Grim parallels emerge in crisis of capitalism

The riots have begun. Civil protest is breaking out in cities across Russia, China and beyond. Greece has entered a third week of turmoil. The mood seems to have turned “pre-insurrectionary” in parts of Athens — to borrow from the Marxist handbook.
 
This is a foretaste of what the world may face as the “crisis of capitalism” — another Marxist phase making a comeback — starts to turn 200 million lives upside down.
 
We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling and barbed wire.
 
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2 per cent of the world economy to “prevent global depression”.
 
“If we are not able to do that, then social unrest may happen in many countries, including advanced economies,” he said.
 
Russia has begun to shut down trade as it adjusts to the shock of Urals oil below $US40 a barrel. It has imposed import tariffs of 30 per cent on cars, 15 per cent on farm kit, and 95 per cent on poultry (above quota levels). “It is possible during the financial crisis to support domestic producers by raising customs duties,” Prime Minister Vladimir Putin said.
 
Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special “licences” to choke off imports.
 
The Kremlin is alarmed by a 13 per cent fall in industrial output over the past five months. There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed “Dissent Marchers” holding copies of Russia’s constitution above their heads in Moscow’s Triumfalnaya Square.
 
“Russia has not seen anything like these nationwide protests before,” Boris Kagarlitsky, of Moscow’s Globalisation Institute, said.
 
The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished.
 
Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1, 1934 when Stalin unveiled his “Enemies of the People” law, kicking off the Great Terror.
 
The omens are not good in China either. Taxis are being bugged by police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall.
 
Exports fell 2.2 per cent in November. Toy, textile, footwear and furniture plants are being closed across Guangdong, now the riot hub of South China. Some 40 million Chinese workers are expected to lose their jobs. Party officials have warned of “mass-scale social turmoil”.
 
The Politburo is giving mixed signals. We don’t yet know how much of the country’s plan to boost domestic demand through a $586 billion stimulus package is real and how much is a wish list sent to party bosses in the hinterland without funding.
 
Shortly after President Hu Jintao said China was “losing competitive edge in the world market”, we saw a move towards export subsidies for the steel industry and a dip in the yuan peg — even though China already has the world’s biggest reserves ($US2 trillion) and the biggest trade surplus ($US40 billion a month).
 
So is the Communist Party mulling a 1930s “beggar-thy-neighbour"strategy of devaluation to export its way out of trouble? “During a global slowdown, you can’t have countries trying to take advantage of others by manipulating their currencies,” Frank Vargo, of the US National Association of Manufacturers, said.
 
It is a view shared entirely by president-elect Barack Obama. “China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world,” he said in October.
 
The new intake of radical Democrats on Capitol Hill will hold him to it.
 
There has been much talk lately of America’s Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation and was the biggest victim of its own folly.
 
Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the “growth bloc” of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.
 
It was a successful strategy — given the awful alternatives — and was the key reason why Britain’s economy contracted just 5 per cent during the Depression, compared with 15 per cent for France and 30 per cent for the US.
 
Could we see such a closed “growth bloc” emerging now, this time led by the US, entailing a massive rupture of world’s trading system? Perhaps.
 
This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the “New World Order” as well, unless we move with great care in grim months ahead. This is where events turn dangerous. The last great era of globalisation peaked just before 1914.

You know the rest of the story.

AMBROSE EVANS-PRICHARD

THE SUNDAY TELEGRAPH

This is a foretaste of what the world may face as the “crisis of capitalism” — another Marxist phase making a comeback — starts to turn 200 million lives upside down.
 
We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling and barbed wire.
 
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2 per cent of the world economy to “prevent global depression”.
 
“If we are not able to do that, then social unrest may happen in many countries, including advanced economies,” he said.

AMBROSE EVANS-PRICHARD

THE SUNDAY TELEGRAPH