The most powerful economy in the world, responsible for a third of world output, is reeling with shock. This time there are no foreign terrorists who can be held responsible for disaster striking. It is capitalism itself that is responsible. As the Daily Mirror declared in June: “Karl Marx must be rubbing his hands with glee and saying ‘I told you so’.”

Marx explained that, while all kinds of secondary factors can trigger economic crises, it is the fundamental contradictions of capitalism that are the underlying cause.

The current crisis stems not from a few accountancy fiddles, but from the fact, as Marx explained, that the working class collectively can not afford to buy back the product of their labor. Marx explained that capitalism partially overcomes this contradiction by investing the surplus back into industry.

But this, in turn, leads to an even greater production of goods, which the working class at a certain stage is incapable of buying back. This leads to a crisis of overproduction. It was overproduction and overcapacity that led to the South-east Asian collapse in 1997.

For a temporary period the US market was able to ameliorate the problems of overproduction by acting as the buyer of last resort for the world’s goods; but that is now coming to an end.

The heydays of the 1990s boom are not about to return. Instead, all the excesses of that boom – an extremely over-valued stock market, an economy dependent upon overseas borrowing, a squeeze on profits, consumers going into massive debt, overproduction, and the ballooning US trade and current-account deficit – still plague the economy. There is a strong possibility of the economy now falling back into a new and even deeper recession.

Despite predictions of 3-3.5% growth this year, after growing over 5% in the first quarter, second quarter growth was an anemic 1.1%. Also, the length of the 2001 recession has just been expanded to three quarters. Manufacturing has declined for 24 months, destroying 1.8 million jobs. Business investment is flat and construction spending has also started to lag.

With one corporate scandal after another coming to light, investor confidence has been shaken, further weakening the economy. It is now left to consumers, who make up two-thirds of economic spending, to hold up the US economy. Massively in debt, and with new jobs drying up, consumer spending is now flagging, pointing to a new recession.

Since 2000, the massive stock market bubble has burst in one of the biggest crashes in US financial history, threatening the pensions of millions. The high-tech NASDAQ index was off 77% of its peak in July, the largest fall in its history (in 1973-1974 it fell 59.9%). The S&P 500 was down 50% from its peak in July. This exceeded its fall in 1973-74 (49.9%), and was second only to the 1929-1932 crash of 86%. In July, the Dow was down 37% from its high, the third greatest decline in its history (45.1% in 1973-74 and 89.4% in 1929-32).

Despite this gigantic collapse, the stock market is still overvalued. The market is still above its 1996 level, when Alan Greenspan warned of “irrational exuberance.”

The boom of the 1990s and the growing trade deficit was only made possible by a massive influx of $400 billion in foreign currency per year. The result was a ballooning current account deficit (the total of all deficits, trade and otherwise). This will surpass 5% of Gross Domestic Product in the next year, a point where traditionally it causes a collapse of a country’s currency. A sharp fall in the already overvalued dollar would wreck havoc on the world finance markets and the US economy.

Property values are also overvalued. According to Freddie Mac Corp., the average price of houses and other real estate rose a staggering 37% in the last five years, fueled by the explosion in mortgage refinancing and the booming stock market.

Stephen Roach, chief economist at major investment bank Morgan Stanley, now predicts that the US economy will fall back into a recession: “What is happening is not unusual. What is unusual is the context in which it is occurring, which is the context of a post-bubble economy.” “We’ve still got a couple of bubbles out there… a property bubble and a consumption bubble, and unfortunately I don’t think either of them will be spared.” (Washington Post, 8/6/02)

This US slow-down takes place against a backdrop of world economic weakness. Latin America’s economies are engulfed in a major crisis. The Bush Administration has been forced to reverse its policy and loan billions of dollars to Uruguay and Brazil in an attempt to prevent an Argentina-style collapse. The South east Asian economies are in stagnation, and the economies of Europe and Japan are declining again. Far from relying on any help from overseas economies, experts had seen the US economy as the only force capable of propping up the world economy. A double-dip recession, where the US economy falls back into a recession after a short recovery, is a very real prospect.

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