The World is Headed to a Crisis

Far Greater than the Great Depression

A combination of financial crisis, fuel crisis and food crisis is afflicting the world.

Monopoly capitalism or imperialism with its basic character of being moribund, decadent and parasitic engendered this crisis. Its fundamental contradiction is socialized production by workers and other laboring masses in the international scale and private appropriation by a few global monopoly capitalists of all the fruits or values created by this socialized labor. Financial and price speculations and manipulations done by the same monopoly capitalists, more particularly by monopoly finance capitalists of the oligarchic type as exemplified by giant banks and other financial and securities trading entities further intensified this contradiction.

Economically and socially costly wars and huge military spending being waged and done by the US, its allies and by its rivals for and in behalf of giant, monopolistic oil corporations, arms and other war industries, construction companies, pharmaceutical and food corporations, etc made this fundamental contradiction most intense.

Untold sufferings and miseries, deaths, hunger, diseases, homelessness and generalized impoverishment plague people everywhere, especially in the third world countries. The working class and people of the US and other capitalist countries are not spared from these plagues and deprivations created by boundless greed for profit by monopoly capitalists.

Finance capital, principally held by the financial oligarchy, having gained dominance in the era of imperialism became more dominant in the present period of neo-liberal imperialist globalization. Capitalism has long ago developed means by which money or wealth can beget money or wealth without the intervention of the real value creating process of production. In the present era when finance capital is dominant, financial transactions and speculations outside the sphere of production have become a normal, legal and regular means to profit.

These financial transactions and speculations create a bubble economy above and far greater than the material or physical economy. These meta-physical economic activities

modeled by such case as the transactions on sub-prime housing mortgages or debts can inflate or deflate prices or cost of debts or mortgages thereby also inflating or deflating the prices or costs of the physical or material assets that secure or collateralize the debts or mortgages.

Generalized crisis of world capitalism

The present crisis is principally financial. It broke out in late 2007 with the bursting of the subprime home mortgage bubble in the US. The crisis is characterized by: credit crunch or capital tightness; continuing devaluation of the US dollar; under-capacity production; reduction in work force; and soaring prices of fuel and food. The features have similarities with stagflation but economists see a long or protracted slowdown or recession. Others say the capitalist world is in the brink of depression.

Before proceeding let us have a short discussion about the collapse of the US mortgage market or the sub-prime bubble bust that triggered the present financial crisis.

Steadily the US financial system is exposed. It has lax credit practices for subprime borrowings. It has lax practices for subprime borrowings. Housing loans or mortgages were extended to low- income groups at variable interest rates, thus the so called “NiNa” loans (for “no income, no assets”)and the laxity if not the absence of sound and professional assessment or investigation of credit-worthiness of borrowers. In other words, subprime credit is high-risk investment. Sub-prime is the business of lending to debtors even to those who have records of having defaulted in payment.

Hard-selling promoters through such advertisements as “zero down payments and 100% financing” attracted homebuyers, especially the first timers. Unsuspecting homebuyers and loan subscribers tended to ignore the risk of possible interest rate hikes and a jump in their monthly payments.

The condition of recession, especially from 2000-2001, when consumption level of people in America was in a continuous slump favored this situation. Many have lost their jobs and among the employed. Many have compromised their wages just to keep jobs. Everyone needs additional income and mortgaging properties is one of the means to additional income.

The banks also have to do business with their idle capital assets and the industries and manufacturers must resume operations or increase their output or capacity. The subprime, estimated at $6.5 trillion in mortgage-backed securities (MBS) and/or collateralized debt obligations (CDOs) is all bubble created by series of buying and selling of MBS or CDO papers. But this bubble kept construction and real estate alive and therefore, manufacturing, industry and commerce, including retail and wholesale trade also.

For almost 5 years, the housing bubble, as the US Federal Reserves admits, kept the US economy, particularly the consumption of Americans close to non-crisis level. Then came the time when the price of sub-prime transactions were way beyond the values of assets (houses and lots) or collaterals that secure the loans or mortgages. The bubble burst, and with it, the prices of ABS (asset backed securities, like the MBS and CDO plunge and so did the resale prices of the mortgaged houses and lots.

Several analysts, including Wall Street economists and US Federal Reserves chair Bernanke, take the March 14, 2008 rescue by the US Federal Reserves and acquisition by JP Morgan Chase, at the greatly discounted price, of Bear Stearns (the 5^th largest investment bank in the US and one of the biggest global financial corporations) as signal for the bigger crisis.

The terrain of the crisis before the rescue of Bear Stearns was a mire of sub-prime housing mortgages or what have been repackaged into new “financial products” called MBS and CDOs that sold like hotcakes before and until 2006. Other than American, several European and Asian banks and financial institutions bought these financial products.

Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation's second biggest subprime lender. The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole. (http://en.wikipedia.org/wiki/Sub-prime_mortgage/)

The crisis could be likened to a virus epidemic whereby the degree of susceptibility of banks and other financial institutions that have direct or indirect exposures in the sub-prime market can not be immediately ascertained. But what is clear is almost every bank has incurred losses.

Thus when the crisis hit the subprime mortgage market, those who bought into the market suddenly found their investments near-valueless - or impossible to accurately value. Being unable to accurately assess the value of an asset leads to uncertainty, which is never healthy in an investment climate.

With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. XXX ordinary, and healthy businesses across the world with no direct connection whatsoever to US subprime suddenly started facing difficulties or even folding up due to the banks' unwillingness to budge on credit lines. (http://en.wikipedia.org/wiki/Sub-prime_mortgage/)

“Since the crisis broke out nine months ago, the true picture of the financial debacle is still subject to much speculations. According to the London Economist, more than $5 trillion has disappeared from the value of public companies (publicly listed) by early 2008; its best estimates of prospective banking losses is around $1.1 trillion”. (Gert A. Gust, Boom and Bust: Understanding the global financial crisis, Philippines Free Press, April 26, 2008).

Many banks, mortgage lenders, real estate investment trusts (REIT), and hedge funds suffered significant losses as a result of mortgage payment defaults or mortgage asset devaluation. As of May 21, 2008 financial institutions had recognized subprime-related losses and write-downs exceeding $379 billion.[1]

Profits at the 8,533 U.S. banks insured by the FDIC declined from $35.2 billion to $646 million (89 percent) during the fourth quarter of 2007 versus the prior year, due to soaring loan defaults and provisions for loan losses.[2]

· Write-down league table

Published: May 13 2008 18:04 | Last updated: May 14 2008 07:33

The following table lists the asset write-downs and credit losses since the beginning of 2007 at some of the world’s biggest banks.

Sub-prime losses by bank
	Company	Total write-downs and credit losses since Jan 2007 ($bn)
1	Citigroup	40.9
2	UBS	19.2
3	Merrill Lynch	31.7
4	AIG (Insurance)	30
5	HSBC	12.4
6	Royal Bank of Scotland	15.3
7	Bank of America	14.8
8	Morgan Stanley	12.6
9	Deutsche Bank	7.6
10	Credit Suisse	6.3
11	JPMorgan Chase	9.8*
12	IKB Deutsche	8.9
13	Crédit Agricole	8.4
14	Washington Mutual	8.3
15	Other European banks	7.9
16	Wachovia	7
17	Société Générale	3.9
18	Mizuho financial	5.5
19	Other Asian banks	5.4
20	Barclays	4.5
21	Canadian Imperial	4.1
22	Bayerische Landesbank	3.6
23	Fortis	3.4
	Source: Bloomberg and FT Research
	* Excluding the expected $9bn charge JPMorgan Chase will take to clean up Bear Stearns’ balance sheet and pay for redundancies and litigation arising from its takeover of the bank (read story)

The move by the US Federal Reserves and by JP Morgan Chase, while particularly benefiting JP Morgan and Bear Stearns, was to save the whole financial system that is teetering. And, it was not only Bear Stearns that the US Federal Reserves rescued. Last March the Fed announced a $200 billion loan package in US Treasury bonds for Wall Street investment banks. The Fed accepts as collateral, mortgage-backed securities or collateralized debt obligations, which had no buyers in the financial market since the sub-prime bubble bust. These moves gave back some measure of confidence for the financial market to somehow recover from continuous fall.

But the Federal Reserves’ moves did little, if not, nothing to avert the financial crisis. The Federal Reserves has admitted that the market has not really returned to normal and that the crisis precipitated by the sub-prime market collapse would be protracted.

Bear Stearns, reportedly holds $2.5 trillion worth of trading contracts with several trading and securities firms in the world. This is about 1/6 of the total GDP of US and around 1/20 of the total world GDP. This explains why it was rescued by the US Federal Reserves and was taken-over by JP Morgan.[3]

Before the rescue of Bear Sterns was the collapse, in September 2007, of Northern Rock[4] a mortgage bank in England and about 100 mortgage-financing institutions in the US. Northern Rock sought and received liquidity support from Bank of England on September 14, 2007. On February 22, 2008 it was nationalized by (Bank of )England when 2 interested parties failed to bid the take-over of the bank.

The US Federal Reserve’s rescue of Bear Stearns and the nationalization of Northern Rock by the Bank of England, although isolated, nevertheless are indications of the so-called “Keynesian” measures or “cure” being resorted to by imperialist states. These exemplify the undercurrent neo-Keynesian stream to the mainstream neo-liberal economics.

Among the features of this crisis are the companies going bankrupt or incurring heavy losses and the simultaneous buy-outs and acquisitions and mergers as banks and other financial institutions “correct or clean their books”.

Other than the acquisition by JP Morgan Chase of Bear Stearns are the following mergers and acquisitions and write-downs and their implications and effects on employment.

· Prominent in the US last year was the filing for bankruptcy by the New Century Financial Corp, the erstwhile 2^nd biggest sub-prime lender in the US. In January 2007, New Century had 7,200 full time employees. When it filed for bankruptcy in April 2007, New Century was terminating 3,200 of its employees.

· As early as September 14, 2007, the Bank of America (BofA) got the approval from the Federal Reserves to acquire ABN Amro North America, La Salle Bank Corp. and La Salle Corporate Finance from ABN Amro for $21 B. On January 11, 2008 BofA acquired Countrywide Financing for $4 billion. Countrywide Financing was mortgage service provider for 9 million mortgages worth $1.4 trillion as of Dec. 31, 2007. Due to write-downs and rising credit costs BofA declared that its earnings for the first quarter of ’08 was down by 80% to $1.2B.

· UBS of Switzerland is writing down $19B of its investments in American sub-prime and other mortgages as part of the expected 12 billion Swiss Franks projected loss for the first quarter. Last May 6 UBS announced it would cut 5,500 jobs by middle of 2009. These jobs include those hired in 2008

· HSBC of England bought E-Trade, an Indian on line brokering firm for $235 million.

· ING of Netherlands made direct bids to buy InterHyp, a German direct mortgage broker for 64 Euros per share or an equity value of 416 million Euros ($645 million).

· Banking and finance including securities have shed a total of 48,000 jobs in the last ten months. On April 1 financial research firm Celent LLC issued a report suggesting that some 200,000 of the US commercial banking industry’s 2 million jobs could be lost over the next 12 to 18 months.[5]

· Citigroup the biggest bank in the world in terms of assets, reported $5.1 billion loss in the first quarter and $16 billion in write downs, announced 9,000 job cuts and a total of 13,000 redundancies since the beginning of the credit crunch.

· American International Group (AIG) one of the world’s biggest insurance companies, announced a $7.8 billion loss in the 1^st quarter. Though it has not announced any retrenchment yet, it is already being anticipated.

· Merryll Lynch announced a loss of $1.96 billion and plans to lay-off a total of 4,000 employees within 2008.

· JP Morgan’s take over of Bear Sterns would mean reducing the 14,000 work force of the latter. JP Morgan has earlier said that it would retain only 6,000 of the 14,000 workers. As of late JP Morgan is “looking for jobs” for 5,000 Bear Stearns’ employees.

· Other large US banking firms, such as Washington Mutual (a $1.14 billion loss and 3,000 layoffs), Wachovia ($393 million loss and hundreds of layoffs) and Wells Fargo (11% decline in profits), have also reported grim first quarter earnings.

· Outside banking and finance, other US based industrial and commercial corporations that announced reduction in jobs are: AT&T (5,000 jobs), Volvo Trucks (1,100), Asahi Glass (900 in the US and Canada), Harley-Davison (730), Lehman Brothers (600), Siemens Energy and Automation (477), AMD (420), Valley Health System (396), Newark Morning Ledger (367), Skybus Airlines (365), Greenville Hospital in Jersey City, New Jersey (356), Aramark Sports and Entertainments (303), Baja Marine Corp (283), Dutch Housing (250) and Summit Production Systems (200), among other firms.

· General Motors announced it will close four factories in the US, Canada and Mexico by 2010, eliminating more than 8,000 jobs. The action is the latest move in the downsizing of the former American industrial icon, which has cut its hourly US workforce by 53,000—or more than half—over the last four years. In the last week of May, GM announced that 19,000 of its workforce have accepted early retirements and buy-outs. This is part of GM’s restructuring of its workforce, that is, GM is steadily eliminating its hourly workers.

· Home Depot announced it was halting plans to open about 50 new US stores and closing 15 existing stores over the next seven weeks. As many as 1,300 employees could lose their jobs.

· Sun Microsystems posted a net loss of $34 million for its third quarter and announced plans to cut up to 2,500 jobs. .

· Health care giant Johnson & Johnson announced Wednesday it was eliminating 400 sales jobs in the US by the year’s end.

Other US-wide data:

· The official unemployment rate in the US has reached 5.5% in May after net loss of 49,000 jobs. This is the biggest monthly jump since 1986. This is up from 5% in April and 5.1% in March. (California has 6.2% unemployment rate in March.) The official jobless count was 7.8 million in March, by May it has risen to 8.5 million. This does not include those who have stopped looking for jobs but nevertheless are still unemployed. So far this year, the US government said, job losses have totaled 324,000.

· The reduction of jobs in the month of April 2008:

- Manufacturing—46,000 jobs

- Construction--- 61,000 jobs

- Retail----------- 26,800 jobs

New jobs in April were in:

- Health care------ 37,000

- Restaurant and Hotel----- 18,000

- Professional/business services--- 39,000

A total of 350,000 jobs have been displaced from construction industries in the US from March 2007 to March 2008. The housing slump is the main reason for this situation which affects directly the employment situation in all other lines of industry, manufacturing and in trading and commercial businesses.

US Housing Crisis

The economic devastation that the sub-prime bubble bust brought to the American people is the housing crisis manifested in the continuing decline in housing prices; defaults in payment of home mortgage loans; and, hundreds of thousands of home foreclosures every year since 2006.

Home ownership is the common American dream. Others say it is “that cornerstone of American dream”. Americans have invested more in homes than in stocks on the common belief that values or prices of homes and lots never go down. Now that dream is vanished for many and is running away from millions of Americans who are now property-less but deeply in debt.

The Mortgage Bankers Association’s (MBA) report for the first quarter of 2008 manifest the monstrosity of the US housing problem.

· Home foreclosure forecast for 2008 is more than 1 million foreclosures. For the approximately 516,000 foreclosure proceedings started in the first quarter, sub-prime ARM (adjustable-rate mortgages) account for 195,000 foreclosure cases and prime ARM, 117,000 cases. The states of Arizona, California, Florida and Nevada account for 89% of total home foreclosures.

· Almost 1 (0.99%) of every 100 mortgages is in foreclosure process. This is more than the 0.83% rate in the last quarter of 2007.

· Mortgage delinquency (30 days late) has risen from 5.82% in the last quarter of 2007 to 6.35% in the first quarter of 2008.

· Delinquency rate among credit-worthy borrowers has also increased from 3.24% in last quarter of 2007 to 3.71% in Q1 of 2008. More than this delinquency trend is the number of credit-worthy borrowers who are falling into home foreclosures. The percentage of credit-worthy borrowers who have fallen to foreclosure has increased from 0.41% in Q4 of 2007 to 0.54% in Q1 of 2008.

The Economist issue of May 29, 2008 said that “America’s housing prices today are falling faster than during the Great Depression.” Quoting S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year (2007) to the first quartern of 2008, the worst since the index began 20 years ago.

The magnitude of the housing crisis is also measured in terms of the total outstanding credit home financing institutions have extended or, in the reverse side, the outstanding financial obligations of the American debtors or borrowers. The standing of the US government-sponsored enterprises, Fannie Mae[6] and Freddie Mac[7], the twin pillars of the US housing finance market can represent the financial aspect of the housing crisis.

By the end of March 2008, Fannie and Freddie had total credit outstanding of $5.3 trillion ($1.6 trillion in debt and $3.7 trillion in credit obligations) – a total that is equivalent to the entire publicly held debt of the US. With the continued decline in housing prices and the increasing delinquency in payment of housing loans and also the increasing foreclosures, experts see these pillars, more likely, to crack. The two are just too big and too central to the US financial System. In case either or both get into trouble, the US government would intervene to save the whole American financial system.

But the social cost of the sub-prime generated financial crisis is so great and irreparable. The number of homeless, particularly those living in cars and mobile homes, has increased significantly. But it is not finished here. They have to grapple with soaring prices of fuel and food.

Total consumer or consumption debt of Americans has risen to $2.6 trillion. This includes debts incurred in using credit card to purchase and fixed-payment loans like student and car loans. Consumption debt does not include housing mortgage and loans.

Due to decline in prices of homes and stocks, including shares in mutual funds, and the increases in the price of fuel and food, the net worth of Americans has declined by $1.7 trillion.

The immediate impact is in the lifestyle of Americans, most particularly the average American middle class family.

Only a few years ago, Americans who considered themselves middle class were scrimping to pay for their kids' college education. Now, many of them are struggling to cover far more basic needs like gas and groceries. (Tam Luhby, Making a good living, but still feeling strapped CNNMoney.com, May 29, 2008)

2. Global effects and manifestations of the crisis

The sub-prime bursting in the US sent shock waves throughout the world, through the financial market. Asian markets particularly reacted proportionally to the collapse of Wall Street investment bank Bear Sterns. The reaction of the big Asian economies was particularly strong. Share values in three large Asian economies—China, Japan and India—have fallen by about 30 percent, 20 percent and 30 percent respectively. These falls outpace the decline in US shares, with the S&P 500 Index falling 13 percent since January 1.

Japan is particularly affected by the appreciation (revaluation) of the Yen in relation to the devaluing dollar. In March, the currency slid past the 100 yen to the dollar, for the first time in 12 years and slumped to Ұ96 before recovering. Some commentators predict that the exchange rate could hit 80 yen in the next year. Sony, for example, has admitted that it loses $62 million in operating profits for every 1 yen rise against the dollar. Mizuho Financial Group’s sub-prime losses reached $6.14 billion. Mizuho Securities is the worst affected by the credit crisis of Japanese banks and is planning to cut by about 300 (or 15%) as part of measures to help the brokerage firm back to profit.

The economy of Japan is perceived to be in recession even before the subprime busting in the US. The fact that corporate capital spending took a deep fall in the last quarter of 2007 reinforced this.

China and, to some extent, India are seen as possible guarantees against recession in the US. The demand of their industrialization program for mineral and other raw materials and capital goods could replace the weakened demand in US. Since the end of the Asian financial crisis of 1997-98, China has been perceived as the motor for the regional growth in Asia.

But China, India and even Japan also depend on the US market. Some present speculations that China and, to certain extent, India would not be affected by the US recession and could pull the world out of recession cannot hold water. (These speculations are referring back to the case of Japan during the stagflation of 1979-1981. In those times Japan was able to keep the unemployment rate at 4% while US and Europe had double-digit unemployment rates.)

China’s currency, the RMB, is appreciating in relation to the dollar. China holds also the biggest dollar reserves (more than $1.1T) outside of the US. Further devaluation of the dollar certainly hurts China’s economy and also Japan’s, India’s, South Korea’s and of other countries with huge dollar reserves.

The recent devastating earthquake in Sichuan province could further constrict the capacity of China to somehow cushion the effects of the US recession on the world. The economic consequences of the earthquake can be gleaned and measured on the number of fatalities and casualties, about 3 million houses destroyed, damaged and destroyed infrastructures, industrial plants and disruptions in agricultural production. Sichuan contributes 3.9% to total GDP and 2.5% of the total manufacturing output of China. The province holds 40% of China’s natural gas deposits and 22% of its natural gas production. The disruptions wrought by the earthquake would ultimately affect China’s energy supply.

A Financial Times’ report on May 16, 2008 said, Europe, particularly the 15 countries comprising the Euro zone (where the Euro is the currency), has remained relatively stable in terms of growth rates in the first quarter with Germany registering the highest rate at 1.5% and is considered as the EU’s engine of growth. France also registered a surprising 0.6% growth rate. Despite huge losses its major banks incurred and the constricting financial conditions, the European Central Bank (ECB) keeps the interest rate at 4%.

This rosy picture however is contradicted by the worsened working and living conditions of workers and the people in general and by certain factors that, in due time, would contain if not reverse this growth in Germany and the euro zone. The ECB has warned of the risk of higher inflation rate in the future. Economists forecast that financial conditions, which have increased borrowing costs; the strong euro; and declining demand in the United States would eventually hurt German and European growth.

This growth, especially of Germany, is at the great expense of the working class. Germany has kept labor cost contained, streamlined production in important manufacturing sector and kept a slow but steady growth in employment. In this way Germany was able to keep domestic demand steady. But the containment of labor cost in concrete terms means the lowering of wages and the steady decline in consumption by workers of Germany.

Despite strong and massive workers’ and students’ protests, the Sarkozy government of France is bent on increasing workers’ contributions for full pension from 40 years to 41 years thereby effecting sharp fall in retirees’ income; implementing budget cuts on education and therefore effecting job cuts among public school teachers and is privatizing port facilities. These moves being taken by the French government is increasing the ranks of unemployed and decreasing the take home wages and salaries of workers and employees in France. This means that the disposable income of the employed have been greatly reduced or at the most gone.

In the rest of the euro zone countries, Ireland and Spain registered near zero growth in the first quarter reflecting falling housing prices. Italy is likely to slide into recession.

A May 21, 2008 news item in The Financial Times report that, for the first time since 2005 the Bank of England’s (central bank) economic growth forecast is significantly lower than that by the Treasury of England. The Bank’s forecast show that England’s economic growth would slip from 3.3% in 2007 to 1.5% in 2009. This is a correction of its last year forecast of 2.8% growth in 2009. For 2010, election year, the bank estimates lower than 2.4% growth rate. On the other hand, the Treasury expects growth of 2.25%-2.75% in 2009 and 2.5%-3% in 2010.

The whole report indicates that the economy of England is heading for what the Bank described as, the “most protracted slowdown since the 1990s”. Presently, the housing market registered some weakening as indicated by lower mortgage lending figures from the Council of Mortgage Lenders. CML expects (housing) prices “to fall 7% this year and transactions to be 35 per cent lower than in 2007”.

The prognosis for the capitalist world is not optimistic. At the least it is a protracted recession but the prices of fuel, food, medicines and medical care, etc are rising; at the worst, the capitalist world led by the US is in the brink of depression. The whole world is dragged into this crisis.

3. Food crisis, fuel crisis and the general worsening of socio-economic conditions

The financial crisis and the logical tendency of capital to find new areas for growth or for profit-making is an immediate and permanent reason for the rising fuel, metal (including valuable metal) and food prices. Of all physical or material commodities, fuel, metals and food are the most urgent requirements for both industrial and human consumption.

When the sub-prime home mortgages finally burst, speculative capital shifted massively to fuel, metal and food price speculations.

The continuous rise in fuel and metal prices increases the cost of food production. Fertilizer and pesticides are oil-based and farm machines run on petroleum fuel. Increases in prices of tin and aluminum also contribute to rising cost of processed food.

In the past year, per bushel wheat prices have risen by 64 %; corn is up 68% ; soybeans 76%. Rice prices have risen by 134 %. With corn and soybean prices going up so too are the prices of animal feeds and therefore the prices of livestock, poultry and dairy products. With wheat and corn prices going up so too is the price of flour and food starch and therefore the price of bread and all flour based products.

A few giant corporations monopolize nationally and globally the businesses of producing crop seeds, livestock and poultry breeding, fertilizer, pesticide and pharmaceuticals for both human and animal medication; and, the processing of human food and livestock and poultry feeds, storage, transport and trading. All these industries consume fuel and power in the whole process from production to distribution.

Because of these, in the first quarter of this year monopoly corporations in the business of agricultural production and agricultural product processing, storage, transport and trading and other related businesses saw huge increases in profits.

Archer-Daniels-Midland (ADM), the largest grain processor in the US, posted a 42% increase in profit from last year to $517 million in the first quarter. Cargill, the second biggest grain processor, profited $1.03 billion, an 86% increase from last year. Bunge, the third largest, reported $289 million profit, a staggering 1,964% increase from last year.

Farm machine maker Deere & Co. reported a 55% increase in quarterly earnings over the year, to $369 million. Monsanto, a biotechnology company with a virtual monopoly on crop seed and herbicide production, reported $1.13 billion in profits for the latest quarter, more than doubling profits of the preceding quarter. Other corporations with significant agricultural operations, including Syngenta AG, DuPont and Dow Chemical, have also posted huge profits.

ADM executives attributed record earnings throughout all of the company’s operations to an enormous increase in speculative activity in commodities markets.

While fuel, metal and food price speculation is the immediate reason for food price spikes, other underlying conditions cause the food supply and price crisis. No less than the UN and WB food programs have enumerated the other reasons for the crisis. The increase in yield in the 1970s attributed to “green revolution” was not sustained for long. By year 2000 yield showed a decreasing pattern.

The fact of climate change is clear and present however, capitalism-made conditions exacerbate the effects of climate change to global agricultural production.

Climate change is not the only seemingly unstoppable force assailing developing countries in their search for food security. Scientific advances in agriculture have brought great benefits, notably in the “green revolution” originating in the 1970s. However, unlike the green revolution which was largely driven by state funding, today’s biotechnology puts seed management and patents in the hands of a small number of very large international companies such as Monsanto, Dow Chemical and Syngenta.(UNDP, Food Security Guide)

A logical consequence of this private monopoly control of biotechnology is the rapid decline in the number of food crop varieties as only seed varieties favored by these companies are mass-marketed. The paper cited above says, “Industrial crops are now limited to about 150 varieties, rendering superfluous the inherited local wisdom acquired over generations. The implications of the loss of biodiversity in both seeds and local ecosystems for resistance to diseases or climate change are uncertain.”

Another result of this control of biotechnology is the controversy and problems surrounding and emanating from the widespread introduction of genetically modified crops developed and patented by biotechnology companies. And under Intellectual Property Rights (IPR) that these companies wield, local farmers lose control over their own produce. “There are doubts as to whether developing countries have the capacity to establish regulatory frameworks to manage inevitable conflicts of interests between the local stakeholders (farmers, consumers, and governments) and global shareholders.” (Food Security Guide)

The same giant oil companies that monopolize the production and distribution of fossil-based fuels encourage the rushto ethanol and bio-fuel crop production as additive to petroleum fuel. This has resulted so far to massive conversion of farmlands for food production into ethanol and bio-fuel crop production. Other than this is conversion of food crop such as corn, for human and animal food into ethanol/bio-fuel use.

In the US, the Bush government has directed that corn would principally be used for ethanol production. This resulted in an effect-causing in an increase in prices of corn and corn-based animal feeds. In China, a shortage of pork has prompted the government to block approval of new ethanol plants which are indirectly forcing up prices of animal feed. The Philippines is offering more than a million hectares to Chinese corporations for the planting of bio-fuel crop such as jatropha and for hybrid rice and sorghum production for China. In Brazil, the denuded areas along the Amazon are being planted to sugar cane for ethanol production.

A study the International Food Policy Research Institute in Washington suggests that bio-fuel production accounts for a quarter to a third of the recent increase in global commodity prices. The Food and Agriculture Organization of the United Nations predicted late last year that bio-fuel production, assuming that current mandates continue, would increase food costs by 10 to 15 percent.

Food security is being compromised where priority is for export crop and bio-fuel crop production. Imagine this; the number of vehicles in the world is 800 million. This is almost the same as the 850 million undernourished people in developing countries. One tank of ethanol for a Sports Utility Vehicle consumes corn that could feed a man for a year.

Food Security is the condition in which everyone has access to sufficient and affordable food. Ten million hunger-related deaths every year, half of them children, testify to our failure to achieve global food security. Over 850 million people remain trapped in the spiral of hardship that hunger imposes, a figure which continues to rise even amidst the riches of the 21st century. As developing countries grapple with the complexities of biotechnology and the alarming impact of climate change, it is extraordinary that the major powers should choose this moment to trigger a craze for bio-fuels, adding pressure on world food prices. (Food Security Guide)

Food Security Guide asserts that world food production yield still outpace population growth rate. But where there is conflict such as in Africa and, of course, Iraq and other Middle East countries, food production is greatly disrupted. Absence of food in the market is not the cause of hunger prevalence but their inaccessibility to many whose income is way below the prices foodstuffs.

The Food Security Guide failed to mention however that the same giant biotechnology firms and grain processing and meat processing firms also control the global grain and food trade. They are among those that dominate the speculative activities in commodities markets where future prices of grains, sugar, flour, edible oil, etc. are set. The future prices set the present prices of food. This is where much of their profits are made more than in food production process where cost of production is kept low principally by depressing wages of farm and factory workers.

Fuel crisis

The price of crude oil has soared to more than $138 per barrel or $11 increase in just 1 day. The immediate causes or factors to oil price spikes are the intensity of speculations in the oil bourses, the continuing devaluation of the US dollar and the increasing tension between Iran and Israel.

Crude oil price is projected to reach $150 per barrel by July 4 when the usually busiest travel holiday in the US combines with strong demands in Asia, particularly by China and India.

The continued spike in oil price and devaluation of the dollar are creating a chain reaction of price increases of almost everything and including the cost of finding and producing oil itself. #####

Kilusan para sa Pambansang Demokrasya

(Movement for National Democracy)- Philippines

June 9, 2008

[1] http://en.wikipedia.org/wiki/2007_Subprime_mortgage_financial_crisis

[2] ibid.

[3] Nick Beams, Shades of 1929: Global implications of US banking collapse Part 1, April 16, 2008, wsws.org

[4] Northern Rock was nationalized or was taken over by the government. It is indebted to the Bank of England.

[5] David Walsh, As losses mount, US banks cut thousands of jobs, April 19, 2008, wsws.org

[6] Federal National Mortgage Association

[7] Federal Home Loan Mortgage Corporation

Kilusan para sa Pambansang Demokrasya-Cebu

Monday, June 23, 2008

The International Economic Situation

US Housing Crisis

The economic devastation that the sub-prime bubble bust brought to the American people is the housing crisis manifested in the continuing decline in housing prices; defaults in payment of home mortgage loans; and, hundreds of thousands of home foreclosures every year since 2006.

Fuel crisis

Kilusan para sa Pambansang Demokrasya

No comments: