The capitalist elite neoliberal response to the crisis of the 1970s was all about finding new avenues for profit. At home, this involved breaking the power of the working class so that a greater amount of value added could be taken by owners, stripping the state of valuable assets at cheap prices (privatization) while extracting as much as possible from what was left (public-private partnerships - PPE, outsourcing, consulting etc.), “freeing” capitalists from pesky regulations (including those against price-gouging oligopolies and wage-restraining monopsonies), and massive tax cuts for the wealthy and corporations. Interest rates were kept high in real terms to tame inflation, but also to maintain the reserve army of the unemployed to discipline the workforce. Outside of the West, foreign nations were coerced and manipulated into opening up their economies for even greater levels of privatization, deregulation and exploitation.
This process of “globalization” was turbocharged in the 1990s as the Communist bloc collapsed, India de-regulated and China worked to become an export powerhouse. The “China price” and the new availability of many hundreds of millions of extremely cheap workers to Western capitalists removed the need for a Western reserve army. There was little inflationary pressure even at low levels of unemployment as large swathes of productive capacity was moved abroad and workers accepted pay freezes or even cuts to keep their jobs. Even in “worker-friendly” Germany, workers forwent real pay raises at the prospect of work moving to Eastern Europe. Real interest rates could become negative, rapidly inflating a bubble in the deregulated financial sector and allowing many to get deeper into debt to offset their falling living standards.
After the 2000 “dot.com” crash interest rates were lowered and an orgy of consumption was officially promulgated, while the US spent trillions on debt-fuelled invasions and occupations. The 2008 Global Financial Crisis exploded the multiple bubbles, requiring state rescues of the financial system and the printing of many trillions of dollars across the Western world. Even with that, a massive credit expansion in China was required to kick start growth. Instead of clearing out the economic garbage that the GFC had exposed, that garbage was subsidized, socialized and hidden. Any return to even prior-GFC levels of interest rates, or even stopping the continued money printing (QE) would quickly expose the continued economic fragility. Instead of the capitalists having to pay for the mess that they had created, the cost was borne by the general public through “austerity”, while continuing military adventures and occupations were paid for through more debt.
Austerity of a truly sadistic kind was forced upon Greece; to save the European banks from their own mistakes the Greek population were put through a new Great Depression and their state assets put up for sale. In the UK, central government transfers to local governments were radically cut, state salaries subjected to multi-year drops in real terms (e.g. the nurses 20% real cut in 10 years), and services such as the NHS underfunded. At the same time, the extraction of value from the public sector through PPEs (privatizing profits and socializing risks) and outsourcing continued. On the European continent governments worked to raise retirement ages, reduce benefits and limit wages. Only in the US, which could borrow at will in the reserve currency, was there little or no austerity. Instead, there were ongoing debt-financed wars and another massive tax cut for the wealthy under the Trump administration.
All the time China kept growing, at rates well above 10% a year in the decade after the US supported its joining of the World Trade Organization, and then in the mid to high single digits per year in the next decade. In purchasing power parity (PPP) terms it passed the US to become the world’s biggest economy in 2013. The US elite had thought that they could gain financial control over the Chinese economy as they had over so many others, but the Chinese Party-state maintained the nation’s sovereignty. Russia had also slowly regained some strength, and its sovereignty after the devastation of the 1990s. It stymied Western plans in Syria, Kazakhstan and Belarus after mistakenly facilitating the regime change operation in Libya. Iran refused to be cowed, no matter how much US “maximum pressure” was applied, and even increased its influence in Iraq and Syria.
Then came the COVID pandemic and the utterly botched Western response that managed to combine repeatedly shutting down economies for months while failing to contain the pandemic. China’s much tighter short and sharp lockdowns, and ongoing active responses, both contained the pandemic and allowed the economy to stay open after the first period of action. In the West, both individuals and corporations (that had heavily spent their “rainy day” funds on share buybacks and had increased leverage with the very low interest rates) had little or no financial resources to see them through such economic closings, and once again massive government borrowing and money printing was required, together with interest rates near zero. At the same time there was an orgy of profit extraction as state contracts were awarded with little formal procedures and visibility, and allocations of state aid hidden from democratic oversight; the level of cronyism and corruption in the Anglo-Saxon nations was more akin to the proverbial “banana republic” than supposed “rules-based” Western nations.
In 2022, victory over COVID was announced in the West even though it had not been defeated. Instead, it was made an un-pandemic through the removal of much of the reporting around cases and related deaths by the state and the supine media. What could not be made to go away was the severe impact to supply chains as important links had gone bankrupt or shrunk during the lockdowns, and the significant reductions to the active workforce in many nations. When added to the continuing Chinese anti-COVID measures, this meant that the huge increases in liquidity fed into inflation as Western nations reopened. At first the signs of inflation were dismissed as being a short-term blip, leaving interest rates at near zero for far too long and requiring a more blunt and urgent interest rate response later. US deficit spending was even increased further, exacerbating the demand vs. supply mismatches.
At the start of 2022, the West then made a massive blunder that exacerbated the inflation issue (especially in Europe), damaged its international standing, and helped coalesce its three main resisters into a tighter coalition. The West greatly escalated the issue in the Donbass in the Ukraine, threatening an outright invasion by the greatly strengthened NATO reequipped and retrained Ukrainian army. As the shelling of the Donbass rapidly intensified, Russia did what they had refused to do for eight years of the ethnic conflict (the Ukrainian state against ethnic Russian Ukrainians) and recognized the Donbass People’s Republic (DPR) and Luhansk People’s Republic (LPR) as independent states under the protection of Russia. The rapidity and scale of the Western sanction response supports the proposition that these were pre-planned, with the aim of collapsing the Russian economy and forcing regime change. As has been noted elsewhere, the embarrassing Western retreat from Afghanistan in 2021 now looks like a required move to focus resources on Russia. If these plans had been successful, the resultant opening up of Russia (and Belarus and Central Asia) to Western exploitation would have greatly aided the West in creating new profit-making opportunities and overcoming its debt burden. In addition, Iran and China would have been significantly weakened (with a Western-oriented Russia on their northern borders) and Western global primacy reasserted.
The West had misjudged both the strength of the Russian economy, and the level of support sanctions would have outside the West, to an astounding degree. The rest of the world, 7/8ths of humanity and 3/4 of global GDP, refused to join the Western sanctions, and the Russian economy refused to collapse – shrinking only 2% in 2022 with an increased current account surplus. Attempts to starve Russia of foreign earnings (after the theft of its US$ and Euro foreign currency reserves) through the refusal of Europe to pay for Russian gas in rubles (instead of the confiscated Euros), and more recent attempts to limit the price that Russia can sell its oil and gas on the global market, have been stymied by the lack of cooperation from that 7/8ths of humanity. The Western surprise and exasperation at this lack of cooperation has been evident. With Russia forming a much closer relationship with Iran, and China reiterating its support for Russia, the West has created a strengthened oppositional alliance. At the same time, the sanctions have exacerbated the inflation problem by raising the global price of oil, cutting off Europe from cheap Russian gas, and causing further dislocations to global supply chains. The impact in Europe is severe, with electricity and heating prices leaping to levels requiring large state subsidies to forestall a social crisis. Real incomes are falling rapidly across Europe, and energy-intensive industries are already restricting output and planning foreign expansions; for example, in a China still happily consuming cheap Russian gas, and a US with abundant domestic gas supplies.
At the very time that the US Federal Reserve has raised interest rates aggressively to defeat inflation, European governments are going into more debt to fund energy subsidies while falling real wages and rising interest rates threaten a deep recession. At the same time EU trade surpluses have disappeared due to the massively increased costs of energy imports. For the UK, the combination of factors is even worse as the highly disruptive impacts of BREXIT continue to work their way through the economy. The West has dug itself into a no-win situation, but from its actions seems incapable of cutting its losses. Instead, through incremental escalation it digs itself deeper and makes its inevitable losses worse; there will be the “nth” sanctions package and yet more and more capable military equipment given to Ukraine and yet more “sheep-dipped” Western soldiers masquerading as mercenaries fighting Russia.
As the West enters the inevitable deep recession, its internal crisis will worsen even further. Europe will be faced with a full year without Russian gas, at the full mercy of global liquefied natural gas (LNG) prices; with the prospect of a cold winter of 2023-2024 ahead. Debt and deficit levels are already extremely high going into this recession. Even in a US that can fund itself with the reserve currency, a government debt to GDP level of 125% and a deficit of 5.5% of GDP, does not auger well with higher funding costs and recession-induced falling revenues. With the Federal reserve in inflation-fighting mode, the possibility of quickly reducing interest rates and more QE is much less of a possibility. The result may very well be pro-cyclical government spending and monetary policies at a time of increasing deglobalization due to Western sanctions and tariffs, greatly deepening the recessions. With military budgets and financial and military aid to Ukraine being increased in parallel, the recipe for social unrest is being well mixed.
The epicenter of this unfolding Western crisis can be seen in the United Kingdom as strikes spread across the public sector in response to government attempts to impose significant real reductions in public sector pay, on top of a decade’s worth of previous reductions. This is at a time when the previous pay cuts and the COVID crisis have led to severe understaffing in public services, for example an 11% shortfall in nurses, which has resulted in very public crises in services such as the NHS. Together with state pensions, the NHS represents the most politically supported part of government services. General public support for the union actions, and aggressive distrust of the government, is at highs not seen for many, many decades. The UK state and media have tried hard to blame Russia for the inflation crisis but have not been successful. Any linkage between the removal of sanctions on Russia, the stopping of aid to Ukraine, and an alleviation in the economic crisis would be extremely toxic for the UK government and both Conservative and Labour leaders. In France there have been mass demonstrations against the government’s plan to raise the pension age, and across Europe there have been demonstrations against the falls in living standards. In the US, the current debt ceiling issue may be the beginning of a Republican push for cuts to “entitlements” (i.e. government spending that does not benefit the wealthy), especially the previously untouchable pensions (called social security in the US).
With the profit-making opportunities from the destruction of Russia rapidly receding, and much of the world becoming harder for Western corporations to exploit as Chinese and Russian influence increases, the Western elites may be expected to turn their exploitative energies even more inwards. This will require aggressive attacks upon the areas of public spending that were previously seen as “sacrosanct” such as pensions and national health services. It is no surprise that in my own Canadian province of Ontario the Conservative government has greatly intensified the defunding and outsourcing of public services, including the public health system. Such a strategy will require increased levels of authoritarianism and media control, especially in the midst of a deep recession and a seeming never ending proxy war; made worse with the probability of increasing Russian successes. The other area of exploitative focus will be the West’s “backyard” in Latin America and Eastern Europe, with increasing attempts to control any movements away from Western exploitation. The new “pink tide” of Latin America is already stumbling under US and local elite pressure. The more the Western elites double down on Ukraine, the more they will need to turn inward their exploitative gaze and the greater the internal economic and social contradictions will become. Time is on the side of Russia, China, and Iran, and the still high levels of delusion and arrogance among Western elites argues for a long wait until they are able to fully comprehend and accept their need to cut their losses.
Thanks for another excellent essay. Here in the UK there promises to be a major disruption to the schools sector too. Interestingly, we’re talking about headteachers, not just the rank and file. Much of the middle class is restive like never before in my lifetime.
excellent summary roger.. thanks..