World Economy

Implications of eurozone Deflation

Implications of eurozone DeflationImplications of eurozone Deflation

The eurozone’s slide into deflation, recorded in the 0.2 percent decline in prices for the year to December, is another expression of the deep-going breakdown of the global capitalist economy. For almost two years, inflation has been consistently below the European Central Bank’s target rate of 2 percent, with each month showing a result worse than the previous one.

The year 2014 was supposed to have been a year of recovery. It turned out to be the complete opposite, WSWS reported Saturday.

More than six years after the collapse of the investment bank Lehman Brothers and the start of what has become known as the Great Recession, economic output in the euro zone has not returned to the levels reached in 2007, and there is no sign of it doing so.

On the contrary, worsening economic conditions — cuts in investment, Depression-levels of unemployment in many countries, ever-lower living standards — have become a permanent condition.

  Low Interest Rates

Besides the clear deflationary trend, another indication of the state of the global economy is the record low interest rates on government bonds.

This week, the yield on German five-year government debt turned negative. As the Financial Times commented in an editorial: “When people pay the government to look after their money, it seldom presages thriving economic times.”

Low market rates, the Financial Times noted, are too well entrenched to be put down to a psychotic episode on the part of the market. Nor can they be ascribed simply to low inflation and the precipitous fall in the price of oil and other commodities.

The low yields point to underlying stagnation, characterized by overcapacity in the economy and resulting low rates of return on capital investment, so that a return of just 2 percent on government debt becomes acceptable.

Peter Praet, the chief economist with the European Central Bank (ECB), pointed to the same process in a recent interview. “There is a risk,” he said, “of a real economic vicious cycle: less investment, which in turn reduces potential growth, the future becomes even grimmer, and investment is reduced even further.”

An “underemployment equilibrium” — the term used by Keynes to describe the situation during the Great Depression of the 1930s — was setting in, he suggested.

 Falling Oil

The same tendency is reflected in the falling oil price following the decision of the Saudis not to cut production. Representatives of the Saudi regime have attributed the price falls to the global slump, insisting that there is no point in trying to boost prices, as their market share would simply be captured by their rivals.

Two conclusions flow from even this brief review of the economic balance sheet. First, the crisis of 2008 was nothing less than a breakdown of the global capitalist economy and the initiation of a downward spiral.

Second, the policies pursued by the ruling elites since then, including the pumping of up to $10 trillion into the global financial system, have failed to bring about any genuine economic revival.

Rather, they have been aimed at protecting the position of the banks and investment houses, whose criminal and semi-criminal activities triggered the crisis, while initiating a series of measures aimed at systematically impoverishing ever greater sections of the working class, thereby exacerbating the economic downturn.

Just as significant as deflation and low bond yields in pointing to the underlying state of the global capitalist economy is the response of financial markets to worsening economic data. Equity markets around the world, and above all on Wall Street, immediately rose on the news of the eurozone deflation figures in the expectation that the data would tip the hand of the European Central Bank towards a major expansion of quantitative easing when its governing council next meets on January 22.

 financial parasitism

This points to one of the most striking features of present-day capitalism: the extent to which financial parasitism, based on the supply of ultra-cheap money for speculation in financial markets, is the main driving force of profit accumulation.

There is a fundamental difference between accumulation by parasitism and the more “normal” forms of profit-making. Financial parasitism involves not the extraction of surplus value from the labor of the working class and expanded production, but profit accumulation through operations in financial markets completely divorced from the production process.

However, in the final analysis, capital accumulation depends on expanded reproduction — investment leading to increased productive activities, greater profits and further investment. But this once virtuous circle has become a vicious one. Ever-increasing speculation has transformed the financial system into a house of cards, creating the conditions for a collapse in the same way, as Marx noted, that the law of gravity asserts itself when a house falls about our ears.