THE most important message from the unprecedented financial catastrophe and its aftermath is that global capitalism’s strategic response to the crisis of 1970s has failed. That was a three-pronged strategy comprising deregulation/neoliberalism or market fundamentalism, globalisation and financialisation. Since these have been the three pillars on which post-1970s capitalism stood – and, in a certain sense, and in certain parts of the world, flourished – the extensive damage they have suffered have left the whole imposing edifice tottering.

Survival Strategies at Stake

After a so-called golden age of capitalism (roughly a quarter century after World War II), the crisis of overproduction struck back with a vengeance. Old remedies like relying on the military-industrial complex and the war economy were proving to be inadequate or counter-productive. As a study released by the Centre for Economic and Policy Research, Washington, in May 2007 showed, after an initial demand stimulus, the effect of increased military spending turns negative by about the sixth year. With the US economy burdened with growing ‘defence’ spending for decades on end, by 1990 the value of the weapons, equipment, and factories devoted to the Department of Defence was 83% of the value of all plants and the equipment in American manufacturing. A clear case of military industries crowding out civilian industries, this led to severe economic weaknesses. There was no question of abandoning military Keynesianism, of course. The highly powerful military-industrial complex would not have allowed that. But other means had to be sought out.

Capitalism’s first major response at this juncture was Thatcherism of late 1970s and Reaganomics of early 1980s, which was soon exported to the underdeveloped countries as Structural Adjustment Programme. Essentially this was a programme of neoliberal restructuring aimed at reinvigorating capital accumulation. Its two major planks were (a) removing state regulations on the growth and flow of capital and wealth, and (b) radically reducing taxes with a view to redistributing income from the poor and middle classes, so that the rich can invest and reignite economic growth. But reduced incomes of the poor and middle classes dampened demands, while not necessarily inducing the rich to invest more in production. Rather, what the rich did was to channel a large part of their enhanced wealth to speculation.

The second major response was globalisation, which basically meant breaking down of state barriers resulting in more rapid and closer consolidation of the global capitalist economy, with China and Soviet bloc countries now fully integrated into it. A major component of this was international relocation of production and business process outsourcing (BPO). By the middle of the first decade of the 21st century, roughly 40-50 per cent of the profits of US corporations began to be derived from their operations and sales abroad, especially in China. But globalization actually exacerbated the problem of overproduction by adding to productive capacity. For example, in the wake of dot-com bubble in 2000, the New York Times reported on one of the many excesses of the period:

“In the last two years, 100 million miles of optical fibre – more than enough to reach the sun – were laid around the world as companies spent $35 billion to build Internet-inspired communications networks. But after a string of corporate bankruptcies, fears are spreading that it will be many years before these grandiose systems are ever fully used.”

Numerous other hiccups in the working of globalisation – even from the viewpoint of the bourgeoisie – have been widely discussed. As for financialisation, it moved from one bubble-bust cycle to another before meeting the recent crippling setback.

Not that these three sets of responses came one after the other in a planned manner. They emerged as interconnected, inter-aided pragmatic measures and gradually dovetailed into one another in such a way that now it appears as one indivisible whole. This is why the body blow to financialisation has seriously undermined the credibility of neoliberalism and globalisation also. The notion that the market behaves itself and corrects itself without government intervention has crumbled and contagion – the spread of the crisis across the globe more quickly and devastatingly than ever – has become the most visible and dreaded face of globalisation.

Confluence of Many Crises

The financial crisis and depression economics have appeared as sort of “add-on”s to the already raging food, energy and environment crises. We have long been witness to a process of financial capital systematically destroying and usurping third world agriculture under the aegis of the WTO and IMF. And now with rising joblessness and further reduction in public outlays in agriculture in countries like India, food availability for some 90% of world population will decline further, adding to what Lenin once called “inflammable material in world politics”.

The recent drop in petroleum prices is not an unmixed blessing either. For one, it reduces income and consumption in petroleum-exporting countries. Moreover, if the present price level points to the unsavoury role of speculative trading during the earlier period of rising prices, it also constitutes probably the most telling confirmation of falling demand with falling industrial and commercial activities.

Again, financial difficulties will prompt corporations and nations to put on hold costly climate protection measures. UN Secretary-General Ban Ki-Moon has warned the world against backsliding in the fight against climate change as it battles the financial crisis, saying “When the world has recovered from the economic recession, it will not have recovered from climate change.”

This mix-up of multiple crises makes the present juncture potentially very challenging – both in economic and political terms – to the continued rule of capital. And of course, the more so because the flag carrier itself, already old and battered in many battles, is now caught rudderless in a Typhoon on the high seas.

US in a Phase of Historic Decline

Like the present crisis, the GD also was “made in the US”. But when the latter struck, the US was already in the first phase of gaining economic supremacy in the capitalist world and it was not assailed by any political or military crisis. In the present case, that country was already in a historical phase of slow, long-term decline in economic prowess (measured in terms of share in world GDP, trade and manufactures; savings rate etc) particularly relative to emerging economies like China. Just consider the fundamentals: growing fiscal and budget deficits, persistently declining competitiveness of US industries, unbearable costs of the Iraq war, the weakening dollar, and so on, to name only the more glaring distortions.

In the 1970s Americans had a savings rate of over 10%. Now it is zero. In the 1970s America still had a very strong manufacturing sector. Now it is down to less than 15% of US GDP. In a word, the mind-boggling sums spent on unproductive areas like militarism and speculation has exacted a very high “opportunity cost”- things not done because the money/resources were spent on something else – in terms of neglected infrastructure and other requirements for the country’s long term economic health.

Most important, US leadership of the capitalist world has long been exercised through Wall Street’s status of being the undisputed centre of international finance with the dollar as the international currency. The recent blow has badly weakened that. Of course, no single currency is yet in a position to completely replace the dollar as international medium of exchange. But a partial shift to the Euro and other hard currencies had already begun since the early years of this century and, depending on how the crisis plays itself out, this trend may grow and threaten the rule of King Dollar.

This threat looks all the more serious in the context of the ever-growing American national debt. As on November 19, 2008, the world's richest country owed a whopping $10.6 trillion to others. Most other countries keep a good portion of their reserves in the US dollar, which they in turn invest in financial securities issued by the US government, considered to be very safe. Thanks to the high demand, the returns offered on these securities are low, which in turn ensures that interest rates in the US are also low. The low interest rate in its turn encourages more and more Americans to borrow and buy goods and services that exporting countries have to offer. And when that happens, countries like China and Japan earn US dollars, which are again invested in the financial securities issued by the US government. When one set of financial securities becomes due for repayment, it issues new financial securities to repay the holders of the old securities. So, money brought in by the newer investors is used to pay off the older investors. That is what makes it a Ponzi scheme, officially called deficit financing. The US government can keep doing this because the major exporters are ready to keep recycling the dollars they earn through US banks and the US economy and reinvesting in the US government securities.

But sooner or later a correction to this distortion or maladjustment is unavoidable. The towering mountain of debt raises the question of America’s ability to meet its obligations. If the doubt about the stability of the US economy worsens, the worldwide demand for US dollars would decline, causing the dollar exchange rate to plummet. American imports would decline, dampening the surge of consumption and slowing the very growth engines of exporting countries like China and many others. The whole world would once again pay dearly for American instability.

This problem is further compounded by ever-growing fiscal deficits. The latest Congressional Budget Office (CBO) release of the updated Fiscal Year 2009 budget numbers showed a $1.2 trillion deficit for the fiscal year (8.5% of GDP). However, a closer examination of the report shows that these numbers are dramatically underestimated. Some estimates put the deficit at $2.2 trillion for the fiscal year or nearly 100 per cent higher than is being reported. In fact, the deficit will finish the fiscal year at an astonishing 15.5 per cent of GDP! Federal spending will rise to 32 percent of GDP.

Moreover, the US has been suffering from a political crisis of legitimacy and leadership while finding itself burdened with an over-extended military juggernaut and a Vietnam-like situation in Iraq. No doubt the election of a very popular president has appeared as a much-needed political bailout package for the American elite, but nobody expects a miracle from Barack Obama. The present crisis is therefore widely seen as the precursor of a shift in global power balance – a shift towards greater multipolarity marked particularly by the rise of the East.

Accentuated Power Struggle in a Multipolar World

While Vladimir Putin has been vocal about this for quite some time past, with the onset of the crisis even men like Tony Blair, Ban Ki Moon and Peer Steinbruck have expressed similar views. The US authorities too have recognised this in an intelligence department forecast.

But that should not be understood in a mechanistic way to mean the decline of the US alone. Apart from the EU and Japan, Russia and China too are severely affected. Russian resurgence and the country’s capacity to challenge the US on many issues depended largely on high prices of its fuel exports; now with a huge drop in that income it is in for a serious rouble trouble. Every nation is, and will be, fighting for itself in its own way and the results cannot be predicted. To take one example, for the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, together keeping the entire global economy afloat. Now it will be interesting to watch how the dovetailed economies of “Chimerica” – as economic historian Niall Ferguson has called it – respond to the crisis and which side scores greater gains at the cost of its contender-partner.

On the occasion of the 30th anniversary of Sino- American trade relations, both countries have expressed the desire for further improving these relations even as the blame game on economic policies goes on. Early in January 2009 a couple of stinging commentaries on the official Xinhua news agency accused US officials of trying to shift guilt for tumbling stock markets and collapsing pension funds and house prices away from their own desks. Developing nations have served as "windshields" to a US economy battered by the global financial maelstrom, yet it is blaming them for a problem caused by its own policies, one lead article commented.

Some early indications of the struggle among world powers to shift the burden of the crisis on to one another and to the third world were expected from the mid-November White House summit of heads of G20 nations. Shortly before the meeting, Nicolas Sarkozy said that it was necessary to rebuild the entire global financial and monetary system, “the way it was done at Bretton Woods.” “Times have changed”, he added: “now the Euro and other currencies have a place in world financial exchanges, a new reality that should be reflected in new rules.” Many leaders called for new rules and tougher regulations together with restructuring the IMF. But just on the eve of the Summit President Bush announced, “The crisis is not a failure of the free-market system, and the answer is not to try to reinvent that system.” It would be a “terrible mistake” to allow “a few months of crisis” to undermine faith in free market capitalism, he observed. In the event it was the US position that prevailed and attempts at a new Bretton Woods system were stymied and the voice of Third World muted. But for a two-paragraph indictment of the United States as the perpetrator of the financial crisis, the Summit declaration remained vacuous.

However, conflicts among big powers and regional entities are growing. US hegemony is getting challenged from different quarters. Hailing the victory of Barack Obama, the European Union said in a unanimously passed resolution: “we want to renew our friendship with the United States, but this time not as junior partners.” In the wake of the financial crisis European leaders have met separately and the leaders of China, Japan and South Korea also held a rare joint meeting to work out how best to cushion Asia from the global recession.

Like inter-imperialist contradictions, those between rich and poor nations are getting intensified. If in certain cases (as in the G20 negotiations) these contradictions are found lumped together, in Latin America the antagonism between imperialism and the third world remains very much focused. The recent expulsion of Israeli Ambassador from Venezuela comes as a continuation of political confrontation. The six Latin America and Caribbean countries that subscribe to Bolivarian Alternative for the Americas (ALBA) – Cuba, Venezuela, Bolivia, Nicaragua, Honduras and Dominica – had already founded an ALBA Bank to finance regional social programs and Venezuela has recently created joint banks with Iran, Russia and China, the latter with $12 billion in commitments.

Last year, as stock markets crashed and a global credit squeeze threatened global economies, some of the Latin American governments pushed ahead with plans for a new financial architecture.

At an international conference of political economists in Caracas on October 8-10, entitled “Responses from the South to the global economic crisis”, Hugo Chavez said the people of the world “no longer support” the privatised banking system while Ecuador’s economic policy minister Pedro Paez said society must “reclaim the leading role that has been kidnapped by the centres of political and economic power … the capitalist system is not the only option.”

Proposals for a new financial system also emerged from the conference, which include: (a) states in the region should take immediate control of their banking systems, without indemnification, according to the principle of the new Ecuadorian constitution, Article 290.7 of which states that “nationalisation of private debt is prohibited”, (b) monetary coordination should be strengthened to avoid a war of “competitive devaluations”, which would undermine the integration process of Union of South American Nations (Unasur – a South American integration process begun in 2007 that envisages a new continental currency) and obstruct a regional response, (c) immediate implementation of Bancosur (The Bank of the South), which should become “the heart” of the transformation of the existing network of banks, (d) establish exchange controls to protect reserves and prevent capital flight, (e) following the principle of assisting the people and not the bankers, social programmes must be maintained, (f) the present juncture should be seen as an opportunity for the countries in the region to get rid of the  IMF and the World Bank, and to begin creating a new international financial architecture.

The crisis is also leading to the further intensification of the contradiction between the bourgeoisie and the working class and that between imperialism and socialism on the ideological plane. The world proletariat thus faces a new set of challenges and opportunities.

A Proletarian Response

In theory, the revolutionary proletariat understands the dual roles or functions of periodic crises – temporarily, restoring equilibrium through destruction and ultimately, bringing the end of capitalism nearer.

As for an assessment of the present one, is it only a crisis, however serious, of neoliberalism and the financial sector as distinct from a systemic crisis of capitalism as such? Can it therefore be “solved” by resurrecting Keynesianism and founding new regulatory institutions – say something like a Bretton Woods II?

The class-conscious proletariat rejects all such patently bourgeois notions that are doing the rounds in the context of the setback to monetarist and neoliberal theories. A hundred years ago Lenin identified in finance capital the core and crux of imperialism and this is a hundred times truer today. The credit system now works like a kind of central nervous system through which the overall circulation of money capital – to and from firms, sectors, countries and regions – is coordinated; a serious damage to this system certainly imperils the whole organism of capital. But the proletariat also knows that without adequate subjective preparation of the revolutionary forces under the leadership of communist party, even the best of objective situations does not lead to revolution and socialism. So it does not indulge in speculation about collapse of capitalism. It senses the challenging opportunities opened up by the crisis and takes up the tasks in hand with redoubled energy, keeping a close, constant watch on changes in the situation.

Everywhere capitalists are now trying to pass on the burden of the crisis to the shoulders of the working messes, who are fighting back. The recent victorious struggle waged by workers of a Chicago-based factory – workers and their families occupied the closed concern and compelled the employers and the state to concede their just demands – is an inspiring case in point. All sections of the working people as well as the intelligentsia and other strata are – and will be – coming out in the struggle to defend their basic economic and political interests. To unite with, organise and lead them is the obvious first task of the working class.

But this cannot be done without fighting against the defensive outlook spread by reformist and reactionary trade unions as well as other organisations in the name of “difficult situation” and “defensive struggle”. Dialectically there is an element of offence in every defence, and vice versa. The working masses should be enlightened on the fact that the new onslaughts of capital actually stem from its weakness, its grave problems, not its strength. A really broad, militant unity of toilers can generate a heroic resistance, mobilise new allies from non-proletarian strata and bring the day of ultimate victory nearer – to instil this confidence among the masses is a foremost duty of the most advanced class.

Second, the crisis is universal but the working class must formulate its fighting slogans in accordance with conditions in each particular country. As opposed to the bourgeois state’s policy of “bail out the rich and boot out the poor”, it should uphold policies like imposing punitive fines on financial swindlers so as to pay up the common people who have lost their money, direct state initiative in job creation and other measures for improving people’s purchasing power as the basic means of mitigating the decision. In other words, the proletariat should be seen to be fighting not just for its narrowly conceived economic demands, but for the overall interests of the nation. In this hour of crisis it should, in the words of Communist Manifesto, “rise to be the leading class of the nation, must constitute itself the nation... though not in the bourgeois sense of the word.”

Third, the working class should vigorously utilise the present situation, when everybody is discussing the limits of capitalism and irrelevance of Marxism, to hold high the banner of socialism as the only real – and achievable – solution to the burning problems of the day. This campaign must include a live exposé of social democracy as a defender of capitalism, while uniting with the mass following of social democratic and other left-of-the-centre parties.

Global experience in the age of imperialism, which Lenin defined as moribund monopoly capitalism under the domination of finance capital, brilliantly confirms and enriches the Marxist-Leninist explanation of business cycles and capitalist crisis. Guided by this revolutionary ideology, the world proletariat must surge forward at the head of the fighting millions in struggles for immediate relief as well as the ultimate goal of liberating all humankind from the clutches of capital.