Robin Clapp, Socialist Party national committee
2018 marked ten years since the collapse of Lehman Brothers bank which plunged the world economy into the deepest economic recession since the 1930s. The financial virus spread quickly, causing production and trade to seize up. Only swift coordinated action by world capitalists and political leaders averted a 1930s-style depression.
The triggers for the crisis included excessive state, corporate and household debt levels, reckless speculation in US sub-prime mortgages and a collapse in the largely unregulated international derivatives market, described by economists as financial ‘weapons of mass destruction’.
Panic spread across borders as European banks ran out of dollars needed to repay their dollar-denominated borrowing, prompting the US Federal Reserve to inject $11 trillion of liquidity to keep the system afloat. However, even this sum was dwarfed by China’s simultaneous stimulus package.
Last month at the annual get-together of billionaires in Davos, little optimism was visible, as a whole array of geopolitical, economic and social problems rose up like spectres before them.
A potent symbol of the growing fracturing of the capitalist world order was the absence of Donald Trump, French president Emmanuel Macron and Theresa May, all grounded at home to firefight the explosive issues of the US shutdown, the ‘gilets jaunes’ (yellow vests) protest movement, and Brexit respectively.
Davos laid bare the concerns of the world’s rulers, forced to acknowledge clear signs of a slowing world economy, a dangerous ramping up of trade battles between the US and China, the lowest Chinese growth rate in almost 30 years, a simmering developing world debt crisis, recession in Italy and the possibility of a no-deal Brexit that will have damaging and uncertain international impacts.
The total cost across the west of recapitalising broken banks and underwriting their debts exceeded $14 trillion. By slashing interest rates to historical lows – and creating ‘quantitative easing’ which allowed central banks to purchase securities from the market in order to increase the money supply – a full-blown collapse of the economic system was narrowly prevented.
These emergency measures have not created a sustainable recovery however. Instead they have assisted in inflating booming asset prices and in many countries consumer debt has soared back to pre-2008 levels. The real causes of the last crash have been ignored. The total value of global debt in both the public and private sectors has now reached an all-time high of $182 trillion.
Twice last year there were panics on Wall Street, as fears of ebbing growth and the impact of tighter US monetary policy took hold. In February, $4 trillion was wiped from the world’s stock markets in just two days. Later the rebound in the US was spectacular, yet between October 2018 and January 2019, the falls have recommenced with 20% of share market ‘value’ evaporating.
Despite assurances from big banks that they have cleaned up their acts, unnerving parallels lurk. The largest world banks have become bigger with the percentage of assets held by the big five increasing, creating fears that they remain too important to be allowed to fail in another severe downturn.
In February last year, US hedge fund manager Chris Cole, took a break from his job of making millions out of financial hedging, to comment cynically: “The entire global system is an Ouroborus – a snake eating its own tail. We are going to have a full-blown financial crisis on the same level as the last one, if not worse.”
One sign of the depleted credit quality of international markets is the deterioration globally in median bond ratings. Since 1980 they have dropped from ‘A’ to ‘BBB’, just one notch above junk status.
Trump’s presidency has added a dangerous new unpredictability to an already volatile situation. Trade tensions between the US and China remain unresolved and may worsen in March. He has railed against China with allegations of cyber-espionage, accusing Beijing of US property rights theft.
Although the US’s economic clashes with Mexico and Canada over the North America Free Trade Agreement (NAFTA) have receded for now, the EU was hit with tariffs of 25% on imported steel and 10% on aluminium last March, and retaliated with counter-tariffs in June.
These naked protectionist measures further complicate already-strained inter-imperialist geopolitical relations. Tariffs push up the cost of imports, add to business costs and eat into profits. Reduction in global growth has a knock-on effect on US exports.
Trump thunders against perceived anti-US bias in the World Trade Organisation (WTO), created 20 years ago when confident capitalists believed globalisation was irreversible. In an interview with Bloomberg in September he threatened: “If they don’t shape up, I would withdraw from the WTO.”
Today’s international trade tensions underline a shift that has been developing since 2008 and is fanned by right-wing populist politicians who demagogically attack globalisation and its institutions, including the EU, demanding a return to protecting ‘national interests’.
In its 24 January edition, the Economist refers to this era of partial retreat into protectionism as one of ‘slobalisation’, noting that the global value of cross-border investment by multinational companies fell by about 20% in 2018 alone.
A handbrake is being applied to world trade, which coupled with the current US backlash against international agreements, further undermines prospects for a coordinated response to any future economic crisis.
Indicative of growing uncertainties is the barely concealed rift between Trump and the US central bank, over the issue of interest rates and the sustainability of the recovery.
The US economy appears robust, growing by 4.1% in the last quarter. Yet average growth rate in the current expansion phase is 2.2%, paltry next to the 4.9% a year on average during the 1960s, or even the 3.6% achieved in the 1990s. This recovery is the first business cycle since 1945 in which there has not been a single year of growth above 3%.
Since 2014, the dollar has risen by nearly 25%, buoyed by a stronger domestic performance and rising interest rates. This has severely damaged developing market economies, which have seen dollars leaving their shores to chase higher US interest rates. Turkey and Argentina have already been prominent casualties of this process.
Trump has slashed corporate taxation from 35% to 21%. Indicating their lack of confidence in the long-term profitability of manufacturing investment however, many big US companies have used these windfalls to buy back their own shares and thus sit on huge cash piles.
As the Fed reverses the bond-buying quantitative easing (QE) programme, the US now faces quantitative tightening (QT). While QE helped to sustain the boom in asset prices, shares and property, QT will do the opposite.
Some US financial indicators are beginning to flash amber and many economists now believe a big market correction is lurking. This may originate in the financial sector, perhaps this time triggered by distress in the ‘exchange traded fund’ market, financial products that offer risk diversification.
In trading houses governed by algorithms that can move the US treasury bond market 10% in ten minutes, these instruments remain untested and susceptible to the effects of large-scale panic selling.
Trump believes he can win another term on his record of presiding over a strong economy. However, he may well face the prospect of fighting for re-election during a recession.
Tech giant Apple’s profit warning last month was a harbinger of things to come. When US Treasury secretary Steve Mnuchin suddenly stated in December that banks have “ample liquidity”, markets responded with palpable fear.
China’s slowdown also creates new tensions. It produces 16% of global GDP (total output) today, compared to 6% in 2008, but in the same period has seen its debt balloon from 150% of GDP to 300%.
US tariffs have hit the Chinese economy hard and an additional $300 billion is threatened in March unless Beijing concedes further ground. China is acutely vulnerable to a full-scale trade war.
Social tensions are rising, with over 1,700 industrial strikes or protests in 2018, the vast majority of which are linked to lay-offs from debt-ridden enterprises.
While it is not possible to be precise about either the immediate causes or the timescale for the coming recession, nor even its severity, it is apparent that a swift and committed response by capitalist governments to fighting its impacts will be more difficult to achieve this time, given the increasingly fragmented capitalist world.
There may be a stock market crash, higher interest rates may ignite debt crises in over-extended developing countries, banking collapses may cause a financial meltdown or there can be an oil shock arising from political upheaval through US meddling in Iran.
Having reduced interest rates to historical lows after 2008 and loaded up the world economy with QE debt, the depleted stock of financial firepower in finance ministries and central banks makes a future downturn or crash a potentially more fraught affair.
Compounding all capitalism’s pre-existing structural weaknesses is the shocking report from the UN’s Intergovernmental Panel on Climate Change which warns the world has only 12 years to take the necessary steps to avert a global warming disaster.
The working class was largely stunned and ill-prepared to mount a fightback after 2008, deceived and abandoned by treacherous former social-democratic parties who had bought into the idea of the infallibility of the market. Betrayals in Greece and elsewhere have meant that capitalism has bailed itself out on our backs and through our wallets.
Next time will be different. Workers and youth, already becoming radicalised around the world, will fight back and forge new mass workers’ parties that will end the rule of capital, rather than submit to it.
The programme of Marxism will be taken up internationally, arming the new generation with the political weapons that can finally dispatch the dictatorship of the market into the dustbin for ever.