Notes on the Crash and Crisis

Robert Brenner

THE STOCK MARKET dropoff of October 1987 was every bit as great as that of October 1929. The Dow Jones average fell by 36% between August 1987 and October 1987 and by 22.6% on Black Monday alone. By comparison, stocks fell by only 11.7% on Black Friday, Oct. 29, 1929.

From the Stock Market to the Economy

The stock market is, indeed, significant. It does not merely mirror, nor is it directly determined by, the underlying economy; moreover, it can powerfully affect that economy. Nevertheless, in order to evaluate the significance of movements on the stock market, one must analyze them in context, in connection with trends in the “real” economy as a whole. For example, in 1962 the stock market dropped 22 % in just six weeks. But this decline was followed, between 1962 and 1969, by the greatest boom in U.S. economic history.

In contrast, between 1929 and 1932, stocks fell by 80% and the gross national product fell by one-third! By comparison, the stock market dropoff of the summer­fall 19.87 has only brought stocks to the level they were at the start of 1986.

It is very likely, nevertheless, that the stock crash of October 1987 will, in the near future, lead into a severe recession and perhaps a deep depression. The crash of 1987 reflected deep problems in the world economy and is likely to exacerbate them. This is primarily — speaking in most general and longest-run terms — because it occurred within the context of a world economy that has been experiencing an ever-worsening crisis for around fifteen years — a crisis, above all, of profitability.

Profitability: Key to the Economy

The rate of profit in the real, productive sector is the key indicator of the health of the economy because it is the immediate determinant of the health of the economy. This is so for at least two reasons:

1. The rate of profit in the real, productive sector of the economy is the main determinant of the level of productive investment. Productive investment is the key to economic growth, to employment and to the possibility of growth in wages and social spending beneficial to the working class.

When rates of profit are high in the real, productive sector, capitalists will invest in this sector, and production and employment will expand; when rates of profit are low in the real, productive sector, capitalists seek to place their funds elsewhere — in finance and unproductive sectors-and this will lead to slowing growth, rising unemployment, declining rates of wage increase, and fiscal crisis of state-supported social/welfare spending.

2. The level of the rate of profit is the major determinant of the economy’s stability. When the average rate of profit is high, it generally means that most firms are healthy, and can easily weather temporary changes in conditions such as fluctuations of demand. Sales or prices may drop temporarily, but firms can absorb the resulting losses and still make some profit.

On the other hand, when the average rate of profit is low, it means that many firms are close to the margin. In this situation, should sales or prices fall, many firms will find they can no longer make any profit, or worse, that they cannot pay their debts and must declare bankruptcy. In such a situation, where the rate of profit is low and many firms are operating at marginal rates of profit, a downturn in the business cycle — which is as normal in periods of boom as in periods of crisis — can lead to widespread bankruptcies.

As a consequence, many firms will be unable to pay their debts, unable to make their usual purchases of machines and raw materials, and forced to lay off their workers. As a result, other firms, which sell the machines and raw materials, will find their markets contracting. In addition, the unemployed workers will be unable to maintain their usual purchases. The outcome is a domino effect, with falling consumption leading to falling production, leading to a downward economic spiral ushering in serious recession or depression.

From Boom to Crisis

As everyone knows, the period from around 1950 to the late 1960s was one of unprecedented economic boom for the U.S. and for the world economy as a whole — a period of high growth rates, high rates of investment, high rates of growth of productivity, high rates of growth of world trade and so on.

It was, in line with the foregoing reasoning, also a period of high rates of profit. Adjusted for capacity utilization, the rate of profit for the U.S. economy as a whole remained steady over the whole period 1950-1966; but from 1966 to 1974, the rate of profit fell by 33%-40% and has not recovered. Put another way, the average rate of profit in manufacturing fell from a peak of 12% in 1965 to 3% in 1974 and has not since recovered.

The crisis has been interpreted, in some quarters, as merely a crisis for the U.S. economy in relationship to that of its leading competitors. It needs to be emphasized, therefore, that the crisis has not at all been confined to the United States. It has been a crisis of the world economy as a whole.

Between the mid-’60s and the mid-’70s, the rate of profit fell significantly throughout the advanced industrial economies: between 1968 and 1974, for all of the O.E.C.D. countries combined (the advanced capitalist economies as a whole), the rate of profit fell by around 40%, with the profit rate in Japan falling about this same amount. Between 1974 and 1981, the overall profit rate for the O.E.C.D. countries fell another 13%-14%.

The Relative Decline of the U.S. Economy

The United States emerged from World War II totally dominant in the world economy. But throughout the entire postwar period-boom and crisis — U.S. industry experienced relative economic decline vis-a-vis the industries of the national economies of its main capitalist competitors, especially Japan. The Japanese economy invested a much greater share of its output in new plant and equipment than did the United States. Japan’s output grew at a much faster rate than did that of the United States; its productivity rose at a much faster rate.

Given these much faster growth rates in Japan, it is not surprising that over the whole of the postwar period a huge number of U.S. industries experienced declining competitiveness vis-a-vis those of Japan and certain other countries. The result was that the share of U.S. industry in the world markets declined significantly. (For an attempt at explaining U.S. relative economic decline, see “The Roots of U.S. Economic Decline,” ATC 2 (1986). The two trends of the falling profit rate for the world economy as a whole and the declining competitiveness of U.S. industry have determined the way the crisis actually has worked itself out in the period since the mid-1960s.

How the Crisis Developed

Since the mid-1960s, the crisis has developed through three phases: (1) A generalized fall in the rate of profit has led to (2) a generalized trend toward cost­ cutting, especially of wages and social spending, which has brought about a drop in the growth of demand, which has led in tum to (3) widespread overproduction.

1. Initial Fall in the Rate of Profit: As stated, the crisis began with the big fall in the rate of profit on a world scale, beginning first in the United States from 1965-66, but soon spreading to the rest of the world.

2. Competitive Cost-Cutting: Especially from the early 1970s, in order to cope with falling profits, the industries and government of the United States in particular, but also the industries and governments of the other countries, took a series of steps designed to restore their profitability. All these had a single aim: to cut relative costs so as to increase competitiveness in a world economy in which profits were harder to come by, in which growth was proceeding much more slowly than before, and in which the level of competition was therefore rapidly intensifying.

These steps can be listed as follows:

a. Big and continuing cuts in the growth of wages. Real hourly wages in the United States have been cut by around 15% since the early 1970s.

p>b. Cuts in government spending on social welfare.

p>c. Devaluations of the currency. The value of the dollar in relationship to other world currencies was cut by 17% during the 1970s.

d. Expansion of investment where profit rates were highest-that is, where the best (relative) techniques could be combined with the lowest (relative) wage cost to yield the lowest cost of production. From the latter part of the 1960s, sections of the “Third World,” especially East Asia (Korea, Taiwan), offered some of the best opportunities. This was because, in these regions, very low-waged labor, maintained by highly repressive authoritarian regimes, could be combined with advanced techniques in many mass production industries. As a consequence, there was a massive flow of funds, both direct investments and loans, to these regions.

e. Stepped-up investment in manufacturing and manufacturing innovation. Those firms which had any hope of surviving in the new environment had to transform their technique. Thus, during the 1970s and 1980s, everywhere including the United States, there was large-scale innovation, leading to more efficient and lower cost production.

3. Overproduction: The very methods individual firms and national economies took to cut their costs so as to increase their profitability further eroded the foundations of the world economy, preventing recovery and exacerbating the crisis. Declining wages, declining social spending and the declining value of the dollar all reduced the rate of growth of demand in relationship to the growth of output, especially in the United States. The expansion of manufacturing in Asia, to an important degree at the expense of Europe and the United States, had the same effect because it took place on the basis of much lower wages than prevailed in the Western capitalist countries.

Meanwhile, the increased productivity achieved through investment in plant and equipment had the effect of increasing potential output for any given input of labor power and means of production. The result was that as productive power increased, the growth of demand was being restricted. The result was overproduction in a huge array of the world’s industries.

In consequence, despite the universal cost-cutting aimed at responding to and restoring reduced profit rates, there was no increase in profitability in the 1970s or 1980s and the crisis got worse. The growth of output declined, unemployment rose, living standards declined.

Why No Collapse?

In the past, the foregoing processes have generally brought depression in the following way: falling profit rates led to increased levels of competition, which led to firms reducing their costs, especially on labor power, and to governments cutting of social spending; reductions in costs — labor power and social spending — led to the relative slowdown of the growth of demand; the relative slowdown of the growth of demand in the context of rising productiveness/declining costs led to “overproduction”; overproduction, in the context of a low average profit rate, led via the above-mentioned domino effect, to depression.

But, so far, the deepening international crisis has failed to issue in the sort of collapse and depression that the world economy experienced in the 1930s. What is the meaning of this difference? What has changed since then?

It needs to be emphasized that, although there has been no collapse into depression, the world economy has experienced, since the end of the 1960s, ever deepening crisis. In each successive downturn of the business cycle-1969-70, 1974-75, 1979-82-growth rates have been lower (and sometimes negative), unemployment has been greater, living standards have dropped more, bankruptcies have increased.

In each upturn of the business cycle, growth has been slower, unemployment greater, wages have grown more slowly. So, in response to the longterm reduction in the rate of profit, the economy has been sinking, if not collapsing. There has been a slow contraction, but not yet a collapse. The world economy has staved off depression largely through debt creation. In the past-as noted above-in crisis periods like this one characterized by low profit rates, cyclical economic downturns have tended to lead to widespread bankruptcies and inability to pay past debts, drops in purchases of machinery and raw materials, and layoffs. This has reduced the income and markets of other firms, leading to a domino effect of business failures.

In the current period, however, debt creation directly by, or backed up by, the government has staved off the foregoing sort of chain reaction. In general the government has run up huge budget deficits to stoke demand. Thus, in every downturn of the business cycle since the end of the 1960s, the government has ended up running large deficits to create the demand that could pull the economy forward. Moreover, every time the economy has threatened to collapse through the aforementioned domino effect, the Federal Reserve has injected great masses of money into the system to prevent a liquidity crunch. Whereas the government actually had tightened credit in the wake of the crash of October 1929, the government increased the money supply by 2% at the time of the crash of October 1987, staving off immediate collapse.

Nevertheless, debt creation, in the context of falling profitability, can achieve only so much-and creates problems of its own. Over each of the business cycle downturns since 1970, the injection of debt has brought smaller and smaller response from the economy in terms of output, and greater and greater debt has been required to prevent collapse.

Here’s what happened in each business cycle since the crisis began at the end of the 1960s:

Recession of 1970

1. In response to the first year of negative growth since the 1950s, 1969-70, Nixon declared that “We are all Keynesians,” and carried through massive deficit sending to stimulate the economy (so as to win election).

2. Deficit spending did lead to an economic upturn.

3. However, the growth of the deficit, by stimulating demand and thus the growth of the U.S. market, also led to a growing trade deficit, as it was to do, increasingly, from that time onward. The reason for this was that foreign producers were becoming increasingly competitive with those in the United States and thus increasingly better able than were those in the United States to take advantage of the growing market.

4. In the new context of reduced profitability, the growth of the deficit, as it was to do throughout the 1970s, had a further consequence: the growth of inflation; there was “less bang for the buck.” That is, because profitability and thus prospects for returns on future investment had declined, firms responded to the increased demand that resulted from the growth of debt relatively less by increasing investment in productive lines, and relatively more by investing in financial assets and other unproductive lines. In consequence, the growth in demand brought relatively smaller increases in the growth of supply than before, and prices thus rose.

5. Inflation led to a worsening trade deficit (higher prices for U.S. goods), because it made U.S. goods relatively more costly.

6. The mounting trade deficit put pressure on the dollar, tending to force down its value. This was because the growth of the trade deficit signified to holders of the dollar that the dollar was becoming relatively less valuable, since people had relatively less need for it to buy U.S. products.

7. Inflation plus the trade deficit plus the declining value of the dollar led eventually to rising interest rates: money lenders saw that to get an adequate return on their loans, in the face of growing inflation and the declining worth of the dollar with respect to other currencies, they had to allow for the declining value of money, which they did by raising interest rates.

8. The reduced value of the U.S. dollar reduced U.S. demand, thus the size of the U.S. market, and this led to recession in Europe. At the same time, rising interest rates led to the reduction in investment in the United States. The result was the worse international economic downturn since World War II, the recession of 1974-75.

From the Recession of 1974-75 to the Boom of 1976-79

1. Ford and Carter, like Nixon, helped bail the economy out of recession by massive debt creation, massive deficit spending.

2. The debt-driven boom led, as previously, to a growing trade deficit arid runaway inflation but only a relatively small upturn in growth. This was the famous stagflation of the later 1970s.

3. The growing trade deficit, resulting from declining U.S. competitiveness and exacerbated by inflation, led to renewed pressure on the dollar, driving down its worth with respect to other currencies.

4. To fight the trade deficit and protect the dollar, Carter tightened the money supply in late 1979. This led to rising interest rates, and, in turn, to the worst economic downturn of the postwar period, the recession of 1979-82.

From the Recession of 1979-82 to the Boom of 1982-87

The recession of 1979-82 posed a truly serious threat of depression as bankruptcies hit record levels and big debtors in the Third World and elsewhere were driven to the verge of collapse.

1. To revive the economy, Reagan engaged in what was far and away the greatest orgy of deficit spending in U.S. history. The result was only a mild upturn in growth, but a long one.

2. What has differentiated the Reagan boom from the previous ones is that there has been little inflation. The main reason for this, it seems, is that the government has been obliged to keep interest rates high in order to attract loans, especially from abroad, to fund its huge deficit (the government has kept interest rates up by maintaining a policy of relatively tight money).

The high interest rates put a damper on investment, and thus helped to counter inflation. The high interest rates also stimulated the demand for dollars to fund loans, and thus pushed up the value of the dollar. The increased value of the dollar made foreign imports cheaper, thus helped keep prices down, and thus helped counter inflation in another way.

3. The huge expansion of debt fueled the boom and, again, stimulated the growth of the U.S. market. But the growing U.S. market brought record trade deficits. This was, first Of all, because U.S. industrial competitiveness was continuing to decline, so foreign producers were increasing better able to profit from rising U.S. demand than were U.S. producers. But the trade deficit was made much worse because of the high value of the dollar.

4. As foreign competition grew, U.S. investment began to drop off, warning of a new downturn.

5. Beginning in 1985, to try to stimulate investment, the government helped increase already-growing pressure on the dollar, and the value of the dollar was forced down radically.

6. Nevertheless, the trade deficit continued to grow, indicating that the problem of U.S. industrial competitiveness persisted, and investment failed to pick up significantly.

7. Moreover, with the dollar in decline, the U.S. market for foreign has grown more slowly and U.S. producers have been able to produce at relatively lower prices. The result has been growing pressure toward recession in Europe, where unemployment is today (before a downturn), on average, at 1T%.

8. Today (early February 1988) the U.S. and the world economy are teetering on the edge of a new major recession; indeed, it is quite possible that the recession has already begun.

Taking into account the failure of the profit rate to recover and three ever worsening business cycles over the period since 1970, it may be seen that the economy has been experiencing ever deeper crisis. Deficit spending, and debt creation more broadly, has, so far, been able to bring the world economy out of recession and to some extent to stabilize it. Nevertheless, growing debt, in the context of declining profitability and declining U.S. competitiveness, has been able to produce less and less corresponding growth, and this has left the world economy-and economic policy-makers less and less room to maneuver.

Broadly speaking, the contradiction can be put in the following way: Policies of debt creation, carried through especially in the United States to achieve international economic stability, eventually bring inflation and/or rising trade deficits and rising imports, which directly discourage U.S. investment and ultimately lead to higher interest rates, leading to recession. On the other hand, policies of deflation and budget balancing, while capable of improving U.S. competitiveness and in that way stimulating investment, cannot stave off recession. This is because they have the effects of reducing the growth of the U.S. market and reducing U.S. demand, thereby inducing recession abroad and, ultimately, via the decline of demand abroad, in the United States.

Causes of the Stock Market Crash

In the context of the evolution of the world economy since the late 1960s, it is possible to get at the significance of the crash.

The crash followed a dizzying boom of the stock market. From 1982 to 1987, the Dow Jones index of stock prices rose by 400%. The economy was, in this period, expanding, and this partially accounts for the increase in stock prices. But the stock increases were far out of proportion to what was in fact a very limited boom in the underlying economy. Why?

What accounts for the boom in the stock market was, to a great extent, the general weakness of investment opportunities. When profit rates are low in the productive sector, capitalists look for alternative investments. During the Reagan boom, capitalists found themselves with income that they did not wish to invest in new plant and equipment because they had little confidence in the underlying economy, since the low rate of profit indicated poor economic prospects. More liquid investments recommended themselves, and the result was a great wave of speculative investment-in corporate takeovers, in financial manipulations of all sorts, and in the stock market.

The premise of stock-market speculation is, of course, that stocks will go up. The debt-driven boom provided the initial basis for this premise, then shifts of money from more productive to more speculative investment further validated the premise by driving up stock prices. Rising stock prices drew further investment and further investment drove up stock prices further-a dizzying speculative boom.

Nevertheless, this boom had no basis whatsoever in the underlying value of the productive assets that the stocks ultimately represent. Sooner or later the boom had to come to an end, and that it did, roughly when it did, was no surprise to many. Any number of financial observers such as Felix Rohatyn and Henry Kaufman had predicted it.

The collapse was set off by a series of phenomena which signaled that the underlying economy was experiencing increasing difficulties. The triggering mechanisms that broke an increasingly fragile speculative boom included a creeping up of interest rates over the summer of 1987, a failure of the U.S. deficit to improve despite the declining dollar, and even the announcement by the Germans that they would not stimulate their economy.

Consequences of the Crash

In 1929, the government responded to the stock crash with tight money, encouraging a chain reaction of bankruptcies, which quickly brought depression. In October 1987, by contrast, the government immediately made money available to the banks at cheap rates, thus allowing for cheap loans to suddenly hard-pressed investors. This prevented a domino effect and an immediate depression.

The stock-market crash brought losses to investors of around a trillion dollars! Nevertheless, the significance of this loss is reduced, since investors had seen their wealth increased by approximately the same amount during the previous one to two years as a result of the mad speculative boom. As Mr. Pickens commented, “Easy come, easy go.”

Nevertheless, the less direct impact of the stock crash is likely to be substantial, especially because the effects of the crash are being experienced by an already fragile economy-an economy that has experienced no significant upturn in the profit rate and which is in the fifth year of a business cycle upturn almost certainly at an end. What are these negative effects?

1. Although companies’ loss of wealth may not directly translate into loss of income, it does reduce their assets and thus reduces their capacity to borrow. Access to loan funds is likely to become especially crucial as the business cycle turns down.

2. The loss of wealth is likely to lead to reduced income and consumption at the upper end of the scale. Thus, yuppie incomes will shrink radically, as a result of wage cuts and unemployment, and there will be less demand for luxury goods. Again, with the business cycle about to turn down, this sort of reduction in demand, while not perhaps in itself enormous, can have a powerful contractionary effect.

3. Investors are likely now to realize — where they hadn’t before because of the illusion produced by the stock boom — that the underlying economy is not robust, but very fragile. There is therefore likely to be a significant cutback in planned investment in plant and equipment that will, again, exacerbate the already-existing pressure toward downturn.

In the face of the short-term pressures of the stock-market crash, and, more important, the longer-term pressures generated by the crisis, U.S. policy makers find themselves on the horns of a dilemma: both deflationary/ austerity and inflationary /expansionary policies seem likely to make things worse.

An Austerity Policy of Cost Cutting?

The catchphrase of the hour is that “America” is living beyond its means and that “we” must tighten our belts. This is the universal conclusion not only of the liberal capitalists at Business Week, but just about every politician of both parties. The reasoning behind this is simple and reasonable, so far as it goes.

Record U.S. budget deficits have fueled an expansion that has led to record trade deficits and record indebtedness. In 1983, the United States was a net creditor of the rest of the world of $100 billion. Just two years later, thanks especially to the miracles of Reagan’s supply-side economic policy of massive increases in military spending and massive cuts in taxes on the rich, the United States was a net debtor nation to the tune of $112 billion. By election time 1988, it is estimated that U.S. debt to the rest of the world, which is today at more than $400 billion, will reach $600 billion. Clearly, something has to give.

Business Week and the politicians are willing to give it to us straight. Thanks to debt creation, “we” have been spending more than “we” produce; now “we” have to cut back on “our” consumption.

There is general agreement among the powers that be, therefore, that it is necessary: (1) to cut the federal deficit especially by reducing social spending; and (2) to cut imports and the trade deficit by reducing the value of the dollar (which, all else being equal, means that Americans can buy fewer goods produced abroad with their dollars). The lame-duck Reagan administration is, indeed, seeking to carry through a policy of devaluation of the dollar and austerity-not easy in an election year.

Nevertheless, there is every reason to think that such a policy, to the extent it is carried out, will prove self-defeating, precipitating a recession, perhaps a disastrous one. What is forgotten by Business Week, by the Europeans and Japanese who are calling on the Americans to be “responsible,” and by the politicians who are demanding that workers now accept austerity is that the great binge of U.S. debt creation was the main thing that saved the world from depression in 1982 and powered the subsequent boom that brought profits and prosperity to at least limited sections of the advanced capitalist world.

Today, reduced spending and a dealued dollar are threatening to push the world into depression. Thus, reduced government spending will lead to reduced consumption and declining demand at just the time when the U.S. economy, at the tailend of one of the longest booms in its history, is already stagnating.

The reduced dollar also will lead to a reduction in U.S. spending power and thus a reduction of the U.S. market, and this will threaten the European and Japanese economies, which are heavily dependent on U.S. consumption. A decline in foreign exports into the United States will lead, in turn, to a reduction in the markets for U.S. exports abroad, extending recession from abroad back to the United States.

An inflationary policy of continued high government spending and/ or easy money?

While it is correct to mock the capitalist prescription of austerity as the cure for our ills, much of the left ignores the element of truth in the establishment’s observation that it is indeed necessary, sooner or later, to pay the piper.

The most obvious point is that for a very long time the government has pursued pretty much Keynesian debt-creation policies, but that policy has, for a good period now, been failing to produce the desired results. As already noted, debt­based expansion has simply meant a growing trade deficit, which has led to reduced investment and rising interest rates, threatening, since 1985, to turn the boom to recession.

Suppose a debt-based expansion was combined with dollar devaluation? Wouldn’t that raise exports, reduce the deficit, reduce the pressure of rising debt to foreigners, and make possible a road to recovery? Unable, due to the political pressures of an election year, to cut spending or reduce the budget deficit significantly, this is in fact the policy the government is pursuing. Yet, it is very unlikely to work.

In the first place, there is good reason to doubt that the dollar devaluation will very much reduce the deficit in anything but the very long run. Why is the deficit likely to prove recalcitrant even to the reduction of the value of the dollar?

1. Most generally, the underlying conditions that have led to declining U.S. competitiveness have not been significantly changed. This means that foreign producers will be able, at least up to a point, to find ways to retain their markets, even as the dollar drops because their relative costs are continuing to drop.

2. Because imports grow in price as the dollar declines in value, gains in the trade deficit measured in terms of volume (that is, growing exports and declining imports of numbers of goods) tend, at least to some extent, to be offset because each import is now more costly and each export is now cheaper. In other words, the trade deficit fails very much to improve in money terms.

3. Some of the main competitors of U.S.-based industries, such as those in Korea and Taiwan, have their currencies pegged to the dollar. Dollar devaluation is therefore likely to help Korean and Taiwanese producers expand their share of the U.S. market at the expense of Japanese and European industries, without helping U.S. industries.

4. Having captured U.S. markets and garnered significant profits, Japanese and European producers may be willing and able, at least for the time being, to accept lower prices and lower profits on their sales in the United States in order to retain their market position there.

The export boom and the supposed economic reorientation that has accompanied it is likely to prove short-lived, more the precursor, and cause, of a new depression than harbinger of a new boom. If home demand is stagnating, as it does appear to be, this is the result of two things: 1) a decline in consumer spending that is the result of a decline since 1973 in real wages, and 2) the capitalists’ refusal to raise investment significantly in an environment in which profits have failed to recover, in which the business cycle seems about to turn downward, in which consumer spending is stagnant, and where the crash of 1987 is, not surprisingly, taken to mean that something has gone very wrong. It is, in other words, a sign that we are entering a recession.

The recent U.S. export boom simply reflects the reduced value of the dollar-in effect, a “beggar thy neighbor policy,” at the expense of Europe and Japan. Europe is already expecting a new recession to result, which will depress overseas demand for U.S. goods, defeating the vaunted reorientation of the economy and bringing recession to the United States.

Finally, there remains a huge underlying risk in the policy of dollar devaluation, Devaluation reduces the value of the debt held (in dollars) by foreign creditors of the United States. Since the deficits will re­ main large for the foreseeable future, the United States will continue to depend on foreign creditors making new loans.

Yet, if dollar devaluation continues, there is likely to come a time, perhaps sooner rather than later, when creditors will demand much higher interest rates to provide an incentive for them to lend in a situation where their credits, held in dollars, have continually lost value. Given the huge overhang of world debt -­ no longer just in the Third World, but especially throughout many sectors of the U.S. economy — such a sudden increase in the cost of credit could, in short order, directly cause a liquidity crunch and a depression.

To sum up in crude terms: Low profit rates in the productive sectors of the economy have meant low real surpluses available to the economy, leading to low potentials for growth and reduced motivation for productive investment. The creation of debt at an accelerating pace has kept the economy turning over.

Nevertheless, debt-driven expansions have not resulted in the recovery of the profit rate. On the other hand, the growth of debt and the growing cost (in interest) of paying for it are eating away the economy’s already low surpluses. The economy is, increasingly, turning in on itself, increasingly vulnerable to small shocks, and slipping toward recession, perhaps depression.

January-April 1988, ATC 12-13