It is sometimes hard to remember a time when the world economy was not meandering through a funk of stagnation or teetering on the cusp of some new disaster. Six years ago I wrote a piece for this magazine entitled “The Crisis: Over or Just Beginning?” Fortunately I erred on the side of “just beginning”, describing the much-hyped recovery with three words: weak, fragile and uncertain.
The weakness was a result of the failure of the crisis of 2008 to destroy or devalue sufficient unprofitable capital or deleverage enough debt to ensure a strong rebound in profitability. The fragility came from the bloated financial sector, which threatened to generalise any new sign of crisis. The uncertainty was a product of state interventions that helped put a floor under the crisis without resolving the problems capitalism had created for itself.
Other Marxists, including Michael Roberts, Andrew Kliman, Guglielmo Carchedi and the late Chris Harman, presented a similar picture. Of course, we did not get everything spot on. If Marxist political economy granted us perfect economic foresight, the revolutionary left would be far better funded than it is. However, the arguments have proved remarkably resilient compared to those of mainstream economists — and indeed many Marxists who rejected the kind of analyses we offered.
Consider the weakness of the recovery. As Roberts points out, the US economy looks very sick; its symptoms include “falling manufacturing output, weakening business sentiment and capital goods orders, and falling corporate profits”. The European Union still struggles to show any sign of vitality. The Japanese economy is shrinking. Weakness in the advanced economies was supposed to be counteracted by the strength of the big economies of the Global South, particularly China. As John McFarlane, chair of Barclays, recently put it, “The past years evidenced a two-tier world, with emerging markets and oil rich countries the darlings and the developed world still in recovery from the global financial crisis.”
In reality, not only did China fail to escape the crisis but it has now become a source of instability. China’s pre-crisis growth was based on intense exploitation, extraordinary levels of investment and production for export markets. As those markets began to dry up, the Chinese state responded by using credit to keep the investment frenzy going. The result was captured by the Financial Times’s Martin Wolf: “In response to the 2008 financial crisis, China promoted a huge rise in debt-fuelled investment to offset the weakening in external demand. But underlying growth in the economy was slowing. As a result, the ‘incremental capital output ratio’ — the amount of capital needed to generate additional income — has roughly doubled since the early 2000s… At the margin, much of this investment is likely to be lossmaking. If so, the debt associated with it will also be unsound.”
Karl Marx would call this a crisis of overaccumulation — too much investment chasing a limited pool of profit.
The Chinese slowdown has increased pressure on other economies such as Brazil that have, in recent years, reoriented their economies to supply the Chinese boom with raw materials. Compounding these problems is the decision of the Saudi government to undercut the shale oil and gas industry in the US through cheap oil. Initially this boosted energy-importing economies but now it is causing dislocation by damaging exporters such as Russia, Venezuela and Nigeria.
The second factor I identified, financial fragility, ensures that each new wave of panic gets transmitted globally and amplified. Witness the upheaval in stock markets the world over in recent months and, in particular, the rout of shares in European banks, which are caught between the impact of negative interest rates and uncertainty about the quality of the loans on their books. As Wolf puts it, “Banks…remain the weak link in the chain, fragile themselves and able to generate fragility around them.”
Then there is the third aspect of the ongoing crisis, the uncertainty of recovery. The state interventions that helped sustain the economy in the aftermath of the recession were not simply direct interventions to bail out failing firms. They also involved financial measures by central banks, such as quantitative easing and ultralow or negative interest rates.
These measures aimed to ensure a stream of lending to corporations, boosting production. But, in conditions of subdued profitability, this failed to transpire. Instead money was either squirrelled away by banks or streamed into financial investments, often high-yielding, risky investments and often in the Global South.
Now, with the US shutting off quantitative easing and starting to raise interest rates, these flows have gone into reverse. Even China, which for many years sucked in capital, is today seeing financial outflows, accounting for all but $59 billion of the $735 billion leaving emerging markets in 2015. A new global recession is not inevitable in 2016 but the fact that we can even contemplate one, at a time when capitalism has not yet shrugged off the damage from the previous one, is an indictment of a rotten system.
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