U.S. debt economy skates on thin ice

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THARDWORLD The world capitalist economy is heading for its deepest crisis since the 1930s. This view is openly-and at times nervously-discussed in the newspapers and other media.

Lester Thurow, an economics professor at the Massachusetts Institute of Technology recently wrote an op-ed article in The New York Times in which he stated that an even more devastating depression lurked on the horizon.

"I am often asked whether the financial panics of the 1920s and the Great Depression of the 1930s could happen again," Thurow stated. "For 20 years, I have answered that what happened then could not happen now. Today, I would not so answer."

Thurow points to the skyrocketing national and inter -national debt as the major cause for a possible collapse of the international economic system. "In the 1980s," Thurow said, "international debt, not the stock market, is apt to be the hammer that shatters a fragile financial system."

Few capitalist economic forecasters are willing to predict when or exactly how the financial house of cards will come tumbling down. But many of them say that no substantial-or long-term resolution has been found to avert an economic crisis of severe proportions.

To emphasize their concern, many economists are drawing comparisons to the "boom" right before 1929 and the "boom" today.

Government spending swells debt While it is true that both these upturns were fueled by falling interest rates and growing debt, today the factor of public and private debt is qualitatively greater and potentially more explosive.

The post-World War II "economic boom" was based on a gigantic infusion of government spending (particularly military spending), which in turn led to a swelling of the national private and public debt.

The current U.S. public and private debt now stands at approximately $6.7 trillion.

The annual federal budget deficit is approaching $250 billion, with the interest on the total accumulated debt costing $100 billion of the government's annual budget.

On a world scale, the expansion of credit and the extension of purely speculative financial ventures added an additional $1.3 trillion in debt; the large bulk ($900 billion) from countries of the so-called Third World.

Latin America is perhaps the clearest example of the logic of the debt crisis.

The total Latin American debt to the imperialist banks today is over $400 billion. One tenth this amount-or $40 billion—must be paid yearly to the banks in the form of interest.

In 1982 the Mexican government's near default on its $10-billion interest payment sent a chill up the spine of the world capitalist financiers. It is estimated that Mexico is in hock to over 1000 foreign banks. A quick restructuring of Mexico's $98-billion debt was necessary to avoid a catastrophic series of failures of major lenders, most of which are major U.S. banks.

But the Mexican debt problem is cropping up again because the lower prices for Mexican oil in February 1986 have made impractical the repayment schedule which was rearranged in 1982.

The capitalists are delaying and running away from the problem. But the debt stares them down as in a typical Joe Louis face-off— "You can run, but you can't hide."

Financial Wizardry According to Lester Thurow, "The American public thinks it has the full faith and credit of the federal government behind it, but legally it doesn't. The net result is a banking system that is surely as fragile today as it was in the 1920s."

Thurow continues, "Financial markets are filling up with instruments-junk bonds, index futures, bundled mortgages...One can easily imagine a default, say in the junk-bond market, that would bring the salability and hence liquidity of these instruments to an abrupt halt."

A growing phenomenon today are mega-buck corporate mergers involving "junk" bonds and highly leveraged buyout schemes that simply use the purchased property as collateral. No new plant or equipment results from these mergers.

Thus, incredible amounts of money are exchanged without any development or expansion of the productive forces. An esteemed Wall-Street investment firm, Sachs, has estimated that 70 percent of the 1984-85 stock market rise was simply due to the merger wave. In other words, capitalists are making money off speculation rather than from capital investment.

For example, Union Carbide's stock went from $52.75 to $87.63 solely on the basis of takeover rumors after the otherwise catastrophic Bhopal incident.

In addition, in the last several years major banks like Continental Illinois, Chase Manhattan, and Bank of America have suffered hundreds of millions in annual losses through bad credit extensions.

In 1984, Contintental Illinois was on the verge of going under. In order to avoid a string of bankruptcies, the U.S. government flew to the aid of Continental. The Treasury lent the nation's seventh largest bank $7.5 billion to keep it solvent. This is the largest amount ever lent to a bank. It shows system was to collapsing.

Another aspect of the present financial crisis is the severe tension on the world's money markets provoked by the high U.S. interest rates.

Debt pushes interest rates up The United States has the highest interest rates in the world because of the great demand for credit caused by the huge U.S. debt. These high rates attracted a lot of foreign capital which kept the dollar's value high relative to the currencies of U.S. imperialism's chief competitors.

The influx of capital from around the world also permitted the U.S. government to finance its budget deficit. As the July 14, 1984, issue of The Economist noted, "the 'boom' in the U.S. economy is strongly linked to the transfer of foreign capital into the United States."

But probably 90 percent of the foreign capital invested in the United States has been in high-yielding government bonds, with only a small amount going to direct investment in new plant and equipment.

As a result, U.S. investment in factories and machinery iș still only about one-third of Japan's investment. U.S. productivity has therefore consistently fallen below its Japanese and European capitalist competitors.

Higher interest rates have also choked off borrowing to finance industrial investments. And the high value of the SOCI dollar has made U.S. exports more expensive imports cheaper.

The dollar rise of 60 percent between 1980-85 contributed heavily to the whopping U.S. balance of trade deficit.

Prices of foreign-produced goods dropped by 35 percent relative to the price of U.S.-produced goods between 1978 and 1984. There was a mammoth trade deficit of $123 billion in 1984. And the $130-billion deficit in 1985 is being surpassed in 1986.

The latest business upturn brought the economy to the point of producing at 80 percent of its productive capacity— hardly an economic miracle. Today, according to the Brookings Institute, unused industrial capacity in the United States is at its highest level since the Depression of the 1930s.

The 1983-1985 economic recovery has been accom -panied by an increase in industrial and bank failures. Business failures are currently four-fifths as high as the worst time during the Depression, with corporate and consumer debt increasing 13 percent yearly.

While millions go hungry all over the world, U.S. farmers are stockpiling their surplus wheat crops in silos, bams, and make-shift storage areas because the market is saturated and prices are low. Farm foreclosures and bankruptcies are on the rise. And small-town, farmcommunity banks are closing their doors in record numbers due to the rise in uncollectible loans.

The May 1986 Commerce Department report of a trade imbalance in agricultural products was, meanwhile, the first deficit of its kind in 27 years.

Trade regulations, tariffs, voluntary agreements, and monetary arrangements are the patch-work "solutic nS" that only postpone the inevitable crisis looming over the horizon.

Postponing day of reckoning The 1983-1985 economic upturn has allowed the media and the government 10 mask the deep underlying crisis of the U.S. economy.

Over 11 million U.S. workers lost their jobs due to plant shutdowns between 1979 and 1984. And only 60 percent of these workers have obtained other jobs, most of them at reduced wages and with inferior working conditions.

Over 550,000 steelwórkers have been permanently laid off since 1978, with 250,000 auto workers displaced in that same time period. And capitalist economists now predict a major glut in auto and related industries in the next year or two.

On Oct: 12, 1974, Business Week magazine published an editorial which is more relevant today than it was then. It stated:

"The United States is the Debt Economy without peer...The most pessimistic view is that the specter of a chain reaction of defaults by borrowers and lenders will thrust the world into a deep depression.

"It is not the 1930s...yet the dangers are greater than in the 1930s. The amounts at risk are greater and so is the leverage, here and abroad...

"The nation's burden of debt is like a string drawn very taut...No one knows the precise breaking point and, while there are schemes and theories galore, no one really knows how to ease the tension, either."

World capitalism has been able to find temporary solutions to ease the tensions. It still retains a wide margin of maneuvering room based on its tremendous financial resources, as the Continental Illinois bailout attests.

But these are stop-gap solutions that only delay the day of reckoning. The financial crisis is unavoidable. It is written into the growth of the "debt economy."

IST ACTION NOVEMBER 1986

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IS NOT THE NICARAGUA TEND!!!

Action/Joe Auciellc terms-before Hiroshima and Nagasaki -almost identical to those which were agreed to after the atomic bombs were dropped.

Winning popular support for the Vietnam War also required the government to completely alter the facts. We were told it was a war for "freedom and democracy." U.S. troops would be less likely to risk their lives for dictators and American bigbusiness interests in the Far East.

Similar deceptions were uncovered in authoritative reports that revealed a direct U.S. role in overthrowing Allende's government in Chile in 1973 and in attempting to assassinate Fidel Castro, Muammar Qaddafi, and other opponents of U.S. foreign policy.

Another function of the government's Blaming immigrants for the loss of jobs is the corollary to the "Buy America" scheme, which promotes competition and division among working people internationally and cuts across working-class cooperation and solidarity.

Racism targets the most oppressed sections of the American working class and is the domestic version of the chauvinist "disinformation campaign" directed against Libya and Nicaragua. Both varieties of government propaganda are designed to protect profits at home and abroad.

Mass protests needed

A social movement that aggressively seeks to provide the public with the real facts can mobilize a powerful challenge to Washington's war and austerity plans.

The job of social and political activists is to reach the real forces who have the power

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"The nation's burden of debt is like a string drawn very taut...