Deficits, Debts, and Deepening Crisis

Standard and Poor’s downgrades US debt, stock markets gyrate around the world, Sarkozy and Merkel perform yet another empty summit, the Chinese and Japanese economies look worrisome.  Serious commentators worry about global recession, another global banking collapse, eurozone dissolution, and austerity programs that only make matters worse.  Nouriel Roubini, famed Professor at NYU’s Stern School of Business asks this month, “Is Capitalism Doomed?”  His answer: maybe.

The crisis of capitalism that erupted in mid-2007 now enters its fifth year.  It grew out of excessive debts of US households and enterprises (especially financial enterprises) that their underlying incomes and wealth could not sustain.  Key to the crisis was real wage stagnation since the mid-1970s.  As the cost of the American Dream kept rising while real wages did not, households borrowed (mortgages, credit cards, student and car loans).  Debts accumulated on the basis of stagnant real wages.  That unsustainable credit bubble blew in 2007.  Nothing since has significantly relieved or alleviated that basic contradiction.  With high unemployment, total wage incomes have fallen and little extra credit will flow to already over-indebted workers.  The crisis deepens as US demand remains hobbled.

Since the 1970s, banks, insurance companies, and hedge funds invented new speculations on the rising debts of US households (asset-backed securities, credit default swaps, etc.).  Those financial speculations were even more profitable than the soaring profits of non-financial corporations who could keep their workers’ real wages flat even as rising productivity delivered ever more product per worker to those corporations.  Huge speculative profits prompted financiers to borrow in a self-reinforcing spiral ever further removed from the household debts on which it was based.  When that base collapsed as millions of US workers could not longer sustain their debts, so too did the financial speculations built upon it.

The wealth and power accumulated by the financial industry since the 1970s secured massive government-funded bailouts after the crisis hit.  Recoveries were underway for banks, insurance companies, and larger bankrupt corporations by mid-2009.  But no recoveries were provided for real wages, declining job benefits, excess household debts, falling public services — nor for the unemployed or the foreclosed.

By bailing out their private financial industries, the US and other governments took over (nationalized) their bad debts and soured speculations.  Governments borrowed to do that, thereby adding massively to national debts.  “Recovery” for the financial markets bypassed the mass of people.  Economically depressed working classes and increasingly indebted states now combine to unravel even the financiers’ recovery.

The trail of failed economic policies undermining a dysfunctional capitalism displays multiple absurdities.  Rising household debt had combined with stagnant wages by 2007 to collapse the US housing market, raise unemployment, freeze credit, cripple state and local finances, and so on.  As demand for goods and services shrank fast, businesses and the rich stopped investing in production.  Their investible funds were idled, and that only aggravated the crisis.  The self-regulating, efficient capitalist market system proved to be the myth its critics had mocked.  However, the market system did spread the US crisis quickly to Europe and beyond.

As crisis flared in 2008, governments unfroze credit markets by pouring money into tottering banks and insurance companies.  Governments printed and created new money to pay for part of these policies; to cover the other part, governments borrowed.  The governments’ creditors included the banks and insurance companies they had bailed out.  Governments also borrowed from the companies and rich individuals who had withheld investment in the production of goods and services and had thereby worsened the crisis.  The absurdities of such “economic policies” (and their gross injustice) invite grim laughter if only to keep from crying.

But wait, the costly absurdities thicken.  Banks and other financial companies that lent to governments got worried about fast-rising national debt levels.  The US situation was especially worrisome and culminated in Standard and Poor’s downgrade this month.  After all, Washington had enjoyed budget surpluses in the 1990s.  But then the last decade’s massive Bush tax cuts, multiple wars, and then the post-2007 bailouts exploded the US national debt.  Politicians who voted for all those budget-busting actions now use the resulting national debt to justify cutting government spending on the mass of people.

Creditors know from history that governments invite political trouble with high and rising debt levels.  The interest costs on national debt risk diverting tax revenues to satisfy creditors rather than to provide public services to tax payers.  After four years of economic crisis, populations may not accept reduced government services while more of their taxes flow in interest payments to the banks, insurance companies, and other financial enterprises they blame for the crisis.  They may revolt when leaders cut pensions, health insurance, etc. “because our nation must reduce its budget deficits and debt.”

Those risks drove rating companies to downgrade the debts of ever more “advanced industrial countries.”  Downgrades signify the historic dangers of this global capitalist crisis.  They reflect the absurdities and contradictions of the ineffective, trickle-down policies pursued by governments since 2007.

Across Europe and the US, all sorts of campaigns seek to prevent or deflect awareness of this systemic crisis of capitalism (when its politics and economics undermine more than reinforce one another).  Some aim to redefine the crisis in nationalist terms.  For example, the German working class is prompted to blame economic difficulties and/or its government’s austerity policies on the Greek and Portuguese working classes and/or their governments’ social welfare programs.  Other campaigns discover other scapegoats: “the financial industry,” “the bankers,” and the “central bank” are candidates.  Texas Governor Rick Perry, now running for President, narrowed scapegoating down to one man, the Federal Reserve Chairman.

Another diversion from seeing this as a systemic crisis of capitalism asserts that large “emerging” economies — China, India, Brazil, and so on — are escaping or even reversing the crisis.  However, their profound dependence on trade and capital flows with the US and Europe should dispel fantasies about their independent development or super-fantasies that their development will revive the US and Europe.  

Ever more of this crisis’s victims are recognizing the historical roots and systemic contradictions deepening it.  Demands for change, organized and disorganized, superficial and systemic, keep building, albeit unevenly, around the world.

Richard D. Wolff is Professor Emeritus at the University of Massachusetts in Amherst and also a Visiting Professor at the Graduate Program in International Affairs of the New School University in New York.   He is the author of New Departures in Marxian Theory (Routledge, 2006) among many other publications.  Check out Richard D. Wolff’s documentary film on the current economic crisis, Capitalism Hits the Fan, at  Visit Wolff’s Web site at, and order a copy of his new book Capitalism Hits the Fan: The Global Economic Meltdown and What to Do about It.  His weekly radio program, “Economic Update,” broadcasts on WBAI, 99.5 FM in New York City every Saturday at noon for an hour; it can also be heard live and in podcast archive on

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