by Kumar David-November 28, 2015
First it was called a sub-prime mortgage collapse, then a financial crisis, then a recession, but the third description great financial crisis (GFC) seems to have stuck. I called it the New Depression; New because it differs from the Great Depression of the 1930s and Depression because it would be prolonged; but the name did not catch on. The GFC has dragged on for seven years and shows no sign of ending, it spread in waves, starting in the US mortgage, banking and financial sectors in the autumn of 2008, crossing the Atlantic to Europe and peaking there in 2010 and now sweeping eastwards to China in 2015 where the downturn is more serious than people realise. The crisis swept east but the areas it ravaged on the way did not recover; the US struggles, raises its head and goes under again, Europe has been thrashing about on the floor for five years and even the future of the euro is questioned. The Japanese economy has been miserable for a quarter of a century; the sick man of Asia gasping in the intensive care unit. Global capitalism has changed qualitatively, old structures are gone, a New Normal has taken root. The state of global capitalism today and the metamorphosis of its nature is the subject of this essay
First a review of the prolonged and costly measures, adding to trillions of dollars, that have been tried and have failed to resuscitate the American, European and Japanese economies. It will be far too much to quote data for each case, so the summary below embraces all three in a composite fashion.
Survival of the losers: In theory, competition ensures that dud firms go to the wall and the best survive. Not so anymore, ‘too-big-to-fail’ theory, or political influence, loose money-policy and rock-bottom interest rates conspire to let dud firms and failed banks stagger on; a sick man on 10-year life support. The world’s government, corporate, financial and household debts add to $ 190 trillion; massive endemic indebtedness is a feature of the New Normal. Who is on the creditor side of all this debt? The world’s ultra rich ‘one percent’.
Quantitative Easing (QE): This is the injection of huge liquidity into the financial and corporate sectors in the hope of kick-starting growth. QE has been a failure everywhere notwithstanding $5 trillion injected in total including the initial bailout monies of about $2 trillion in 2008-9 in the US and UK. Industrial output and the real economy have refused to raise their heads; labour force participation (a better indicator than the unemployment rate) remains depressed. US GDP picks up in one quarter only to fall back in the next; there is no sustained picture. This is according to US, EU and Japanese official stats and IMF reports; I cannot reference them all or this piece will read like a research paper.
Where did all the QE money go? It was channelled by the Fed, ECB, BoJ and BoE into buying bank, mortgage-house and corporate debt (the last mainly in the early years – GE, GM and Chrysler bailouts in the US, Sharp in Japan). The largest portion was for buying bank bonds. Central Banks ‘buy’ pieces of paper called bonds from banks – that is lend at low interest in the expectation that these billions will be borrowed by investors and employed in economic activities. The endeavour has been unsuccessful since capitalists in production activity are reluctant to invest as they lack confidence and do not borrow. Banks are loath to lend sans watertight guarantees having burnt their fingers in the GFC.
Much is borrowed by speculators in asset and financial markets. Leverage is when you have $10 million and use it as a lever to persuade a bank to lend $90 million to buy shares hoping to sell at $110 million, in say a month. You return $90 million plus interest to the bank and hey presto keep nearly $20 million, a gain of almost 100% in a month. The risk is if price drops say to $90 million, you are wiped out, if it drops to $80 million you are $10 million in debt. Risk-taking is the less pernicious side; the real problem is equity price inflation. When speculators chase assets (shares, property) stock-markets and property prices rocket up, not because performance of companies or the economy have improved but in expectation that this grand ponzi mania will go on forever and prices rise without end. A similar but more complex phenomenon is at work in the case of financial sector asset bubbles.
In the worst case this ends in an almighty crash like the Tulip Mania of 1637, Mississippi Bubble 1720, Railway Mania 1840, the Roaring Twenties stock-market bubble that crashed in 1929, and most recently the 2008 GFC. An asset price bubble is now inflating the Dow, NASDAQ, Nikkei and FTSE alarmingly though there is no improvement in underlying companies; another algal bloom. But central banks, desperate to encourage growth, fear to end QE; they see no other way to promote economic activity despite repeated failure. Never ending QE seems a psychological aspect of the emerging New Normal.
Near-zero interest rates: This analysis of QE can be extended to other medications. Nominal interest rates of the dollar, euro, yen and sterling have been hovering just above zero for seven years. When the rate of inflation is less than the nominal interest rate, the real interest rate is negative; you are paying the bank for ‘the privilege’ of keeping your money in an account. Short-term (less than one year) interest rates are set by central banks - longer term 10 year bond yields depend on market activities and cannot be set. The Fed, EU and BoJ have held short-term rates below 1% since the GFC since they are terrified that even a quarter percent rise will crash the economy. Fed chair Janet Yellen is under such pressure that she faints in public!
What’s the logic of near-zero interest rates? The stated objective is to encourage investors to borrow, invest in production, create employment and boost the economy. The unsaid reason is that raising interest rates will crash the stock-market asset bubble. Speculators who borrow to lever asset purchases will find it difficult to service speculative loans if interest rates rise. A downward spiral commences if a few big investors sell since the whole speculative herd follows. The New Normal includes permanent loose money and perpetual low interest rates. Capitalism in the intensive care unit has grabbed Janet Yellen and governors of other great central banks firmly by the short and curlies.
Near-zero interest rates denote slack demand for capital, depressed rates of surplus-value (profit) and sagging reproduction/accumulation to use classical terms, or slow reinvestment and growth if you prefer. These are symptomatic of global capitalism in poor health (except a few industries like digital and mobile communication devices and social media). This long-term growth sag underlies the New Normal.
The devolution crisis: Too much inflation is bad; we don’t want prices rising crazily do we? But did you know that deflation is worse? The ideal seems to be an inflation rate of 2% to 4% per year. There are reasons why moderate inflation is essential for capitalism. Devolution is unfeasible; nobody producing for profit will do so if current production cost exceeds the selling price when going to market. But there is a theoretically more fundamental reason. In a growing economy (capitalism cannot survive without expanding) current investment is recouped in future output and the time the lag may be many years for large investments. Hence the money supply will have to grow faster than the rate at which output grows making modest inflation a necessity of healthy capitalism.
The problem is that since the start of the GFC inflation has been very low (UK, Germany, USA) or negative. All "great" economists pontificated that QE will spur inflation; too much money chasing the same or a falling quantity of goods. In defiance of this logic prices have hardly risen, or in Japan they have on the whole been falling. If inflation is too high central banks can raise interest rates to suck money back into quiescent banks accounts and discourage investors because they spend now but their output comes on stream only later. It is crazy to increase interest rates in a deflationary atmosphere; this is another reason for retaining abnormal near-zero interest rates indefinitely. But keeping near-zero or negative real interest rates in perpetuity is also crazy; again this is the New Normal.
The engorged dollar: Despite America’s monumental debt burden the US dollar is rising in value against all currencies; it is about 30% higher against the euro, sterling, yen and yuan from what it used to be two years ago. Prima facie this is absurd, loony; another aspect of the New Normal. The reason is that nobody has confidence in the global economy or in the other currencies, hence the flight to the currency of last resort, the dollar – economists are confused why gold and silver prices remain depressed. A consequence is that countries carrying dollar debts face unbearable repayment burdens if calculated in local currencies. The dollar is going up; if dollar interest rates also go up the burden worsens.
Resource and oil price plunge: The prices of primary materials (oil, copper, iron ore, bauxite etc) have fallen by alarming amounts creating crisis in raw materials exporting countries – Venezuela is nearly bankrupt; Brazil and Russia in deep trouble. The global economic slowdown underlies this trend but contraction of the Chinese economy drove the last nail into this coffin of depressed primary materials prices. Hardship in producing countries is another consequence of the New Normal.
The New Normal
Quantitative Easing and near-zero interest rates are an attempt to revive the economy by bastard-Keynesian methods – bastard because Keynes proposed massive public works and employment creation, today central banks pour money into banks and the capitalist "to spur growth". The experience of the last seven years is that this approach has, in the main, failed. The alternative ‘Austrian Method’ of austerity, welfare cuts and ‘labour market reforms’, results in misery, social upheaval, political revolt and a drift to the left (Greece, Portugal and Spain) or to the fascist right (France). Both approaches have come to a dead-end.
Figure 1 reproduces a diagram I sketched five years ago to depict what I thought would be the unfolding of the GFC. The two core concepts are that global capitalism will thrash and struggle at the bottom of a trough for a long time, and second there would be no sustained recovery unlike after business cycle type recessions we read about in textbooks. This I said was a whole different ball game, like the Great Depression, from ordinary recessions. I won’t tell you that you can appreciate this long term sequence by leafing through Volumes 2 & 3 of Kapital because you won’t do it. So let that pass.
I have updated figure 1 to figure 2. The crucial change is the New Normal; a new global economic order that has come to stay and won’t go away. The US for example is on a short upturn but the Wobble-U thesis argues that the asset bubble will burst in a year or two and a sizable downturn follow. The realisation is dawning that global capitalism will not recover in the sense of returning to the pre-2008 norm and certainly not to the heady years of post-WW2 boom. Economists have to overcome the habit of asking "When will this crisis end; when will things get back to normal"; the old-normal is kaput, the order will not return, many leading thinkers say capitalism as we have known it for three centuries is gone. Hmm!
