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. Originally published in Socialism Today, Issue 216 (March 2018), the political journal of the Socialist Party (sister party of Socialist Alternative in England and Wales).
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%.
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.
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.
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.