Is the world economy past the worst of the crisis? This is what the stock markets have been signalling these past few months, pushing share prices upwards.
At some stage, this crisis will definitely end. Capitalism has always moved in what Karl Marx called a “dysfunctional circuit”—a cycle of booms and slumps. He shows in Capital Volume III how the slump itself—through unemployment pressing down on wages and the destruction of unprofitable capital—helps to create the conditions for an economic revival.
So are we now reaching this point? I doubt it. There are two main reasons why the markets have bounced up.
The first is the long-term refinancing operation organised by Mario Draghi after he took over as president of the European Central Bank last November. This has pumped 1 trillion euro worth of cheap three-year loans into the European banking system, buying the eurozone a bit of time.
Secondly, the US economy, after a lengthy period of stagnation, has started to grow a bit faster.
In mid-March new claims for unemployment benefit fell to the lowest level since February 2008, at the start of the Great Recession.
But this upward trend is contradicted by what’s happening elsewhere in the world economy. China, for example, continues to slow down.
According to the latest Purchasing Managers’ Index, manufacturing output is shrinking, and Japanese exports to China dropped by 14 percent in February, mainly because of a fall in machinery deliveries.
The eurozone Purchasing Managers’ Index shows that manufacturing production in continental Europe has been shrinking since last autumn, with France and Germany bearing the brunt of the contraction.
Add to this the rising price of oil, largely occasioned by fears that a war between the West and Iran could disrupt supplies. Fatih Birol of the International Energy Agency warns that higher oil prices could “tip the global economy back into recession”.
But there is a more fundamental problem. The current crisis was precipitated by the bursting of the huge bubble of cheap credit that inflated in the middle of the last decade.
As a result, a variety of economic actors—individual households, private firms, states —are loaded down with debt. They are now “deleveraging”—ie trying to pay off this debt.
John Authers, the Financial Times’s senior investment columnist, cites a study that “shows that Swedish households cut their debt by 44 percent of gross domestic product in seven years during their 1990s credit crisis.
US households have paid down 15 percent of GDP; the figures for the UK and Spain are 10 percent and 6 percent respectively. The process is barely under way.”
The fact that the US is further advanced with deleveraging may help to explain why its economy is doing better than Britain’s or Spain’s. But there’s a further problem with deleveraging. To pay off debt, you have to save rather than spend. This reduces effective demand for goods and services.
Meanwhile, the crisis itself has increased government borrowing. In part this is because states are taking over private debts.
Economic commentators as different as Costas Lapavitsas and Nouriel Roubini have argued that this is what has happened with the latest “rescue” of Greece, as the European Union (EU) and the International Monetary Fund replace private creditors.
If governments then try to reduce their debt burdens by cutting public spending, this further reduces effective demand.
Economic output shrinks, making it harder to meet the debt targets imposed on the weaker eurozone economies. All this has happened on a catastrophic scale in Greece, which is experiencing a slump comparable to the Great Depression of the 1930s.
But there are fears that something similar is beginning to happen in Spain, a much bigger economy. Total debt has actually risen since the start of the crisis. Cutting the budget deficit to 5.3 percent this year, as the EU demands, has been described by two Spanish economists as “mission impossible”. No, the crisis isn’t over.