Ten
years since the crash
What now for the world economy?
All is not well with
capitalism. Economic jitters parallel political volatility. Stock market
highs in December turned to mass share sell-offs in February. Colossal
personal and governmental debt stalks the system, limiting the
capitalists’ room for manoeuvre. In reality, the global economy has not
fully recovered from the 2007/08 crash. JUDY BEISHON writes.
The year 2018 began with
capitalist economists applauding global synchronised growth and record
high stock markets, debating whether to call it a recovery, an expansion
or a boom. Racing beyond the level of real company health and profits,
stocks worldwide ended 2017 at an unprecedented ‘value’ of over $80
trillion – around $17 trillion more than their pre-2008 crisis peak.
Regarding worldwide output, not only did the IMF and other institutions
estimate its growth for 2017 at 3% or more, they declared the next two
years will be better still.
But when the economically
powerful met in Davos in January for their annual gathering, their
delight was combined with caution and unease. In particular, they were
worried about political and environmental issues that could impact the
economy, including trade protectionism, wars, refugees, inequality and
climate change-related extreme weather. The jitters were clear when
early in February bond and equity prices suddenly fell, and the
Financial Times felt compelled to advise against panic.
There is awareness that the
equities ‘bull run’ is unsustainable and a questioning of how solid and
lasting the growth really is. Colossal debt levels are a major fault
line: the combined global debt of companies, governments and households
rose from $142 trillion in 2007 to $233 trillion in 2017 – a massive
increase in absolute terms but also a 40% increase as a percentage of
world output.
The deep financial crisis of
ten years ago shook the capitalist elites to their core and was followed
by sluggish economies in subsequent years. Of the world’s largest
economy, the US, Martin Wolf wrote in the Financial Times in January:
"The economy is 17% smaller than it would have been if the 1968-2007
trend had continued. Since its recovery, in 2009, it has been on a far
slower trend. The same is true of labour productivity, whose growth
remains low". Capitalist economists have long been puzzling over the low
productivity growth in the economically developed countries and are
pointing out that it is slowing in the so-called emerging economies as
well, with an accompanied slowing of growth rates.
Reflecting the pervasive lack
of confidence in the recovery and its underlying weakness, many of the
massive stimulus measures introduced after the 2007-08 crisis remain in
place in some form or other. Interest rates remain extremely low and
quantitative easing (QE: asset purchases using digitally created money)
or other interventions are ongoing in many major economies. The Bank of
Japan – in the world’s third largest economy – continues to buy assets
of around $700 billion a year. The European Central Bank (ECB) is buying
assets at a rate of €30 billion a month with no end date yet set (down
from the previous €60 billion a month). ECB president Mario Draghi said
he sees "only very few chances that interest rates should be raised this
year". The Bank of England has not yet started selling its £435 billion
of post-crash asset purchases and the US Fed is only very slowly
reversing its stimulus programme that amounted to $4.5 trillion.
Those vast injections of
money, over $10 trillion in QE alone, along with zero or very low
interest rates, dragged economies out of recession and prevented
1930s-scale bankruptcies. They laid part of the basis for the present
global growth, which has led to a propaganda drive by governments
proclaiming that the deep recession following the credit crunch is
firmly in the past.
Against the background of
global growth, some of the eurozone countries that were worst-hit by the
recession – given bailouts and suffering extra economic damage through
enforced austerity – have managed to return to pre-crisis growth rates.
A welcome consequence has been a more favourable arena for the working
class and middle class to achieve gains. While economic growth
continues, workers will feel more encouraged to demand decent pay rises,
such as council workers in Scotland demanding a 6.5% pay rise, or
Germany’s IG Metal workers who have asked for 6%.
Low investment
The stimulus and bailout
packages have been a bonanza for the wealthiest, having increased the
value of their main financial assets whether held as government bonds,
corporate debt or shares. At the same time, they preside over a crisis
of low productive investment and productivity. "Throughout the G7", the
largest seven ‘advanced’ economies, "net investment rates are lower than
before the financial crisis; and labour productivity is below its
average between 1995 and 2007", wrote Wolf. (Financial Times, 5 December
2017)
Instead of investment to
advance society, the ‘captains of industry’ have gorged themselves on
obscene pay levels, stock options and dividends. These colossal gains
have been partly financed by reducing the share of total wealth produced
that goes to their workforces – by grinding workers’ conditions and
wellbeing further into the ground. Moving production, call centres, etc,
to lower wage countries or using low-paid domestic or immigrant
workforces has boosted profits, as has the use of new technology in some
sectors, which under capitalism is not used to improve the living
standards of the majority.
The enormous gains of those
at the top have also come from ‘financial engineering’. This has
included companies buying their own shares on a vast scale, often with
money borrowed at low interest rates. This has become a major way of
boosting the stock holdings of company executives and shareholder
dividends. Companies in the US S&P 500 share index have spent $1.1
trillion on buying back shares over the past two years alone. The
buybacks reduce the number of available shares and so increase the
‘earnings per share’ that the company can report, and the ‘value’ of the
remaining shares. Large US companies have spent more on buybacks than on
dividends in 13 of the last 14 years. Money has also been flowing
copiously into private equity takeovers, often in order to asset strip
the companies being swallowed up.
In addition, the finance
institutions continue with a staggering amount of speculation – gambling
unimaginable sums on the currency markets, stock markets and elsewhere.
Cryptocurrencies like Bitcoin have become a new tool for speculation and
hiding money but, although they are now ‘worth’ more than $700 billion,
they are not yet embedded enough in mainstream channels for their
volatility to upset the world economy. Moreover, there are calls for
them to be regulated, due to concern over the added instability they can
bring if their use continues to rise.
The short-selling of shares
is another means of speculation, in the news recently because Carillion
– whose collapse jeopardised the livelihoods and pensions of tens of
thousands of workers – had repeatedly been hit by it. Expecting its
shares to fall in value, many were borrowed so they could be sold and
then bought back at a lower price, before being returned to the original
owner.
Rising inequality
When firms like that go bust,
most of the rich shareholders and executive officers are likely to have
salted away enough wealth to still live in luxury. Not so their workers,
the foundation of their wealth, who have had their living standards
squeezed by low pay and austerity. Crocodile tears are shed and warnings
galore given by media commentators about the dangers of rising
inequality, as IMF chief Christine Lagarde did when she referred to
fears that growing inequality in many countries is leading to
"fractures".
The stark figures are ever
more shocking. Eight men own the same wealth as the 3.6 billion people
in the poorest half of humanity, said Oxfam a year ago. In the year
since then, the world’s richest 1% took 82% of all the wealth generated.
The bottom half on the planet had no increase.
Stagnating or falling living
standards is not confined to the former colonial countries. In the US,
41 million people live in poverty and the median weekly salary for
fulltime workers has barely changed in real (inflation adjusted) terms
since 1979. Reports indicate rising average wages now in the US, but
also that managerial-level employees are benefiting more from the
increases than the lower paid. In the UK, pay rises are less than the
inflation rate and households are still worse off in real terms than
they were in 2007. As well as pay generally being held down, a large
number of previously well-paid, secure jobs have been replaced by
low-paid, part-time or insecure jobs, as many millions of people bear
witness to. New technology is often used to reduce the overall amount
paid to workers via cutting jobs, hours or pay, and to put them under
greater surveillance.
These are all signs of the
drawn out impasse of capitalist economies and the short-term
profit-seeking of the ruling classes, as are the widespread attacks on
public services and welfare. This has gone so far in some countries
that, in regard to Britain, even Lagarde concluded: "There is not much
space for additional spending cuts". Instead, she recommended tax
increases and the scaling back or privatisation of the health service!
For the super wealthy, a reduced public sector serves two purposes.
Firstly, they see it as a means to pay less tax, not more. Secondly,
they see rich pickings through profiting out of the private provision of
vital services.
Capitalist economists have no
real idea of what the next period will bring and what policies to adopt.
There are no academic models that can map out the effects of the
prolonged low investment and productivity, or of withdrawing the vast
amounts of stimulus. Most realise that capitalist economies have up and
down cycles – as Karl Marx explained long ago – and this means they have
to withdraw the stimulus measures and increase interest rates (as some
central banks have started doing) in an attempt to ward off potentially
high inflation, and so they retain some tools to counter the next
recession. At the same time, these steps are brakes on economic growth,
and overall indebtedness is so massive that increasing the cost of
borrowing will progressively throw many companies and individuals into
difficulties or bankruptcy – whole countries even.
US tax cuts
As if the super-rich have not
pocketed enough, Donald Trump’s new corporate and individual tax cuts
are a further huge transfer of wealth to the US elite – including Trump.
He justified the cuts as providing money for economic investment and job
creation, including by enticing trillions of dollars held abroad into
the domestic economy.
While some temporary tax cuts
(and in some cases bonuses from employers) will benefit low and middle
income taxpayers, and the sheer amount of money involved can give some
spin-off stimulus, even right-wing economists have dismissed these as
the over-riding features. For example, Wolf wrote: "A more plausible
view is that it will mainly increase stock prices, wealth inequality and
the speed of the competitive race to the bottom on taxation of capital.
British experience on this is sobering. The slashing of UK corporate tax
rates to 19% has done little for investment or median real wages".
A ‘repatriation tax holiday’
in 2004 led to the transfer of over $300 billion of overseas-held money
to the US, but most of it was used for share buybacks and dividends. It
was "an ineffective means of increasing economic growth", according to
the US Congress research service, and many of the corporate
beneficiaries went on to axe jobs rather than create them. Following
Trump’s success in getting the tax cuts agreed, Wells Fargo, the
country’s third largest bank, announced $22.6 billion of share buybacks.
Other companies are set to carry out hundreds of billions of dollars
more. For the rich it is a double bonanza: tax cuts, then using them to
get even more money.
As they will add an estimated
$1.5 trillion to US government debt over the next decade – already over
$20 trillion – not every Republican supported the package. The US
deficit might go as high as 5.7% of GDP in 2019, with annual borrowing
over $1.1 trillion – unprecedented in what is hailed as an upswing. The
reality of this was alluded to by Lagarde at Davos. She spoke of the tax
cuts leading to possible "serious risks" and "an impact on financial
vulnerability". Higher government borrowing can lead to increased
interest rates, and a rising budget deficit will reduce the Fed’s
capacity to counter the next recession.

Protectionism
Another source of great
instability for global capitalism is rising tensions over trade barriers
and subsidies. In a world where economies are more interdependent than
ever, Trump’s ‘America first’ rhetoric has ratcheted up fear of a
possible spiral into an abyss of protectionist measures. It is not as if
reducing barriers was going smoothly before Trump’s tenure. Overall, the
picture has been one of retreats from globalisation, and the World Trade
Organisation (WTO) has not signed off a single multilateral trade deal
since its foundation in 1995.
The US commerce secretary
caused a small storm at Davos when he said that the US is already
engaged in a ‘trade war’. Trump quickly denied that and has so far taken
only quite limited protectionist measures. His recent imposition of
tariffs on imported washing machines and solar cells was not a
significant departure from measures taken by previous administrations,
and the threatened 292% tariffs on Bombardier aircraft were rejected by
a US adjudicating committee. Trump is renegotiating the North American
Free Trade Agreement (NAFTA) rather than pulling out of it and even
spoke of possibly re-joining the Trans-Pacific Partnership (TPP).
Much of the US and global
working class has rightly become hostile to capitalist trade deals and
rules – NAFTA, those of the EU, the planned TPP, the looser WTO, and
many others – because they are designed to meet the needs of big
business. Whole regions or work sectors that suffer largescale job
losses are viewed as necessary casualties by the treaty architects. It
is precisely this hostility that Trump leaned on to get elected but,
when it comes to the reality of US ‘isolationism’, he meets a number of
staying factors. When tariffs on steel and tyre imports into the US were
imposed by previous administrations, the raised cost of those goods led
to net job losses, the very outcome that Trump claims to be acting
against. And when other governments retaliate with their own trade
barriers, US exports suffer in turn.
However, Trump is not
entirely predictable and will not necessarily always act in the best
interests of US capitalism. He used right-wing populism to gain support
and might sometimes decide to stick to pledges in the face of corporate
opposition. But in the final analysis, neither protectionism nor reduced
barriers can solve the problems of the US and other capitalist powers in
competing for markets in a world with limited demand.
One irony is that the US
trade deficit actually grew by 12% in Trump’s first year, including to a
record level with China. Tensions over trade and other issues have been
increasing between the US and China, the manifestations of which include
military manoeuvres and territory claims in the South China Sea. In
2016, US exports amounted to only 12% of the global total, while China’s
were 17%, the highest share in the world. China’s $900 billion ‘Belt and
Road Initiative’ aims to expand this further, along land and sea
corridors to reach 60% of the world’s population.
However, that vast country’s
economic development has been propelled by a massive borrowing spree and
has deep-seated problems. Its official growth improved slightly year on
year to 6.9% in 2017, but this is significantly lower than its over-9%
average of the last 25 years. China has huge assets it can use to
intervene in its economy and most of its banking system is owned and
controlled by the state. But the sheer scale of the imbalances,
including an immense shadow banking sector and a time-bomb debt
mountain, are deep-seated, acute problems for the regime to deal with
while maintaining growth and trying to prevent social upheaval.
A further cause of great
tension between the world powers has been the trade-related issue of
currency values. Trump rushed to counter another of his representatives
at Davos, this time his treasury secretary Steve Mnuchin, who welcomed a
weaker dollar as being good for US trade. The US dollar has fallen over
14% against the euro since Trump took office. That helps US exports but,
fearing a new round of competitive currency devaluations on top of those
resulting from QE, the world’s leading economies had agreed last October
not to encourage their currencies to fall.
Can the crash be repeated?
The cycles of capitalist
economies are as inevitable today as when Marx analysed them in the 19th
century; the basis of the system has not changed. The next recession
will come, with the only question being how deep it could be. Many
capitalist economists chorus that 2007-08 will not be repeated because
governments have forced changes on financial institutions – for
instance, banks must hold more capital. "But capital still flows freely
around the world; current account imbalances between countries are as
enormous as ever; financial derivatives remain both flummoxing and
dangerous", pointed out Sky’s economics editor, Ed Conway. (Times, 11
August 2017)
The 2010 US Dodd-Frank
proposals were touted as helping to ward off a new crisis, but no such
limited measures could do so and they have not even all been
implemented. The capitalist market system is by its very nature profit
driven and largely unplanned, with no amount of regulation being able to
eliminate crises.
All the fundamental causes
remain. The present recovery is based on new bubbles and debts. It is
not just shares that are hugely overvalued but bonds as well. Guardian
columnist Larry Elliot’s verdict is: "Deep structural problems –
over-reliance on debt to support consumption, a lost decade of
productivity growth, growing income inequality – have not gone away and
are merely being disguised by a strong cyclical upturn". (8 January
2018)
Apart from the ongoing
economic weaknesses that date from before 2007 and the many potential
political sources of instability, there are new financial sources of
instability as well. Not least among them are the unpredictable
consequences of withdrawing the stimulus measures. The 2007 crash was
triggered by the US subprime mortgage market and since then there has
been a general shift from bank lending to corporate bonds. This
introduces different crisis points when interest rates rise. In any
case, there are still plenty of bad debts left in the banks – for
example, eurozone banks have almost €800 billion in bad loans, much of
it held by Italian banks.
No future downturn will be an
exact repetition of a previous one and it is impossible to predict the
specific triggers, timing and depth. But all the facts indicate that a
crisis as deep or deeper than 2007-08 can happen. What an indictment of
capitalism.
Stagnation and crises
An equal indictment is the
lack of any prospect of restoring healthy growth. Instead, humanity
faces fragile economic growth or stagnation interspersed with repeated
crises. The capitalist powers will have blunter tools to counter the
next major crisis. Given the weakness of economies they are unlikely to
be able to return interest rates to very high levels beforehand and then
be in a position to lower them significantly to provide a big stimulus.
They can resort to injections of liquidity but this would raise enormous
debt levels even higher, storing up yet more imbalances and instability.
Furthermore, the post-2007
cooperation between the world powers in pumping liquidity into the
financial system could be less forthcoming next time, as divisions and
tensions between them are growing. Their lack of solutions stems from
the long-term crisis of a system that can no longer carry out its
original historic mission of developing the productive forces. Unable to
end unemployment, poverty, war and pollution, the capitalist classes
focus parasitically on short-term gain rather than long-term objectives.
Their system is based on
production for profit and not need. It comes up against inbuilt
contradictions: limits on the buying power of the exploited majority; a
general underlying tendency, across cycles, of the rate of profit to
fall due to mechanisation and automation; and the counter-pressures
between globalisation and nation states.
The limits to buying power
are illustrated clearly by the experience of Japan, which has been
trying for three decades to increase domestic demand for goods. Prime
minister Shinzo Abe has even appealed to company bosses to increase
wages by 3% this spring, to raise demand and stave off deflation.
However, it would be hard to find bosses who are willing to give rises
for the sake of capitalism’s health. They have to be fought for by
determined trade union action.
Of course, the ten years
since the crash have been much more than an economic story. Commenting
on the rise of right-wing populism, Wolf glumly wrote: "Soaring
inequality might slay democracy… in the end". (Financial Times, 19
December 2017) No, the much greater trajectory is towards the slaying of
austerity and inequality. The decade has seen significant support for
politicians advocating this: Bernie Sanders becoming the most popular
politician in the US, Jeremy Corbyn increasing the Labour Party’s vote
in the UK, Syriza (before its betrayal) receiving 36% of a Greek general
election vote, the emergence of Podemos across Spain, Jean-Luc Mélenchon
receiving seven million votes in France, among others. The Brexit vote
and Trump’s election were, fundamentally, expressions of outrage against
wealth polarisation and the then failure of anti-austerity, left forces
to present a real alternative.
These developments and many
more have been political follow-ons from the 2007-08 crash. Then there
was a certain waiting among working-class and middle-class people for
the tide to turn and for lost living standards to be recovered. As
realisation grows that this is not happening for many, and that new
generations no longer face a better future than previous ones, interest
will grow in socialist ideas as the only alternative. Young people in
the US lead the way. A poll there last November showed more millennials
supporting socialism than capitalism. As new mass socialist parties
based on the working class and trade unions come to be built, they will
be enormously attractive if they boldly pose programmes that can sweep
away the rotten-to-the-core capitalist system.