 was far milder than the crisis of 2008—in order to halt the crisis. It seemed to be successful. The credit markets thawed and the stock market rallied. By the beginning of 1971, the first signs of an economic recovery based on the rebuilding of inventories by commercial and industrial capitalists began to appear. It seemed that the crisis was over—but it wasn’t.
Crisis of August 1971
In August 1971, the post-World War II dollar-gold exchange standard, also called the Bretton Woods System, was in its death throes. The central banks of Europe were cashing in their dollars for gold at the rate of an ounce of gold for every $35. Once again the U.S. and world capitalist economy seemed to be on the brink of a major plunge after less than a year of recovery from the 1969-1970 U.S. recession.
The only way to save the dollar-gold exchange standard would have been for the Federal Reserve System to sharply curtail the rate of growth of the monetary base, allowing interest rates to rise sharply. This would have ended the recovery then underway and led to a massive fall in the dollar-denominated world price level. Unemployment and bankruptcies would have soared.
On the positive side—for the big capitalists—the recovery of confidence in the dollar—and the demand for the dollar as a means of payment—would have lowered interest rates, raising the profit of enterprise when economic recovery resumed from a much lower level. But the price would have been years of mass unemployment and depression unlike anything seen since World War II up to that time, extending well into the 1970s decade.
But the policy makers of the Nixon administration, who were supporters of the economic theories of John Maynard Keynes, thought they knew how to avoid such a crisis. Instead of trying to save the dollar-gold exchange standard, they let it die by refusing to exchange any more gold for dollars. As was said at the time, the U.S. Treasury slammed shut the “gold window,” transforming the postwar gold-dollar exchange standard into the current dollar system.
Nixon administration policy makers—supported by academic economists, especially the followers of John Maynard Keynes—encouraged the Federal Reserve Board, then under the chairmanship of Nixon crony Arthur Burns, to continue to expand the “money supply” at a rapid rate.
Instead of raising interest rates, they launched a massive attack against the wages of the workers and the unions under the guise of “wage and price controls.” But the controls were far more effective in restraining wages—the price of the commodity labor power—than they were at restraining the prices of the commodities sold by the industrial and commercial capitalists. Calculated on an hourly basis, the real wages of U.S. workers have never recovered, even though almost 40 years have passed and the productivity of labor has vastly increased.
Today, though no wage and price controls are being proposed, the attacks against the Greek workers—which the capitalists intend to extend to other workers, first in Europe but no doubt, if they are not stopped by the struggles of the European workers, throughout the world—can be considered the functional equivalent. Both the wage and price controls applied by Nixon in the United States in August 1971 and the austerity measures adopted by the Greek government and parliament boil down to increasing the rate of surplus value. The part of the working day that the workers work for the bosses and the bosses’ government for free is to be lengthened at the expense of the part of the working day for which the workers are actually paid.
In the days of Nixon, U.S. political liberals who followed the teachings of John Maynard Keynes actually supported Nixon’s actions more wholeheartedly than conservatives did. The conservatives, or economic liberals in European terms, complained about Nixon’s abandonment of free market principles. (6) The liberals and social democrats praised Nixon for not following old-fashioned deflationary policies that would have plunged the U.S. economy back into recession. Instead, they praised “Tricky Dick” for following the policies advocated by Keynes.
The liberals believed that the inflation of the early 1970s could be ended without a renewed recession. And how was this to be achieved?
Renewed recession was supposed to be avoided by lowering the real wages of the workers. If real wages were lowered, Keynes claimed in his “General Theory,” employment would recover. Ultimately, Keynes held—just like other bourgeois economists—that unemployment is caused by real wages that are higher than the value that the workers create through their labor—a theory completely at odds with both Marx’s theory of value and surplus value and reality. In general, Keynes favored inflationary policies like currency devaluations and expansion of the “money supply” that encouraged inflation, which he believed would lower real wages. (See my posts on Keynes.) (7)
What American liberals and social democrats did not emphasize, however, was that lower real wages would mean higher profits for the capitalists. With real wages lowered and profits increased, the liberals claimed, a “stimulative monetary and fiscal policy” would keep the shaky recovery of 1971 alive. What happened?
Did Nixon’s policies work?
The U.S. stock market did rise sharply on the announcement of Nixon’s response to the crisis—just like the European and world stock markets rose immediately after the announcement of the “shock and awe” campaign. But in 1971 the rally did not last. True, by increasing the rate of surplus value the Nixon wage and price controls—largely wage controls—did help lay the foundation for the “great” bull market in stocks that began 11 years later in 1982. But why did it take 11 years for a lasting rise in the world stock markets—and profits—to develop?
The need to realize surplus value
The problem was that it is not enough for the capitalists to increase the rate of surplus value in order to raise the rate and mass of profit—the key to cyclical economic recoveries under capitalism. They also have to realize the surplus value in terms of the money commodity, the special commodity in whose material use value the exchange values of all other commodities—and profit—are measured. (8) Rising profits in terms of depreciating currencies—but not gold—are not the real thing and cannot be the basis of anything but a transient recovery. I discuss why this is so in my main posts.
The decade of the 1970s actually saw no complete “10-year” industrial cycle. Though the recovery that had begun in the U.S. economy in 1971 seemed to strengthen in 1972—which helped reelect Nixon—this “recovery” began to unravel as soon as Nixon was sworn in to begin his, as it turned out, abbreviated second term in office. (9)
The coming of the ‘Great Recession’—1970s style
As the U.S. dollar plunged against gold, dollar prices—and prices in terms of other currencies as well—began to rise rapidly. The “price controls,” such as they were, quickly collapsed and prices—in dollar terms—soared. The Fed was forced to raise interest rates to check the further devaluation of the dollar and the inflation the dollar devaluation was causing. The recovery from the 1969-70 recession came to a halt by the end of 1973 as both inflation and interest rates soared while real wages plunged. Despite sharply declining real wages in 1974, the U.S. and world capitalist economies plunged into what was called at the time the “Great Recession.”
The Federal Reserve again moved to inflate the supply of dollar token money in a move to halt the “Great Recession” of those days. Again it seemed to work at first, as an economic recovery began in the spring of 1975. But the dollar price of gold began to rise again in 1977, gradually at first. Then between August 1979 and January 1980, the price of gold rose from below $300 at times during the month of August 1979 to a peak of $875 in January 1980. The U.S. dollar—the pivot then as now of the global dollar system—lost more than half of its gold value in a five-month period.
The “recovery” was replaced by the Volcker Shock of 1979-82, with its accompanying prolonged and deep recession and soaring unemployment. This time the Fed under Paul Volcker was not so quick to cut interest rates by accelerating the growth in the dollar monetary base like they had done during the 1969-70 recession and the “Great Recession” of 1974-75. The theories of Milton Friedman had begun to eclipse those of John Maynard Keynes, and the era of neo-liberalism began.
Long-term damage to the workers’ interests from Keynesian economic policies
But capitalism paid a heavy price for the Keynesian polices of the 1970s. Once currencies are devalued against gold, expectations are raised that further devaluations will follow. The capitalist class protects itself against the threat of more devaluations by raising the rate of interest they charge on loans.
The central banks find that they must keep interest rates at higher levels to prevent renewed runs by the capitalists from paper currencies into gold. If they follow the advice of Keynes, the central banks inevitably undermine their own credit, leading to long-term increases in interest rates, and find their power to act as “lenders of last resort” in a crisis melting away. This is exactly what happened during the 1970s and early 1980s.
The combination of the long-term effects of Nixon’s wage and price controls, the effects of inflation on wages both in real—commodity—terms and in gold, or real money, terms—and the resulting weakening of the trade unions greatly increased the rate of surplus value and, after the Volcker Shock, made it possible to once again realize surplus value—and raise the rate of profit.
High profits, low capitalist investment
In the wake of wage and price controls, the inflation and finally the Volcker Shock, the mass of profit was very high. Therefore, while the wage and price controls—the austerity measures of those days—failed to prevent the economy from double-dipping back into what turned out to be a far worse recession than the 1969-70 downturn—they did help raise the rate of profit.
But a high rate of profit does not in and of itself ensure a high rate of investment—and a subsequent high level of demand for the commodity labor power. What is necessary for high investment and rapid job creation under capitalism is a high rate of the profit of enterprise. The profit of enterprise is the profit after the interest is subtracted. Why is this so?
Suppose the rate of profit is 10 percent but the rate of interest on long-term U.S. government bonds is also 10 percent. The corporations will figure, why take the risk of building a new factory when we will probably earn only a 10 percent return on our investment—and run the risk of losing everything if the commodities we intend to produce do not sell well—if we can make a 10 percent rate of profit by simply buying U.S. Treasury bonds? Indeed, the corporate tops will figure they can make an even greater killing if instead of buying U.S. Treasury bonds they enter the consumer credit business and lend money at maybe 20 percent or 25 percent!
When this happens, like it did in the wake of the Volcker Shock, the rate of profit is high but the profit of enterprise is low or even negative for awhile, because the rate of interest is swallowing up so much of the total profit (interest plus profit of enterprise) that little or nothing is left over for the profit of enterprise.
Then we have the worst of both worlds. The rate of surplus value rises, or what comes to the same thing, the rate of exploitation is very high. Applying Marx’s theory of surplus value, the percentage of the workday that the workers work for the bosses without pay rises at the expense of the part of the workday when the workers work for themselves. But because the profit of enterprise is low, investment in job-producing enterprises remains low and there is little growth in the demand for the commodity labor power.
In the bargain, if workers and their middle-class potential allies get entangled in the consumer debt trap, they end up working long hours without pay not only for their bosses but for their creditors as well!
In the years that followed the Volcker Shock, instead of the “Great Boom” that generally follows “great economic crises” in the capitalist industrial cycle, we had only the “Great Moderation.” We had capitalist prosperity of a sort, but it was a very moderate prosperity that created relatively few jobs and left many people unemployed.
But there were high profits for the capitalists, especially those capitalists who make their money lending money as opposed to those capitalists who create industrial—or even commercial—jobs. The relatively small number of jobs—especially compared to the growth of the population—in turn further undermined the trade union movement and the workers’ political parties. These were the fruits of the policies advocated by Keynes and his followers supported by political liberals, whether inside or outside the world’s workers’ movements.
The “neo-liberals,” who include not only the followers of Milton Friedman but also the more “moderate” pro-business followers of John Maynard Keynes, drew the conclusion that post-World War II economic policies—especially those of the 1960s and 1970s attempted to keep unemployment too “low.” These pro-capitalist economists reasoned that if a higher level of unemployment and its resulting poverty and human misery were tolerated than was the case during the “golden post-World War II years—though lower than during the Depression years of the 1930s—acceptable results for the capitalists would be achieved.
The bourgeois economists—both the followers of Keynes and Friedman—claimed that as long as price increases were kept in a reasonable range—between 1 and 3 percent a year—as measured by official government statistics—the swings in the industrial cycle would be minimal. This policy, called “inflation targeting,” is the official policy of the European Central Bank and is strongly supported by U.S. Federal Reserve Board Chairman Ben Bernanke. As long as inflation is kept relatively low—but is not allowed to drop below 1 percent a year—these economists believed there might only be small booms but there would also only be small recessions. (10)
The industrial cycle would therefore be smoothed out. Booms would feel for workers looking for work much like “mild recessions,” while recessions would feel for capitalists like “mild booms.” Hence the term the “Great Moderation.”
Small boom, big bust
Between 1983 and 2007, though there were many financial crises, recessions were relatively mild in the imperialist countries. This wasn’t true everywhere, however. Even if we ignore the crises caused by the counterrevolutionary restoration of capitalist relations in the Soviet Union and Eastern Europe—which were not cyclical crises—the crisis that Argentina, for example, went through in 2001 was fully comparable to the effects of the crisis of 1929-33 on the economies of the United States and Germany.
Finally, the panic of 2008 in the United States showed that it is perfectly possible to have a big panic after only a very modest capitalist “boom.” Over the last 40 years, the various schools of bourgeois political economy—radical Keynesianism, conservative moderate pro-business Keynesianism, Friedmanite “monetarism,” and “rational expectationalism”—have all shown their bankruptcy. (11)
All these schools, based ultimately on the false ideas of marginalism, which claims that the values of commodities arise from scarcity rather than the quantity of labor that is on average necessary to produce them, have failed the test. This failure should now include the “experiment” in the restoration of the market economy and capitalist production in the Soviet Union and Eastern Europe.
After first promising to create a consumer paradise virtually overnight, the pro-capitalist “reformers” then explained that a transition period of austerity and unemployment would be needed before the promised consumer paradise arrived for the great mass of the people as opposed to the rich few. The people are still waiting more than 20 years later. The sorry experience of the former Soviet Union and the Eastern European countries provides a powerful if negative confirmation of Marx’s refutations of the claims of the bourgeois economists. The school of Marx is, therefore, literally the only school still left standing.
The experience of the 1970s showed that capitalist austerity measures cannot prevent capitalist crises. The only way to abolish capitalist crises is to abolish their real cause: the contradiction between socialized production and private appropriation—the private ownership of the socialized means of production. It is the capitalist class’s insistence on retaining private ownership of the means of production, enabling the capitalists to live without working, that is the real cause of the successive capitalist crises.
The Greek workers show the way
If the Greek workers and people are allowed to win in the sense that the Greek government withdraws the austerity measures, it will be shown in practice—not simply in theory—that the only way the workers can win is to struggle.
To continue to retreat—that is, to continue with the policies that have dominated the workers’ and trade union movement since the days of Nixon’s wage and price controls—will not end the crises, it will only embolden the capitalists to make even greater demands. You cannot reason with capital—capital is not a person but a social relationship of production. Capitalists, Marx explained, are only functionaries that are made necessary by these capitalist relationship of production. You cannot reason with a social relationship of production. That is why attempts at “historic compromises” only end in ruin for the workers. The only way to deal with capital is to struggle against it.
An opportunity and a danger
The question whether the Greek workers and their allied forces are able to beat back the austerity measures must be separated from the purely speculative question of whether the governments and central banks will be able to prevent the latest financial flare-up from derailing the “recovery” and plunging the global capitalist economy back into the “Great Recession”—which will perhaps then have to be renamed Great Depression II.
The only way the workers can really ensure that the “Great Recession” does not resume is to make the socialist revolution. Of course, this is a tall order after decades of retreat and reaction! Assuming that a socialist revolution is not possible in the immediate future, the workers must do everything to protect themselves and their potential middle-class allies from the effects of whatever the capitalist economy may have in store for us in the wake of the May 2010 European financial crisis by continuing the struggle!
If the worst happens and the world economy—perhaps after a period of virulent inflation—does plunge into renewed recession leading to Great Depression II—defined as a situation as bad or worse than the disaster of the 1930s—this will not be because of the struggles of the Greek workers but in spite of them.
The danger
But there is a danger that if the crisis resumes and worsens, the capitalists will say, look it was the greed of the Greek workers that derailed what was a “promising recovery” and led us back into a full-scale economic crisis. The bosses and their right-wing supporters, including the fascists—the would-be Mussolini’s and Hitler’s of today—will claim that the only way of preventing a recurrence of severe economic crises is to crush the unions and the workers’ parties once and for all.
But this is false. As I showed in my main posts, the causes of capitalist crises is the capitalist system itself—the contradiction between globally socialized production and private appropriation of the product. It is the capitalist class—not individual capitalists—that is the real cause of the crises, because it insists on maintaining private ownership of the means of production, which enables the capitalists to live in luxury without working.
We cannot end capitalist crises by reducing the rate of surplus value, as well-meaning “underconsumptionists” claim, nor can we prevent them by increasing the rate of surplus value, like the reactionaries—and certain types of super “revolutionary” Marxists as well—claim. The problem is not a given rate of surplus value but the whole system of capital, wage labor, and surplus value itself!
The workers’ movement shares responsibility for the continuation of capitalist crises in only one sense. Because the workers’ movement failed to overthrow capitalist exploitation on a world scale during the 20th century despite two world wars, the horrors of fascism and the Depression, along with the “ordinary” crises and numerous other wars, capitalist crises are continuing into the 21st century.
Even greater disasters loom in the 21st century if the workers listen to the siren calls of capitalist propaganda and allow the small capitalist minority to continue to live in luxury without having to work at the expense of billions of people worldwide. (12)
In ancient times, Greek philosophers laid the foundations of modern science, including the science of socialism—Marxism. Today, the modern Greeks are teaching us another lesson. They are teaching us how to struggle again!
Victory to the Greek workers and the Greek people, and onward to the victory of the worldwide socialist revolution!
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1 The reasons for the current weakness of the European Union and the euro relative to the dollar are political. Unlike the United States, the European Union and eurozone have no true central government that commands powerful armed forces. In addition, the United States maintains many bases and troops in Europe. Interestingly enough, the European nations don’t maintain any bases and troops in the United States. Europe remains divided into many governments whose armed forces are largely under the command of NATO—that is, effectively under U.S. command. As a result, considering its economic power, Europe has remarkably little independent military and political power. The European Union and its eurozone essentially function as a satellite of the United States.
This situation dates back to the victory of the United States against the other imperialist powers—its “allies” as well as its axis enemies—in World War II. As a result, primary commodity prices including oil are quoted in dollars, not euros. The currency price of gold, the money commodity, is also quoted in dollars. Gold, for all the reasons that Marx gave in “Capital” and other works, remains at the center of the world monetary system. It is the commodity in whose use value the exchange value of all other commodities are measured.
However, gold is represented in circulation by the U.S. dollar, which functions as the de facto world currency. If you want to know the price in terms of gold of a particular commodity at a particular time that is not quoted in dollars, you first have to calculate the price in dollar terms. You then have to check the dollar price of gold and convert the dollar price into a given weight of gold.
If you know the price of a commodity in terms of euros, for example, and want to convert the euro price into the real price—the gold price—you first have to check the exchange rate of the euro against the dollar, convert the price of the commodity in euros into dollars, and from there check the dollar price of gold and proceed to convert the price from dollars into a weight of gold.
If we use the analogy of the solar system, gold is the sun, the dollar is a planet, and the other currencies are moons that revolve around the dollar.
As a result, many more debts are denominated in dollars than in any other currency. During global credit crises such as the one that occurred in the fall of 2008, panic-stricken capitalists demand dollars from their creditors in order to meet the demand for payments from their creditors payable in dollars. This is why after years of a declining dollar exchange rate against the euro the dollar suddenly soared against the euro in the fall of 2008 allowing the U.S. Federal Reserve Board to issue huge amounts of dollar currency to calm the panic. It was the dollar and Federal Reserve System that were king, and not the euro and the European Central Bank.
2 The final stage of the industrial cycle is marked by a reckless expansion of credit that momentarily hides the overproduction of commodities. In the last industrial cycle, this expansion was particularly marked in the U.S. mortgage market. Many working-class people were duped by salespeople who sold homes to them on mortgages that they could not possibly pay.
These mortgages included so-called balloon payments. For the first year or two, the interest was very low and the victims of the con were led to believe that they would remain low. But after a year or so, the interest “ballooned upward” forcing the victims of the scam into foreclosure. This didn’t matter to mortgage lenders, because by that time they had sold the mortgage to other capitalists who then got caught up in the crisis when it became clear that these “toxic assets” could not be repaid.
When the first signs of the crisis began to appear in 2007, the capitalist press and the U.S. Federal Reserve pictured it as a limited crisis involving only excesses of the “sub-prime mortgage market” that could be contained. It turned out, however, that the sub-prime mortgage crisis was only part of a much bigger crisis representing the generalized overproduction of commodities on a world market-wide basis that was shaking the entire world capitalist credit system to its foundations. The sub-prime mortgage market was only the “weak link” in the chain of global payments. In the summer of 2007, the chain was beginning to break at its weakest link, but soon the entire chain began to break apart.
3 When Lehman Brothers collapsed in September 2008 and the crisis was clearly getting a lot worse, many people were astonished to see the U.S. dollar, which had been progressively declining against the euro, suddenly start to soar against the euro. But this is really no mystery when you keep in mind both the nature of the dollar system, which establishes the dollar as the main means of payment in the world, and the sharp increase in the demand for money as a means of payment in a crisis.
4 Strictly speaking, when a central bank—whether the Federal Reserve, European Central Bank, Bank of England or other—buys government bonds, it pays for them by writing a check against itself that creates a liability to pay in paper dollars, euros, pounds or other currency to the seller of the bond. Economically, this amounts to printing paper money, whether or not the paper money is actually printed. Paper money, or the unconditional promise to pay in paper money, is what Marx called token money.
This is different than credit money, where the owner of the credit money—for example, owners of deposits in commercial banks—can demand payment in either legal tender paper money or in gold. Under the gold standard, the banknotes issued by central banks were payable in gold, and the promise they created to pay in their own currencies was therefore ultimately payable in gold as well. Under a gold standard, therefore, the central banks create credit money, not token money.
Many economists, both bourgeois and Marxist, slur over the differences between token and credit money, calling today’s token money created by the central banks under the dollar system “credit money.” However, Marx explained that the economic laws that govern credit money and token money are quite different. See this main post for an examination of the different laws that govern token and credit money.
5 One qualification should be made. If the euro was drastically devalued against the dollar, but the dollar were to soar against gold—which could happen if there was a sudden increase in the demand for dollars as a means of payment such as occurred in the fall of 2008—the euro could plunge against the dollar but not against gold. In that case, there would be no inflationary surge in Europe. Indeed, euro prices might actually fall. In order for euro inflation to be unleashed, the euro must fall against gold.
In “Capital,” in dealing with token, or paper, money Marx explained that paper currencies, unlike gold coins, are confined within the borders of the nations that issue them. Today, the U.S. dollar, though a paper currency, is widely accepted as a means of purchase and payment in many countries, not only the United States. Indeed, many countries suffer from “dollarization,” where purely internal—not international—debts are denominated in U.S. dollars. Prices are quoted in dollars and then converted into the local currency according to the local currency exchange rate that prevails at the moment. In a few cases, countries have gone one step further and abolished their local currency altogether, simply using the dollar as their currency. Indeed, more paper dollar bills circulate beyond the borders of the United States than within it.
Why can the U.S. paper dollar circulate beyond the borders of the U.S. state? It can circulate beyond the formal borders because the United States is a world empire. If the U.S. world empire were to collapse, the circulation of the U.S. paper dollar would once again be confined to the legal borders of the United States. This is why the end of the dollar system and the end of the U.S. world empire—established by the U.S. victory in World War II—are essentially two sides of the same coin.
6 By political liberals, I mean supporters of New Deal-type liberalism, not economic liberalism. U.S. liberals in the above sense actually hated Nixon, who had gained fame as a corrupt and slimy McCarthy-style red baiter during the early years of the Cold War. But these same liberals were delighted when Nixon adopted wage-price controls urged by liberals under the influence of the theories of John Maynard Keynes as opposed to the traditional deflationary-type policies that would have meant a resumption of the 1969-70 recession and associated mass unemployment.
7 In his “General Theory,” published in 1936, Keynes claimed that during a classic deflationary depression when prices are falling the hourly real wages of workers actually tend to rise, because the price of labor power falls more slowly than other prices. Of course, even if this happens, the reduction in the amount of work still means a considerable fall in the standard of living of most workers during a major crisis.
Keynes then went on to falsely claim that the money wages of workers determine prices. Therefore, Keynes claimed, falling money wages would lead to falling prices, which would again raise the real hourly wages of the workers! What a disaster—for the capitalists!
Though Keynes claimed falsely that the money wages of the workers determine prices, he also tacitly, if inconsistently, understood that inflationary policies by the government and central bank, such as devaluing the currencies and increasing the supply of paper money, would lead to inflation. Therefore, Keynes advocated general inflationary polices in order to lower real wages. This, he claimed, would lead back to “full employment” after a crisis.
Today, policies of “inflation targeting” where the central banks aim to achieve a moderate rate of price inflation—not price stability—are partially inspired by these theories. The claim is that moderate inflation, by keeping real wages under constant downward pressure, should actually prevent crises from breaking out in the first place.
In the early 1970s, the U.S. liberal supporters of wage and price controls held that by keeping money wages down wage controls would slow inflation—they didn’t. With real wages lowered, liberals argued, the government would then be able to follow expansionary policies—run deficits financed through the “printing presses”—without having to fear rising inflation, since frozen money wages would supposedly prevent inflation.
Milton Friedman pointed out that as long as the Federal Reserve kept expanding the “money supply” by increasing the quantity of paper money, inflation would inevitably continue no matter what happened to money wages. On this point, Friedman was correct. This helped discredit Keynesian economics during the 1970s and made the superficial Friedman look like an economic genius by comparison with the muddle-headed Keynesians. In reality, both Keynes and Friedman were what Marx called “vulgar” pro-capitalist economists who dealt with mere appearances. We should support the theories of neither but instead stick to Marxist science.
8 Many Marxist economists attempting to document the long-term fall in the rate of profit make the mistake of calculating profits during the crisis of the 1970s in terms of dollars of constant purchasing power in order to abstract fictitious “inventory profits” during the inflationary years. This, however, is a fundamental error. The attempt to calculate the rate of profit in terms of dollars of constant purchasing power is really an attempt to calculate the rate of profit in terms of commodities. However, the mass and rate of profit are measured in terms of money—real money—gold bullion—not commodities.
If it is more profitable to hoard gold—which by definition yields a zero profit in terms of gold—than virtually any other investment, then such investments are producing losses, not profits, in term of real money—gold. Profits in terms of real money were actually massively negative during the decade of the 1970s. Such a situation cannot be sustained for very long without capitalist production collapsing altogether.
That is why the Volcker Shock was an absolute necessity to save the capitalist system from disaster. From the viewpoint of capitalism, the Volcker Shock was not a choice to accept more unemployment in exchange for lower rates of inflation, as claimed by many social democrats and well-meaning reformers who advocated a policy of accepting higher inflation in exchange for “full employment,” but an absolute necessity—for the capitalist system.
After the Volcker Shock, we saw a situation where profits in terms of gold were much higher than nominal profits—or profits in terms of commodities. This shows that the Volcker Shock was indeed a great success for the capitalist class.
To document the trend of the long-term rate of profit, it would be necessary to average the massive losses that capital suffered in terms of gold in the 1970s against the massive gains it made in terms of gold when the dollar and the other paper currencies began to recover part of their gold values in the wake of the Volcker Shock.
9 Nixon and most of his henchmen were forced to resign as a result of the so-called Watergate affair—and previously in the case of Nixon’s vice president, Spiro Agnew, as a result of kickbacks that Agnew pocketed when he was governor of Maryland. So far, Nixon has been the only president in U.S. history who did not die in office who failed to complete a full four-year term in office.
10 Ben Bernanke, the chairman of the U.S. Federal Reserve Board, claims that if the rate of inflation falls below 1 percent, there is always the danger if a recession hits that the cost of living might actually fall. What a disaster! Bernanke fears that if prices actually fall corporations and consumers will put off purchases, therefore deepening and prolonging a recession.
Another reason that the Federal Reserve Board—and the European Central Bank—are afraid of a falling cost of living is the fear that many declining U.S. and European corporations are able to stay afloat—for awhile—due to the generally inflationary environment where price increases reduce the burden of debts. If the cost of living actually fell, many of these corporations would be forced into bankruptcy.
Inflation targeting policies where the central bank, far from aiming at price stability, follows policies that encourage inflation should be kept in mind when unions negotiate contracts that lack cost-of-living protection.
One of the reasons why the polices of the neo-liberals cannot work in the long run involves inflation targeting. Marx showed that with some modifications, prices in the long run must fluctuate around axes determined by the actual relative values of commodities and the money commodity, which in terms of its own use value measures them.
A constant rise in prices of 1 to 3 percent as advocated by the neo-liberal inflation targeters implies that over time prices will gradually rise more and more above the values of commodities. This is not possible in the long run according to Marx’s theory of value. Sooner or later, prices must fall back below values, either through massive currency devaluations—which lead to all the problems discussed above—or through a good old-fashioned deflation.
Central bankers like Bernanke and Trichet, trained in bourgeois marginalism, not Marxism, don’t understand this is so. Marginalism has no notion that prices can be below or above the values of commodities. According to marginalism, value and price are the same thing, and therefore prices are always in line with their values. Therefore, Bernanke and Trichet can’t understand that under the capitalist mode of production inflation targeting is very unsound—that is, destabilizing in the long run—even when it seems to work in the short run.
11 There is one school I left out here—the Austrian School. The Austrians favor massive deflationary contractions of the credit system and desire a 100 percent reserve gold-backed currency system in the future. If this is done, the Austrians claim, the industrial cycle will vanish and permanent capitalist crisis-free prosperity will result. The views of the Austrian School are so extreme that they are not seriously considered by policy makers—though they play an ideological role and are sometimes used by extreme right-wing demagogues. For a more detailed discussion, see my reply on the Austrian School.
12 This blog is dedicated to examining capitalist crises of overproduction. However, there are many other types of crises possible, some far more terrifying than even the worst possible overproduction crises.
For many decades, it has been assumed that the worst possible type of crisis would be a full-scale nuclear war. This would almost certainly destroy civilization, but humanity even if in greatly reduced numbers might still survive. Some optimists have argued that after a few thousand years a new civilization would arise. Even if humanity did not survive, some of these “optimists” hope perhaps some other species of animal would eventually develop a high level of intelligence and create a new civilization. In any case, life on earth in some form would continue.
However Dr. James Hansen of NASA, the U.S. government space agency, in his recent book “Storms of Our Grandchildren” claims a crisis far worse than even a full-scale nuclear war is possible—a runaway greenhouse effect. Dr. Hansen believes—he may be right or he might be wrong, I am in no position to have an independent opinion—that if all fossil fuel is burned, especially the so-called Canadian tar sands and other forms of heavy oil, the Earth will experience a runaway greenhouse effect much like the one that occurred on the planet Venus.
Many planetary scientists believe that Venus once had oceans and possibly even life early in its history, but as the sun grew hotter the oceans literally boiled away, depriving the planet of most of its water and rendering it the lifeless desert with temperatures literally hot enough to melt lead that it is today.
Scientist have long assumed that as the sun continues to brighten, the earth will meet a similar fate—in about a billion years. For perspective, human civilization has existed for less than 10 thousand years. However, according to Dr. Hansen, if all fossil fuels still in the ground are burned—especially coal and heavy oils—in only about 500 years a runaway greenhouse effect would set in extinguishing all life on earth. While 500 years is not within the lifetime of any person alive today—though it is well within the lifetime of certain long-lived organisms such California Redwoods—it is less than the time that has elapsed since the discovery of gold and silver in the Americas ushered in the capitalist era.
In such a runaway greenhouse event, everything dies including cockroaches and microbes. Compared to a runaway greenhouse effect, an all-out nuclear war is a day at the races!
What is terrifying about Dr. Hansen’s claims—if they are true—is that one of the few “bright” spots in the U.S. economy these days are the vast reserves of coal plus the coal tars in nearby by Alberta, Canada. The fossil fuel capitalists have huge political power and are waging an obstructionist campaign denying or minimizing the problem of global warming altogether. Every time there is a big snowstorm, or some cold weather occurs somewhere in the United States, these capitalists and their hired politicians and media talking heads go on a big campaign claiming that global warming is refuted!
To allow such people to continue to privately own and operate for a profit such potentially dangerous resources as coal mines, tar fields and so on, and to wield the great political power in the U.S. Congress and over the media that comes with the private ownership of these resources, is to play with the future of all living things on the only planet in the universe that we can be sure has life on it.
A Critique of Crisis Theory 