When future generations one day look back upon the turbulent first decades of the 21st century, they will certainly remember 2010 as the year that class politics burst back onto the scene. This year marked the dawn of the Age of Austerity, replete with xenophobic backlashes and violent street protests.

Yet the class politics of austerity is not something to be concerned about for reasons of inequality or social unrest alone. Severe public sector cuts pursued by fiscal fetishists in Europe and the U.S. are threatening to stall the very engine of the global recovery. By ripping the economic heart out of the lower and middle classes, austerity measures risk turning a protracted recession into another Great Depression, imperiling the very survival of global capitalism as we know it.

The Class Politics of Austerity

Now that the bankers’ bail-out packages have largely been transformed into Lamborghini’s and fancy cocktail parties, and now that the world’s various stimulus packages have all but evaporated without any job recovery to show for, who will foot the multi-billion dollar bill of all this upper class profligacy?

Basically, the average people will. Those who had their houses foreclosed upon or who lost their jobs in the recession, and who now have to forsake their social security benefits because the bankers are refusing to take a haircut. Or those who managed to cling on to their poorly paying jobs, but have to keep working until their 67th just because some speculator wants to buy another condo in Bermuda.

Or those who weren’t even born when Reagan and Thatcher began to push through their dogmatic creed of liberalization, privatization and deregulation — those who grew up as the Berlin Wall came down and everything seemed possible — but whose future aspirations have now been blocked by the tripling of university tuition fees in the UK, or by 40 percent youth unemployment in Spain.

In Greece, 2010 saw the doubling of unemployment and a near-tripling of suicide rates, with a fifth of all small businesses in the Athens region forced to close, and a third of the country — those living on less than 470 euros per month — now at risk of being thrown into abject poverty. In Ireland, thousands of abandoned horses roam the fields around Dublin, slowly starving to death in a brutal sign of the sudden destitution of the country’s once affluent middle class, and the repercussions of poverty for humans and animals alike. All of this to appease an elite club of multi-billionaire global investors.

To speak in Dickensian terms, these are hard times. The Scrooges and Mr Bounderby’s of this world are allowed to continue their greedy conceit unabated while the rest of us suffer the scourges of poverty and inequality. For all the talk of the ‘post-ideological era‘ in which we were supposed to live — that post-scarcity arena in which class politics had been relegated to the counter-cultural back burner; a mere relic of the ideological upheavals of the 20th century — the events of the past year demonstrated that the brutal extraction of surplus value from students, pensioners, workers and the unemployed is leading to a violent backlash both from the Right and from the Left.

The Great Backlash

After all, this was the year that (social) temperatures reached boiling point. Apart from the fact that 2010 saw the highest global average surface temperatures recorded since 1850 — causing unprecedented wildfires in Russia and catastrophic floods in Pakistan — the political climate also reached its nadir. Ever since 2007, commentators, especially those on the Left, had been wondering where the anger was. Well, here it is, and it’s unlikely to go away anytime soon.

The electoral successes of xenophobic populist parties like Geert Wilders’ Freedom Party in the Netherlands, neo-Nazis in Sweden, Flemish nationalists in Belgium, and the Tea Party in the United States are directly related to the vagaries of global capitalism. As Ian Buruma put it, the right-wing backlash is “part of a global wave of anger against political elites, who are blamed for all of the insecurities that come with global economics.” As such, it shows a haunting similarity to the rise of fascism in the first great capitalist crisis of the 1930s.

At the same time, the Left has been mobilized to a degree not seen since the late 1960s or ’70s. Greece witnessed the eruption of violent street clashes as the EU and IMF moved in to impose harsh austerity measures upon the country. Three people were killed as anarchists set a bank on fire, dozens were injured in skirmishes with police as petrol bombs and tear gas grenades rained down on the streets of Athens.

Several months later, violence erupted across Europe as various countries went on a general strike. Before long, even the traditionally ‘passive’ students in England found themselves at the barricades facing lines of riot police in a series of standoffs that saw the occupation of the Conservative Party headquarters, the destruction of a police van, the attempted storming of the Houses of Parliament, and the attack of the royal vehicle carrying a frightened Prince Charles, with students calling for the Prince’s head to be severed.

Rome also saw its most violent riots in decades as students, anarchists and communists took to the street to demonstrate against Berlusconi’s corporatist grip on the state and the perpetuation of austerity measures and university reforms. The rage is spreading, and the legitimation crisis of global capitalism is only going to deepen in 2011 as austerity measures aggravate inequality, insecurity and unemployment. The question is not so much if there will be renewed violence, but where and when it will take place.

A Crisis of Underconsumption

Next to the social and political upheavals that austerity will continue to feed into, 2011 will also see a profound deepening of the economic crisis. This is because massive public sector spending cuts will coincide with the exhaustion of the stimulus packages. As countries across Europe all feel compelled to rapidly get their short-term balance sheets in order, it will become impossible for any one country to export its way out of recession — demand everywhere will shrink, putting increased pressure on ailing national economies that never truly recovered from the initial shock of 2007-’09.

Essentially, what we are witnessing is a problem as old as capitalism itself. Karl Marx rightly observed that capitalism never solves its own crises; it merely moves them around. As David Harvey points out in his excellent new book — The Enigma of Capital and the Crises of Capitalism — austerity measures are merely a way of socializing the losses and privatizing the gains. While this temporarily fills the pockets of the rich, it will not solve the fundamental problem of capital accumulation, which is crucially blocked by a crisis of underconsumption.

To understand what is going on, we have to observe the current crisis in its proper historical context. For the past three decades, neoliberal policy prescriptions and the pressures of economic globalization have meant that real wages in the U.S. and Europe have remained stagnant. As the spending power of the lower and middle classes virtually evaporated over the course of a generation, the upper classes wallowed in unprecedented wealth.

By the late 1970s, the richest 1 percent of the U.S. population was earning 8 percent of total income. By 2008, their share had grown to 24 percent. In the 1980s, the average C.E.O. in the U.S. earned 42 times more than the average worker — by 2001, this was 531 times as much. From 1980 to 2005, over 80 percent of the income increase of U.S. families went to the richest 1 percent. Today, the U.S. is more unequal than ‘banana republics‘ like Nicaragua and Venezuela. Indeed, if the City of New York were a country, it would rank 13th worst on a list of 134 countries.

One may wonder how such shocking rates of inequality could be sustained for so long in the first place. Under normal conditions, as Marx observed, wage stagnation among the working classes would produce a crisis of underconsumption, where the capitalists — forced to reinvest surplus capital into the production process — would find themselves unable to find a market for their burgeoning output as a result of the continued surplus extraction from labor.

Over the past three decades, this problem has been addressed in a very straightforward manner: through cheap credit. Essentially, the vast increases in U.S. consumption levels have been financed by surplus countries like China, who kept buying up U.S. Treasury bonds as a way to safely reinvest their own capital surpluses. This allowed the Fed to pursue an expansionary monetary policy, with artificially low interest rates in turn feeding into the greatest real estate bubble in the history of capitalism.

At the same time, financial innovation on Wall Street and in the City of London — and the conscious decision on the part of the White House and 10 Downing Street to completely ignore this — allowed the financial sector to spread around the risk of this excessive debt-fueled consumption, obscuring the grave danger posed to the global economy.

Bizarrely enough, this combination of global imbalances, financial innovation and lack of oversight allowed the U.S. to temporarily obscure its underconsumption problem by ‘exporting’ it to China, where factory factory workers now toil for an abysmal $0.50 per hour to make the consumer items that Americans greedily buy up with the money they borrowed from the Chinese capitalists who exploited these Chinese workers in the first place. The Chinese capitalists were only too keen to keep reinvesting their dollars into the U.S., as this was the only thing that still sustained American demand for their products. But sooner or later, the bubble simply had to burst.

Economic Collapse?

With the financial crash of 2008, the debt-fueled consumption model abruptly came to an end. Today, despite the enormous financial sector bail-outs, banks are still refusing to lend to households and businesses. There is no trust, as everyone inside the financial sector knows that crucial assets, like houses in Spain, are still greatly overvalued.

To make matters worse, the financial sector as a whole is dangerously exposed to the unfolding sovereign debt crisis in Europe and the municipal debt crisis in the United States. No wonder gold is trading over $1.410 an ounce and oil is back at $90 a barrel. Investors everywhere are hedging for the deluge of default they know is coming.

There is little doubt that 2011 will see the Portugal and Spain, and possibly Belgium and even Italy, going the same way as Greece and Ireland. While the smaller countries can still be bailed out by the new EU financial stability fund, the collapse of Spain or Italy would put such stress on the Eurozone members as to call the very survival of the single currency — and with it the raison d’être of the European Union as a whole — into question. The looming default of Greece, Ireland and possibly even the UK would only further aggravate the situation. We stand, indeed, on the eve of a potentially disastrous global currency crisis.

At the same time, the United States is facing a major crisis of its own. Over 100 U.S. cities are now sitting on $2 trillion in debt, with the vast majority of them at grave risk of defaulting. The bankruptcy of a number of major states, including California — the 7th largest economy in the world — would spell not only a direct fiscal disaster for the federal government, but also a further aggravation of the underconsumption crisis, as crucial public services will forcibly be cut. This, in turn, may feed into rampant social unrest.

The bottom line is that the credit-fueled consumerist project that kept neoliberal capitalism alive and kicking over the past thirty years, is broken. And all the King’s horses and all the King’s men couldn’t put this model together again. The underconsumption crisis that has been brewing underneath the surface for three decades — and that was itself a direct consequence of the vast increases in inequality since the 1980s — is now bursting onto the scene in all its destructive glory.

In order for capitalism to survive, global demand will have to be restored. Governments, already forced into printing money to cover their soaring budget deficits, will no longer be able to carry this demand without raising taxes or exacerbating inflation by printing even more money. As a result, pressure to cut spending will increase even further, in turn exacerbating the shortage of demand. The world is about to spiral into the next Great Depression.

A New Configuration

Right now it seems that only emerging markets can carry the requisite demand to provide an engine for the global economy to restart. But this would mean raising Chinese wages — a proposition that will prove to be unacceptable to the Chinese state capitalists, as it would undercut their crucial competitive advantage (i.e., cheap labor) in the global economy. In light of all this, it is becoming ever clearer that we need to radically rethink the present configuration of the world economy. As long as this configuration remains capitalist in nature, the crisis will never be fully transcended; only further moved around.

What the exact nature of the system will turn out to be remains to be determined by the political battle that will be unleashed in 2011 and 2012. Free-market neoliberals will now have to vie with regulatory liberals, populist nationalists and anti-capitalist activists all at once. Only time can tell who will emerge victorious out of these ideological struggles. Still, as we enter 2011 in a cloud of political turmoil and a shroud of economic uncertainty, it is becoming ever clearer that the collapse of Western capitalism is no longer merely an abstraction. It has become an increasingly serious possibility.