The end of Golden Eras

The new lease of life that world capitalism experienced after the collapse of the Stalinist states of Russia and Eastern Europe from the late 1980s has definitively run its course. Whatever the immediate perspectives are for the world economy, argues HANNAH SELL, there is no prospect of any new golden era of capitalist progress.

This March saw the second and third biggest bank collapses in US history, followed by the failure of the Swiss banking behemoth, Credit Suisse. A new worldwide financial crisis seemed to loom, and with it another Great Recession akin to 2007-08. No more banks have failed since, but that does not tell us much.

The events that set off the 2007-08 crisis began in the US subprime mortgage sector. In April 2007 the first major US subprime mortgage company was made bankrupt, yet in December 2007 the US stock markets were at an all-time high. In March 2008 the investment bank Bear Stearns folded, but it was not until September of that year that Lehman Brothers imploded, now remembered as the ‘shock event’ that triggered the Great Recession. So the cautious optimism of increasing numbers of capitalist commentators that we are not heading into a new recession, at least in the US, is certainly not justified merely by the booming major stock markets (with the exception of London) and the lack of any catastrophic financial events for a few months.

Previous assertions that stronger regulation of the banks post-2008 would prevent future financial crises are in tatters. In fact the ‘stress tests’ demanded by the Basel Regulatory Framework for banking do not even account for the possible consequences of higher interest rates. They also only require banks to be able to cope with maximum losses of 10% a day, whereas during the run on Silicon Valley Bank (SVB), digital banking meant depositors removed almost a quarter of the bank’s assets in just a few hours, while First Republic lost an incredible 90% of its uninsured deposits. Nor is it only banks which are at risk. During the fiasco of the Liz Truss premiership in Britain it was pension funds that were in danger, while US insurance companies are also on the danger list, holding about $2.25trn of assets deemed to be risky, almost double the level they held in 2008, and representing about a third of their assets. There are multiple possibilities for the inevitable next financial shock to hit the global economy.

That does not mean, however, that the Great Recession is going to be precisely replicated. On the contrary, the capitalists will face crises in the next period that are likely to be even more devastating for their system, both economically and politically. None of the factors which led to the 2007-08 recession have been overcome, while the ‘solutions’ that were adopted to ameliorate its effects will not be possible in the same way next time. More fundamentally, the factors which allowed the prolonged ‘great moderation’ period prior to 2007-08 have now definitely reached their limits. Probably future historians will look back and conclude that the 2007 crisis marked the end of that era, but it is only in the period opening now that the scale of change will become fully apparent.

The great moderation

The ‘great moderation’ is the name now used for the period from the early 1990s to the Great Recession when, after overcoming the 1987 financial crisis, the cyclical volatility of capitalism, at least in the advanced capitalist countries, appeared to have been minimised. The capitalists’ over-confidence was encapsulated in the ludicrous claim of New Labour chancellor Gordon Brown that his government had “overcome boom and bust”. The Socialist Party and the Committee for a Workers’ International (CWI) wrote extensive material throughout that period analysing the factors which created the great moderation but were also preparing a new phase of capitalist crisis. This was the era of ‘financialisation’, when the dominant sections of the capitalist classes of the major economies increasingly focused on getting greater profits through the buying and selling of existing assets on the financial markets rather than investing in the production of goods and services. Huge amounts of liquidity – ‘cheap money’, as it is now known – was invested in increasingly high-risk financial instruments while the working class and sections of the middle class became more and more reliant on debt to finance their lives. Gigantic financial bubbles developed, far removed from the underlying value of the real economy. It was the deflating of these bubbles, and the resulting seizing up of the whole financial system, that was the immediate cause of the Great Recession.

However, had the vast amounts of liquidity been a merely monetary phenomenon inflation would have accelerated long prior to the Great Recession. That it didn’t until recently reflected the deeper processes at work. This was the brief period, historically speaking, after the collapse of the Stalinist regimes in Russia and Eastern Europe. These brutal dictatorships bore no resemblance to genuine socialism, but they were based on planned economies – albeit grossly distorted – and acted as a counterweight to US imperialism. After their implosion US imperialism really was, for a short period, the sole ‘unipolar’ superpower.

In this period Western, particularly US, capitalism, restored profits by stepping up their offensive against the world’s working class, which had begun with the adoption of neo-liberal policies following the breakdown of the post-war upswing. Now they were able to go further because of the weakening of workers’ consciousness and organisation in the post-Stalinist period, combined with the 1.2 billion additional workers added to the world capitalist economy. When, for example, Chinese factories began on a large scale to act as assembly plants for Western capitalist companies, with workers paid a tiny proportion of the wages of workers in the US or Europe, it was a powerful means to increase profits and to drive down wages globally. When China entered the WTO, the average wage of a Chinese car worker was 59 US cents an hour, less than 3% of a US car workers wage. At the same time, the surpluses of the exporting countries, particularly China, underpinned the tide of liquidity. The Chinese state recycled parts of its trade surpluses, using its foreign exchange reserves to buy US government bonds (ie debt) on a vast scale in order to help to sustain the US economy and the ability of US workers to buy Chinese exports.

This was a period when the profits of Western capitalism were huge, but investment levels generally remained low. Since the end of the post-war upswing in the early 1970s the capitalists had found it increasingly difficult to find profitable fields of investment in production. Despite the growth of new products, in many sectors there was, and remains, an overcapacity in relation to money-backed demand. Billions of people lack basic necessities, but they also lack the purchasing power to buy them. This over-accumulation of capital led to lower levels of capital investment, notwithstanding the enormous growth of the IT sector over the last four decades. The annual growth of fixed capital stock (which takes account of the depreciation or obsolescence of worn out capital) in the United States fell from 4% in the 1960s to 3% in the 1990s and only 2% between 2000 and 2004. It has remained lower in the recent period: according to the World Bank it averaged under 2% from 2009-18. Instead the capitalists’ profits were increasingly gambled on the financial markets. At the same time, the driving down of wages further undermined the market for capitalist goods and services, aggravating the underlying problems, even though that was temporarily and partially disguised by the growth of consumer credit (otherwise known as debt) in the Western capitalist countries.

Re-inflating the bubbles

When the inevitable crisis hit in 2007, the imperialist powers, under the leadership of the US, belatedly cooperated in order to try and minimise the political and economic consequences. They did this by re-inflating the bubbles. Effectively the US acted as the world’s banker of last resort, which enabled the Chinese economy to continue growing, and limited the depth of the recession globally. The US central bank, the Fed, provided $10trn to foreign central banks through currency swaps on top of $5 trillion in liquidity and loan guarantees to non-US banks. This was followed by an international programme of Quantitative Easing (QE), of central banks creating money by purchasing financial assets. The Fed quintupled its balance sheet of US government debt and mortgage securities from 2008 to 2015 (to $4.5trn). The Bank of Japan brought up 40% of Japanese government bonds, while the Bank of England’s £375bn QE purchases by 2013 saw it end up holding 26% of total UK government debt. Historically low interest rates and large-scale QE kept the punch bowl full and the party going.

In addition the Chinese regime also carried out a massive investment stimulus, far greater than other countries, of approximately 12.5% of GDP. The Chinese state’s control of its capital account enabled it to protect its currency against the dollar – avoiding an appreciation by buying dollar-denominated securities to peg the yuan to the dollar – and so build up its current account surplus at US capitalism’s expense.

While the living standards of the working class continued to suffer as a result of the Great Recession, the financial market bubbles soared again. According to the McKinsey Consultancy, for every $1 of global investment made since 2000, $1.90 of debt has been added. During the 2020 and 2021 pandemic period this accelerated to $3.40 for every $1 in net investment. This has raised the putative value of all global assets, relative to GDP, from about 470% of GDP in 2000, to more than 600% today. Real estate and equity markets have grown faster than the real economy by an incredible $160trn. Never before has the gap between the real economy and the financial bubbles been so big.

Low interest rates and easy borrowing conditions created fat profits for shareholders and allowed the continuation of zombie companies, only able to pay back the interest on their debts, even with rates at rock bottom levels. In both Britain and the US the percentage of such companies was around 20% when the pandemic began. Personal debt also grew again, exceeding even the records set before the Great Recession. Then, during the pandemic, the state debts of the advanced economies also rocketed as huge stimulus packages countered the consequences of lockdowns. As a result in 2022 the combined debts of corporations, states and individuals were equal to more than three-and-a-half times global GDP.

The holders of these gargantuan debts now, however, face a world where the era of ‘cheap money’ is definitively over. Inflation is back! While individual countries had suffered bouts of inflation in previous years, now it has spread to the advanced capitalist countries. In response, interest rates are up. According to the latest Bank of International Settlements (BIS) report, almost 95% of central banks hiked their policy rates between early 2021 and mid-2023. Historically this share has rarely exceeded 50%, surpassing 80% only during the oil shocks of the 1970s. At the same time, the major economies’ central banks started to gradually shrink their balance sheets, with the exception of Japan. Quantitative easing has turned into quantitative tightening.

This is putting an enormous strain on every worker with a mortgage or credit card, and sections of the middle class, and beyond that on the whole world financial system. As the BIS 2023 report puts it, capitalism globally faces a combination of risks that is “rather unique by post-World War II standards. It is the first time that, across much of the world, a surge in inflation has coexisted with widespread financial vulnerabilities. The longer the inflation persists, the stronger and longer the required policy tightening, and hence the bigger the financial stability risks”.

The central banks are walking a tightrope, with little room for manoeuvre. The destabilising consequences of the surge in inflation mean they are compelled to try and drive it down by raising interest rates. Yet the bank runs earlier in the year drove home that too precipitate action could trigger a serious financial shock leading to a deepening economic crisis. When SVB collapsed – with investors withdrawing their funds on mass, panicking as rising interest rates led to a fall in the value of the government bonds held by the bank – the US Fed had no choice but to step in and act as lender of last resort for the whole US banking system and to pause quantitative tightening. A wider financial crisis could force them to take even bigger measures despite the difficulties of doing so, not least the explosive political consequences of bailing out Wall Street while leaving workers to suffer.

Why inflation now?

While there is debate among different sections of the capitalists about the reasons for, and the likely longevity of, the current bout of inflation, most broadly agree on the immediate factors that triggered it developing in the way, and at the time, it did. One was the consequences of the pandemic stimulus packages. In the US in 2020, for example, the Federal Reserve pumped more than $3trn into the economy. One fifth of all the dollars in existence, physically and electronically, were created that year. Not only was this an unprecedentedly large stimulus package, it was of a different character to the many rounds of QE, which in the main went to the super rich. The Bank of England, for example, estimated in 2012 that its QE up until then had ended in the hands of only the top 5% of the population.

The pandemic stimulus packages, which were emergency measures to prevent the catastrophe for capitalism which the lockdowns would otherwise have led to, also transferred huge sums to the capitalists, not least the pharmaceutical industry. However, in addition, the UK government’s furlough scheme during the pandemic, for example, paid 80% of the wages of over ten million workers. While a 20% wage cut was a real hardship for those on furlough, they were nonetheless being paid 80% of their wages for staying at home rather than going to work and producing goods and services. With society shutdown and no possibility of spending on normal leisure activities, many in the middle class and better off sections of the working class accrued some savings. Unlike the top 5%, who are more likely to keep adding to their cash piles, once economies reopened and there was the possibility of spending, those with savings did so. This was a factor in the short-term surge in inflation in many countries, which was further fuelled while supply chains remained disrupted after the pandemic.

The eruption of the Ukraine war, in addition to the untold human misery it has unleashed, has of course also massively exacerbated the supply chain problems, particularly when it comes to energy and food. And then of course, as even capitalist institutions like the IMF have had to acknowledge, major corporations inevitably took advantage of the situation to further increase their profits by hiking-up prices. Commenting on the fact that it is not wages that have driven up inflation, the Director of the IMF’s Research Department, when introducing its April 2023 World Economic Outlook report dryly remarked that corporate profits “have surged in recent years – this is the flip side of steeply higher prices but only modestly higher wages – and should be able to absorb rising labour costs on average”. Unsurprisingly he did not add that the capitalists will only give up even a fraction of their fat profits if they are forced to by workers’ collective action.

While all these factors explain the short-term surge in inflation, they do not fully explain why it has persisted, to the surprise of most central bankers. That is related to the nature of the capitalist system and its increasingly chaotic, multipolar character today or, to put it another way, the coming to an end of the exceptional period – based on US supremacy and cheap commodity production in China – which made ‘cheap money’ possible. The period of increased global integration came to an end with the Great Recession. Between 1990 and 2008 global trade as a share of GDP rose from 39% to 61% but fell after the 2007-08 crash and in 2019 when the pandemic hit was still below the 2008 peak.

Even at ‘peak globalisation’ the nation state remained the economic and political basis upon which capitalism is organised, alongside private ownership of the commanding sectors of the economy. However, a dominant global power can ‘call the shots’, mediating between the different interests of smaller powers, looking after its own interests of course in the process. That was the role of US imperialism in the 1990s and up until, and during, the Great Recession; but we are now in a different world, where the US is still the strongest power but not all-powerful.

The fracturing US/China axis

The mutual co-dependence of the US and China remains the central axis of the world economy. Last year the US trade deficit with China reached a record $309bn. At the same time China still holds over a $1trn of the total $28trn of US government debt. However, it is clear to everyone that the two powers are increasingly in conflict. At root this is because China is no longer content to act as an assembly plant for the West but is an increasingly powerful rival, which US capitalism is desperately trying to prevent climbing up the value chain (ie developing advanced manufacturing). In 2001, when China joined the World Trade Organisation its economy at market exchange rates was barely one-tenth the size of the USA’s. Even at the start of the 2008 crisis it was only one-fifth of the size. Now it has grown to almost half.

The unique character of China, with the state playing a large role, enabled it to provide the infrastructure and workforce for a qualitatively larger, more advanced, ‘assembly plant’ than any other country could have provided. However, it has also enabled the regime to develop the Chinese economy beyond that. Xi’s 2015 ‘Made in China 2025’ policy is a determined effort by the Chinese state to develop ten strategic sectors from next generation IT to agricultural machinery. Progress has been made. In March this year China became the world’s biggest car exporter, overtaking Japan, and leads the world in electric vehicle manufacturing. At the same time China is no longer the cheap labour assembly plant it once was. Today a car worker in the US only earns three-and-a-half times as much as their Chinese equivalent, rather than hundreds of times more as was the case twenty years ago. Nonetheless, the Chinese domestic market remains limited. The consumption share of Chinese GDP was just 2% higher in 2019 than it was in 2007.

Therefore, the Trump-era tariffs, which are still in place, and now Biden’s Inflation Reduction Act (IRA) and the CHIPS and Science Act, limiting the export of high-tech microchips to China, are squeezing the Chinese economy. As yet China has not mastered the etching of precise patterns on silicon wafers in order to produce the most advanced microchips, and remains reliant on imported equipment. US imperialism’s actions are aggravating China’s internal contradictions which have only been disguised by the strong economic growth of recent decades and are now beginning to be more clearly revealed.

At the same time China is retaliating, enforcing export restrictions on critical minerals for semi-conductor production, prompting a scramble across Europe, the US and Japan to find alternative sources. More than 95% of rare earth materials or metals currently come from, or are processed in, China. Western capitalist powers, including the US, still have a high level of economic integration with China at this stage. Nonetheless, the direction of travel in this increasingly multi-polar world is for increased conflict between the major powers, above all between the US and China. While the fracturing of the US/China axis is the central tension, there are many others. The rise of China, and the relative weakening of the US, has had a generally destabilising effect. This is most brutally demonstrated by Putin’s invasion of Ukraine, which he would not have dared to carry out without being able to lean on China’s economic strength.

At the same time, the US’s increasing protectionist measures have inevitably been met with steps in the same direction by other trading blocs. Biden’s IRA, with the stated aim of encouraging investment in green technology in the United States by devoting $369bn in subsidies to US industry, is above all part of its trade war against China, and it is attempting to draw Western allies fully behind it. However, different economic pressures limit the degree of agreement on the approach to China. According to the Economist magazine, Germany, for example, is twice as reliant on China’s economy as the US. And in response to the IRA, both Japan and the EU announced plans to take similar measures to subsidise their own industries, although there are big differences between the nation states that make up the European Union trading bloc on what that actually means. Meanwhile, at the time of writing, the US and the EU are in conflict over steel exports, with the threat of 25% tariffs being imposed on EU steel imports to the US from the autumn. A decade ago about 9,000 protectionist measures were in place worldwide. Today there are around 35,000.

Even now, in this multi-polar world, in a new global financial crisis the major powers are likely to attempt co-ordination in order to try to limit the damage, as the central banks of the US, the EU and Japan did in response to the run on Credit Suisse. However, the scale of co-operation that took place in the aftermath of 2008, and in particular the role China played, cannot be repeated again as different national capitalist classes are compelled to defend their own increasingly conflicting interests. Whereas China played a role in limiting the depth of the Great Recession globally, the increased tensions between China and the US – and potentially also China’s own internal crises – are set to be central factors fuelling the next global downturn.

A new ‘green upswing’?

As the need to halt climate change becomes ever more urgent, is it possible that the Inflation Reduction Act and other similar measures could kickstart a new era of Western investment in manufacturing, leading to sustained growth? After all, the sums promised in the IRA are substantial. If fully implemented they would be on a scale similar to the Marshall Aid provided by US imperialism to Europe and Japan after the second world war. This does not mean that the IRA is comparable in other senses, however, or that it is going to lead to a new prolonged upswing like that which took place between 1950 and 1973.

The post-war upswing developed in a period in which US imperialism completely dominated the capitalist world. After 1945 it had two thirds of the world’s gold in Fort Knox, and was able to establish a framework for the capitalist world under US domination, including the international institutions of the IMF and the World Bank, plus the 1944 Bretton Woods Agreement which tied 44 capitalist currencies to the US dollar. At the same time, Stalinism emerged from the war strengthened through the extension in Eastern Europe of the planned economy, and the victory of the Chinese revolution in 1949. Fear of revolution – of the potential of capitalism being overthrown – was the central factor which drove US imperialism to use its dominance to provide financial aid for the rebuilding of war-ravaged Europe and Japan. It was these factors, along with the huge destruction of capital, which created the unique factors which led to the post-war upswing.

Today, in contrast, US imperialism has retreated into its ‘small yard, high fence’ protectionist strategy. Halting climate change would clearly only be possible on a global basis, and yet under twenty-first century capitalism it is a tool for protectionism. So while green subsidies are being promised to US industry, only $1bn has so far been agreed to the UN Green Climate Fund, far short of the $11.4bn per year pledged by Biden. And it is, of course, uncertain how much of the IRA measures will actually be implemented, particularly if the Republicans, backed by the fossil fuel sections of the capitalist class, win the presidential election next year. Even if the Democrats win a second term and continue on their current path, much of the funding will go to existing fossil fuel capitalists to manage their transition to hydrogen and carbon capture projects. The US working class will face major battles over cost cutting, safety and profiteering as the transition takes place.

The moves towards a green transition will not consist of the creation of additional fields of profitable investment for the capitalists without losses; rather it will be a battle between different sections of the capitalist class, with some gaining and others losing out. The degree to which capitalists invest in ‘Green Capex’ (green capital expenditure) will not depend on the needs of the planet, but their ability to make a profit. Some will undoubtedly see an opportunity. Nonetheless, the latest Goldman Sachs report on the issue estimates that, even with currently pledged government subsidies, investment will only reach $0.9trn of the $2.8trn a year of Green Capex needed for qualitative steps to a green transition.

At the same time, moves towards a green transition will mean disaster for some sections of the capitalist class. A report by the former Bank of England governor Mark Carney argued that the move to a net zero carbon global economy would need a huge “reallocation of capital”. He estimated that to reach even the 2015 Paris agreement’s upper target of a 2C temperature rise the ‘stranded assets’ of companies’ consequently unusable fossil fuel reserves and associated production patterns could total $20trn. In other words, the urgent question of attempting to combat climate change is an added destabilising factor for global and US capitalism, intensifying conflict between different sections of national capitalist classes, as well as between different nation states. Technological breakthroughs on the one side will be used to attack the other and to step up the fight for market dominance. Inevitably an element of this will be the US gaining at the expense of weaker powers.

Nor will the CHIPS act have any significant positive effect on the lives of US workers. Even the Semi-Conductor Industry Association, welcoming the Act, estimated that the current US-based workforce involved in designing and manufacturing semi-conductors is 277,000, just 0.17% of the total US workforce, and that it will increase by just 42,000 as a result of the Act. This highly-skilled, technology-intensive industry employs few workers directly. At the same time, the estimated increase in the costs of producing the most advanced chips in the US rather than in Taiwan is considerable. There is nothing in Biden’s programme which will overcome capitalism’s prolonged problems of overcapacity and the shrunken share of wages in national income further restricting the market for capitalism. Other new technology, including the further development of artificial intelligence (AI), will exacerbate rather than help overcome these problems on the basis of capitalism.

Time for socialism

The capitalist classes of the world have no way out of the intractable problems facing their system. The masses of the neo-colonial world face a nightmare, with new Sri Lankan-style debt crises on the cards. For the economically developed economies, new financial crises – against the background of already heavily indebted nation states that are increasingly at odds with each other – will prove much more difficult to contain than in the past. Even if they manage to limit the immediate effects via state intervention, the anger at bailing out the banks and financiers at the same time as savage cuts to public services and workers’ living standards will put the movements of 2008 and its aftermath into the shade.

It is not possible to predict when the inevitable next major crisis will erupt, nor whether it will be started by a financial or another geo-political event – like the Ukraine war – that would have significant detrimental effects on the world economy. Even prior to such developments, however, capitalism is increasingly atrophying worldwide. As Marx predicted, this system has reached an impasse within the framework of private ownership of the means of production and the nation state. Growth is slowing across all the major blocs in the world economy. New global economic crises are inevitable, and could develop very quickly. The IMF concludes that long-term growth predictions have permanently slowed and that “a fragmented world is unlikely to achieve progress for all or to allow us to tackle global challenges such as climate change or pandemic preparedness”. Their plea to the capitalists is that “we must avoid that path at all costs”, but that is clearly the path to disasters that the system is on.

Only planning, under the democratic control of the working class, will make it possible to develop production to a higher stage, organising it on a global basis to satisfy social needs and halt and reverse climate change, rather than being driven by the greed for profit. Replacing this rotten capitalist system with democratic socialist planning is the urgent task facing the working class worldwide.