On Friday,
October 24, the pound sterling dropped to just $1.58 (down from
$1.73 earlier in the week, an enormous plunge by foreign-exchange
standards), and the euro sunk to just $1.26, while Japan’s yen
soared by 10 per cent. These shifts threatened to disrupt export
markets and hence industrial sales patterns.
Global stock
markets plunged from 5 to 9 per cent abroad, and there was talk of
closing the New York market if stocks fell more than 1,000 points.
Pre-opening trading saw the Dow Jones Industrial Average down the
maximum limit of 550 points (largely on foreign selling) before
bounding back to lose “only” 312 points as the dollar soared
against European currencies.
Friday’s
currency turmoil and stock market plunge was a case of the chickens
coming home to roost from the class-war policies being waged by
European and Asian industry and banking squeezing their domestic
consumer markets – that is, labor’s living standards – in favor of
export production to the United States.
The internal
contradiction in this industrial and financial class warfare is now
clear: To the extent that it succeeds in depressing labor’s
income, it stifles the domestic consumer-goods market. This
disrupts Say’s Law – the principle that “production creates its own
demand,” based on the assumption that employees will (or must) be
paid enough to buy what they produce.
This has not
been true for many years in Europe and Asia. But production has
been able to continue without faltering because of an international
deus ex machina: consumer demand in the United
States.
This is not to
say that no class warfare is being fought in the United States.
Indeed, living standards for most wage earners today are down from
the “golden age” of the late 1970s. But the U.S. economy had its
own financial deus ex machina to soften the blow: Alan
Greenspan’s asset-price inflation that flooded the banks with
credit, which was lent out to homebuyers and stock market
raiders.
Rising home
prices were applauded as “wealth creation” as if they were a pure
asset, much like dividends suddenly being awarded to one’s savings
account. Homebuyers were encouraged to “cash out” on the rising
“equity” margin, the (temporarily) rising market price of their
homes over and above their (permanent) mortgage debt.
So while most
mortgage money was used to bid up the price of home ownership,
about a quarter of new lending was reported to be spent on
consumption goods. Credit card debt also soared. In the face of a
paycheck squeeze, U.S. consumers were maintaining their living
standards by running further and further into debt.
This could not
go on for very long. It never has. Debt-financed bubbles can’t last
for more than a few years, even when fueled by a self-feeding
inflation of asset prices in which households and corporate
industry borrow more and more against the rising price of their
collateral. But once the housing bubble burst the game was
up.
The game was up
was up not only for the U.S. economy, but also for foreign economies that
had geared their industrial production to serve the U.S. market
rather than their own home markets. A global
industrial slowdown is now threatened, and must continue until
foreign domestic markets are nurtured – just the opposite trend
from the recent generation of neoliberal anti-labor
policies...
http://www.counterpunch.org/hud