Much as politicians try to put an optimistic gloss on the economic recovery from what is now called the Great Recession of 2007-08, they come up against the harsh reality of faltering growth and chronically weak demand, despite near zero interest rates in the dominant capitalist countries. This was driven home by none other than Larry Summers, former top economic adviser to US President Obama, in a speech to the IMF annual research conference on 8 November. There he spoke of the possibility of ‘secular stagnation’ in the major capitalist countries, a near permanent low growth deflationary crisis similar to that which Japan endured during the 1990s. David Yaffe reports.

In an interesting article ‘Why the future looks sluggish’ in the Financial Times (20 November 2013), its chief economist, Martin Wolf, takes Summers’ side. Summers’ speech, he says, has poured ‘gallons of icy water on any remaining optimists’ with his proposition that ‘there will be no early return to pre-crisis normality in high-income economies’. Wolf offers us his own explanation of why this is likely to be the case.

He points to three relevant features of ‘western economies’: first, that the recovery from the financial crisis of 2007-08 has been decidedly weak despite ultra-expansionary monetary policies; second, that today’s crisis-hit economies experienced rapid rises in leverage (debt/asset ratios) in the financial and household sectors, together with strong jumps in house prices before the crisis; and third, that, despite strong global economic growth, remarkably low long-term real interest rates persisted in the years before the crisis. From this Wolf concludes that merely restoring a degree of health to the financial system or reducing the overhang of excessive pre-crisis debt is unlikely to lead to a full recovery. The reason he gives for this is noteworthy: ‘the crisis followed financial excesses, which themselves masked or, as I have argued, were even a response to pre-existing structural weaknesses.’ In arguing this he shows how much he has retreated from his previous defence of neo-liberal globalisation and has been forced to come to terms with the dominant reality of a fundamental structural crisis of the capitalist system – the overaccumulation of capital in the heartlands of capitalism.1

He does not speak of an overaccumulation of capital but of a ‘global savings glut’ or ‘investment dearth’. Low real interest rates, he says, are evidence of such a glut with ‘more savings searching for productive investments than there were productive investments to employ it.’ The word profit does not feature in his article. The class interests that propel the capitalist system seem alien to his understanding. Capital will only be invested if it can make sufficient profitable returns. A non-expanding capital is a capital in crisis. There are plenty of productive investments that could serve the interests of the millions of people facing falling living standards, lack of housing, poor education and inadequate healthcare. But they would not be profitable for capital. The world economy is generating ‘more savings than businesses wish to use’, even with the low interest rates in the major capitalist economies, because there are not sufficient profitable outlets for the world’s surplus capital. This is an overaccumulation of capital in relation to the profitable exploitation of labour. The rate of exploitation is insufficient for the expansion requirements of capital.

Wolf argues that another indication of the ‘savings glut’ is ‘global imbalances’; the huge current account surpluses (net capital exports) of east Asian emerging economies, particularly China, oil exporters, and several high-income economies, notably Germany. These economies, he says, are net suppliers of capital to the rest of the world. This was true before the crisis and is true today. This glut of savings he sees as a constraint on current global demand, leading to weak investment and slow growth. This pre-dated the current crisis and the crisis made it worse.

So what is the solution? Desperately searching to avoid what he sees as the ‘impoverished future’ that could face the high-income capitalist countries, Wolf retreats into Keynesianism, into wishful thinking, and argues that today’s glut of savings could be used to finance a surge in public investment. Finally, he inevitably ends up promoting imperialism, calling for the major capitalist countries ‘to facilitate capital flows to emerging and developing countries, where the best investment opportunities must lie’. Wolf must be aware that they are already doing that and the super-exploitation of the workers and oppressed masses in these countries has been a feature of a crisis-ridden capitalism for a very long time. The predominant character of capital exports today is financial capital, which scours the world, exploiting, plundering and looting the underdeveloped countries desperately searching for new sources of super-profits. Britain’s overseas investments alone are nearly seven times its GDP,2 with the City of London acting as an offshore centre – a gigantic usury capital – for a significant proportion of the world’s surplus capital. Today, as the crisis deepens, we see the major imperialist powers battling to redivide and control areas of the world in their own interests. Far from being a solution to the crisis, it is having devastating consequences for the vast majority of humanity.

A sluggish recovery

Hopes that an economic recovery would gather strength in the second half of 2013 were soon dashed once it was clear that eurozone and Japanese growth had significantly slowed down. The eurozone, only just out of recession, expanded by a mere 0.1% in the third quarter of 2013, down from a 0.3% rise in the second quarter. The Japanese economy grew 0.5% in the third quarter, slowing from a 0.9% expansion in the previous quarter of April to June, as a result of lower exports and a slowdown in consumer spending. This deceleration in growth came despite large rises in public spending and property investment.

Janet Yellin, now Chair of the US Federal Reserve, said during her Senate confirmation hearing that the US economy and labour market were performing ‘far short’ of their potential. In the third quarter of 2013, the US economy was just 5.5% larger than its pre-crisis peak five years ago. However, relative to the pre-crisis trend, US real GDP has continued to decline and is estimated to be some 15% below that trend despite near zero interest rates. There has been much talk of introducing negative real interest rates in the desperate hope that this will force banks to lend and consumers and businesses to borrow. At least it would discourage banks from parking their money with the Federal Reserve.

The dispute between Democrats and Republicans over the Federal government budget and debt ceiling added fuel to the fire. A deal was eventually agreed by Congress to temporarily lift the debt ceiling and end the government shutdown, averting the threat of default just hours before the 17 October deadline. This ended over 16 days of farce. The legislation funds the government through to 15 January 2014 and lifts the $16.7 trillion debt ceiling until 7 February. The drama could then start all over again. A directive was issued to all government employees to return to work. Standard and Poor’s said the shutdown had already shaved $24bn from the US economy and would cut growth significantly in the fourth quarter.

In the third quarter of 2013 the British economy grew by 0.8%, its fastest expansion for three years. There is much talk of a recovery and of a rebalancing of all sectors of the economy. As we have argued previously, whatever growth is occurring is driven by debt-fuelled consumer spending and inflated house prices. UK household debt has reached a record high of £1.43 trillion. On 28 November the new Governor of the Bank of England, Mark Carney, recognised this by ending the Funding for Lending Scheme for mortgage lending and personal loans and keeping it for businesses to avoid creating a housing bubble before the 2015 General Election. Lending volumes to small and medium size businesses have fallen nearly a quarter from their 2009 peak. There has been little evidence of a rebalancing of the economy from services to production and from consumption to investment and exports.3

Crisis in the eurozone

A slippage in German growth of GDP, continuing recession in Italy and a fall in French GDP saw eurozone growth down to an almost stagnant 0.1% in the third quarter of 2013. Growth in Germany, the main eurozone engine, at 0.3%, was less than half the 0.7% in the previous quarter. Italy’s GDP fell by 0.1%, extending Italy’s recession to nine successive quarters, its longest post-war recession. France’s economic growth declined by 0.1%, after a fall in exports and business investment, a significant turnaround from its 0.5% growth in the previous quarter. Greek GDP fell at an annualised rate of 3%, slightly down on 3.7% in the previous quarter. Spain’s economy crept out of recession for the first time since the middle of 2011, with growth of 0.1% in the third quarter.

This slow recovery leaves the eurozone economy still 3% smaller than its pre-crisis peak. Only Germany, among the largest countries, has surpassed its previous peak, with its GDP up 2.6% on that level. France’s economy is 0.3%, Spain’s 7.4% and Italy’s 9.1% below their respective pre-crisis highs. In comparison Britain’s GDP is now 2.5% below and Japan’s 0.1% up on their pre-crisis peaks.

Eurozone inflation fell to 0.7% in October, the lowest level since the depth of the financial crisis and lower than Japan’s for the first time since 1998. This sent shockwaves throughout the eurozone with many analysts now seeing deflation as the real threat to the eurozone economies. In the first week of November the governing council of the European Central Bank cut interest rates by half to 0.25% from 0.5%. The President of the European Central Bank, Mario Draghi, said that if inflation fell further, the ECB had other options and he would consider charging lenders for parking their funds at the central bank.

The unemployment rates in the eurozone reflect some of the social consequences of this reality. Some 19.3 million people were unemployed in the eurozone in October 2013, a decrease of 75,000 on the previous month, but up 615,000 on October 2012. The overall unemployment rate was 12.1%, but this masks major differences throughout the eurozone and the devastating consequences of the austerity programmes imposed on the bailout countries. While the unemployment rate was 5.2% in Germany, 10.9% in France rising to 12.5% in Italy, it reached 12.6% in Ireland, 15.7% in Portugal, 26.7% in Spain and 27.3% (August) in Greece. However it is the youth unemployment statistics that show how hundreds of thousands of young people have little hope of ever finding a job. The youth unemployment rate in the eurozone in October 2013 was 24.4%, nearly 3.6 million young people. It ranged from 7.8% in Germany, 25.8% in France, 26% in Ireland, 36.5% in Portugal, 41.2% in Italy, 57.4% in Spain to 58.0% in Greece (August 2013). These horrendous statistics illustrate the devastation of neo-liberal austerity programmes on the lives of young people.

A study published by the International Red Cross and Red Crescent Societies in early October 2013 reported on the social impact of the economic crisis in Europe. It said that:

‘The long term consequences of this crisis have yet to surface. This report shows that problems caused will be felt for decades even if the economy turns for the better in the near future… [T]he economic crisis is creating the conditions for a widespread social crisis, whereby a growing gap in the distribution of resources (the rich becoming richer and the poor becoming poorer) and the competition for shrinking resources could bring about growing xenophobia, discrimination, social exclusion…’

It will also bring organised resistance to a decaying and parasitic capitalist system that has long outlived its historical time.     

1. For a discussion of Wolf’s previous position see David Yaffe ‘The politics and economics of globalisation’ FRFI 137 June/July1997, at See also David Yaffe ‘The world economy – facing war and recession’ in FRFI 171 February/March 2003, at for our criticism of his attempt to deny that the global expansion of capitalism had come to a halt and was about to be reversed with capitalism moving into similar crisis-ridden conditions that led to two imperialist wars.

2. See David Yaffe ‘Tories self-destructing over Europe’ FRFI 233 on our website at for the latest statistics on Britain’s overseas investments.

3. See David Yaffe ‘British capitalism: a recovery built on sand’ in FRFI 235 October/November 2013 at

Fight Racism! Fight Imperialism! 236 December 2013/January 2014