The current global economic upheaval — already the worst since the Great Depression — is emerging as a clash essentially between two forces. One is the Covid-19 pandemic, which is strictly exogenous to the economy.1 But it is not exogenous to how capitalism has developed the productive forces — the decades-long disregard for how agribusiness has been managed, the persistent neoliberal process of destroying public health, disdain for epidemiological research, and the deaf ears turned to warnings about the potential for human epidemics of new coronaviruses.2 The second force is the weakness remaining from the characteristics of the 2008–9 post-crisis recovery. This weakness has been expressed for more than 10 years in two groups of complementary factors: (1) the slow growth of world trade — a trend that predates Trump’s protectionist measures — as well as slow growth in investment in fixed capital and labor productivity, despite the impressive development of new technologies; and (2) the blazing growth of both private and public debt.
The pandemic, for its part, acts as a sort of paralytic agent spreading through the channels established by globalization itself, almost as some sort of “fateful revenge.” The lack of preparedness required bringing the economy to a halt — and in particular the international flow of people and products — for fear that health systems would collapse, provoking a humanitarian catastrophe and the loss of control by governments. The paralysis is shaking the economies as a whole but is hitting the most internationalized sectors particularly hard: global value chains, where electronics, automotive, and chemical companies are particularly prominent, and service sectors such as tourism, aviation, hotels, and restaurants. The quasi-freezing of the economy has, of course, affected the oil sector, already a victim of sharp international competition, especially among Saudi Arabia, Russia, and the United States.
This illustrates part of the present dynamic, but it is, in a sense, already in the past. Especially interesting is how these critical points are intertwined and play on the weaknesses bequeathed by that second force — the conditions of the post-Lehman era.3 By getting to the critical core of the crisis, as well as by making the major questions and contradictions that color the future as explicit as possible, we can address how the crisis might develop.
Corporate Debt: The Weak Link
There is a jarring coincidence between those sectors of the economy hit hardest by the pandemic shock and nonfinancial corporate debt.4 As an antecedent, it should be noted that unlike the 2008–9 crisis, most private sector debt is at present not concentrated in real estate and mortgage loans but in loans to the corporate sector. According to the Financial Times, OECD data indicates that companies accumulated cheap debt over an entire decade, raising the global stock of nonfinancial corporate bonds to a historic high of $13.5 trillion at the end of 2019 — that is, twice the amount corresponding to December 2008 in real terms. At the same time, according to U.S. Federal Reserve estimates, corporate debt in the United States increased from $3.3 trillion before the 2008–9 crisis to $6.5 trillion in 2019. China and the United States, by far, lead the global ranking of the 10 countries with the largest nonfinancial corporate debt.
The Financial Times attributes this phenomenon to the fact that once central banks dropped interest rates after the Lehman bankruptcy, the yields on the safest government bonds collapsed and investors found loans to riskier companies were a way to make profits. The Financial Times also divides this universe of debtors into intermediate-level borrowers that could, until a few months ago, continue to borrow and repay debts, and so-called zombie borrowers — one of every six U.S. companies — that are not making sufficient profits to cover interest payments but that could continue to postpone the effects of the crisis as long as debt markets allow them to refinance. Companies such as Alphabet, Apple, Facebook, and Microsoft had a total of $328 billion in cash at the end of 2019. This suggests that this type of company can actually lend to other sectors where much of the debt is concentrated, including sectors of the so-called old economy.
The Financial Times also points out that the change in the type of corporate debt is somewhat less risky for the financial system as a whole, because banks are not as exposed to corporate debt as are investment entities such as insurance companies, pension funds, and mutual funds. That said, however, it warns that banks could not escape a wider collapse that would end up increasing their credit defaults.
This entire scheme emerges like a time bomb from the crisis unleashed by Covid-19. In principle, 50 percent of global corporate debt is rated BBB by agencies such as Moody’s, Standard & Poor’s, and Fitch. This means that although these bonds are considered “investment grade” — or “quality” — they are the worst in that universe, so a downgrade places them directly in the “junk bond” category. In the case of the United States, while 40 percent of this debt is rated BBB, the 22 percent outstanding includes “junk bonds.” This means that almost two-thirds of the bonds belong to companies with a higher risk of default, including many retailers.5
Not only are vulnerable companies threatened but also those that had been considered relatively solid. Companies suffering from massive write-offs, such as hotels and airlines, are highly vulnerable — including smaller cruise companies and the giant cruise lines such as Carnival and Royal Caribbean, aviation titans such as Boeing and American Airlines, and hoteliers such as Ryman Hospitality Properties, managed by the American giant Marriott. Then there are the North American energy companies, which are tremendously dependent on high oil prices and were already on the brink; they are suffering a severe blow as futures prices hit negative levels. But the threat goes much further. Automotive companies, electronics companies, and chemical companies remain vulnerable owing to disruptions in supply chains. Car rental companies and large cinema operators such as National Amusements, among many others, have already seen their debt downgraded to negative territory. And since banks will most likely settle with large corporations first, small and medium-size companies are likely to be hit the hardest. This is worrisome because those companies are often crucial links in the supply chain, and if the links are broken, it will be much more difficult to recover later. Of course, this is also an opportunity for further capital concentration in the hands of large companies through the acquisition of these small and medium-size enterprises.6
Given this scenario — even though the banking situation remains stable, unlike in the 2008–9 crisis — corporate debt constitutes one of the most significant weak links. The risk of successive bankruptcies hangs like the sword of Damocles over the banks. This situation arises in a context in which contraction of worldwide GDP has been optimistically calculated by the International Monetary Fund (IMF) at 3 percent while the World Trade Organization is forecasting that global trade will “plunge” between 13 and 32 percent, a very wide margin. In addition, if we take the United States as a paradigm, the best-case scenario is that the economy contracts by only 6 percent in 2020 and unemployment reaches only a chilling 16 to 20 percent. Except for the forecast regarding global trade, which remains an open question, these data all far exceed those from the 2008–9 crisis.
This is the context for the historically unprecedented stimuli — both monetary and fiscal measures — that already exceed $5 trillion in the United States. The fiscal measures that represent 30 percent of GDP in Germany and Italy and nearly 20 percent in Spain are aimed at avoiding this explosive combination of pandemic effects and one of the most combustible vulnerabilities of the post-Lehman era. Also unlike the 2008–9 crisis, the current state interventions are not aimed at reactivating the economy, which they could not do, but rather to stem the decline. An ongoing economic standstill may, however, prove more powerful than the stimuli, which is why most governments are trying to get out of their “quarantines” despite the unknown health consequences. Given the circumstances, the “dialectic” between pandemic and economy emerges as one of the greatest uncertainties of this moment, leaving many analysts — ironically, as the French socialist economist Michael Husson puts it — without the words with which to chart the future.
The Profound Meaning of Debt
Returning to nonfinancial corporate debt, it is interesting to go a little beyond its immediate causes. The accelerated growth of that particular type of debt in the 10-plus years since the post-Lehman recovery began is actually a mirror image of the low growth of investment in fixed capital over the same period. This is a profound symptom of the coexistence of huge sums of liquid assets on the one hand and few sources of profitable investment on the other. It is a contradiction that is largely “resolved” through the growth of corporate debt as a preferred and highly speculative destination for these large volumes of liquidity originating either in highly profitable companies headquartered in high-income countries (such as Alphabet, Apple, Facebook, and Microsoft, already mentioned), or in the very quantitative easing programs of the central banks that rescued the private banks during the past crisis,7, or in the extremely low interest rates that have been in force in the capitalist “center” for more than a decade, among others.
As Marxist geographer David Harvey says, “The circulation of interest-bearing capital demands its pound of flesh in future value production.”8 Institutions such as investment funds, pension funds, banks, and others, channel credit to companies — many of which show little or no real profit — that then use the money to buy back their own shares, artificially raise their prices, and thus increase the company value and attract greater masses of capital. The technology innovation companies known as “unicorns,” which show no profits but are revalorized thanks to continual infusions of capital, and that had already been losing momentum,9 are an example of this type of transaction. It is an entire system that constitutes an almost unfathomable tangle of speculative bets and creation of dependence through credit, built on the scarcity of real sources for investment.
The relationship between scarcity of investment sources and the growth of debt, not only of private nonfinancial corporate debt but also of public debt,10 accounts for more than 80 percent of the extraordinary increase in total debt in the last decade, as well as household debt. This speaks volumes about the current limits of capital for self-production. It is a question that has the distinction of “unsettling” not only Marxists but also a large part of the New Keynesian mainstream.11 In a recent Financial Times article, Martin Wolf asks why today’s global economy has become so dependent on debt and answers that it expresses an “excessive desire to save relative to investment opportunities.” Wolf adds that “rising inequality in the U.S. has resulted in a large increase in savings of the top 1 percent of the income distribution, not matched by a rise in investment.” Instead, he writes, “the investment rate has been falling, despite declining real interest rates.”
This is the foundation of the phenomenon known as “hysteresis,” which accounts for the economy’s inability to return to the levels at which it was operating before the crisis — even with the huge monetary infusions by the central banks.12 This is a characteristic element of the latest recovery and the basis of the thesis of secular stagnation. For his part, Harvey argued a few years before the current crisis that uninterrupted cumulative growth in the face of the growing scarcity of profitable investment opportunities exerts intense pressure on the form of capital that can increase money on credit without limits. It is in this context that Harvey also developed the concept of “debt slavery” as capital’s preferred means of imposing its particular form of bondage through predatory lending on workers, other capitalists, and states themselves.13
This deep sense of the increase in predatory debt as a counterweight to the progressive scarcity of lucrative sources for investment had its first major expression in the 2008–9 crisis, emerging later in the form of the great weakness of the post-Lehman recovery that the New Keynesians define as “hysteresis” or “secular stagnation.” It is, more precisely, the crisis of capitalism in its neoliberal form as well as the specific qualities of financial and productive globalization that has characterized that form. In fact, while low investment explains the slow growth of labor productivity — despite major technological advances — the sluggish growth of world trade appears, in turn, to be one of the factors that explains low investment.14 The Covid-19 storm is taking place against this inhospitable backdrop, which had already been shaken not only by economic weakness but also by deep political crises and geopolitical instability. What shape this may take in the coming period is among the most complex and interesting questions to be addressed.
What Comes Next?
The shape the scenario takes in the immediate future depends in large part on the timing of the pandemic and the capacity to control it. As usual, it is the IMF that offers the most optimistic prognosis; it forecasts that that the disease will be overcome in the next six months and that the damage from the economic crisis will not exceed that already anticipated. Given those characteristics, the IMF predicts global economic growth of 5.6 percent for 2021. While that number may seem high, it is actually quite low, because when including the recovery from the 3 percent fall for the current year it is, as the IMF itself points out, below the trend specified before the crisis. In other words, a “hysteresis” scenario — again, in New Keynesian terms — is more acute than the one that characterized the recovery of the last decade. The IMF, of course, considers much worse scenarios, but keeps those quiet.
While this scenario cannot be ruled out, the situation is likely to be more complex. The development of the virus and its relative control is regional, which — beyond the development of geopolitical tensions — implies inequalities that complicate convergence. The beginning, of the apparent economic recovery, for example, coincides with the worst moment of the pandemic and the crisis in the United States. Moreover, it is impossible to say that most of the economies that are beginning to try to return to normal will be free from a new wave of the virus. Therefore, they could be exposed to recoveries and new falls that, together with international inequalities, would create an unequal, uncertain scenario that would delay economic recovery even more. 15 On the other hand, pointing out that the abandonment of blockades is a process and not an event, an article in the Economist incorporates the concept of the “90 percent economy.” That is, a situation in which for fear of contagion and resurgence — until the vaccine is discovered or fear is dispelled — the economy cannot return completely to normal, considering that so few consumers are patronizing bars, restaurants, and hotels, or using private travel services and public transportation, among other services. Considering this general scenario, it can by no means be ruled out that in a tangle of bounces and setbacks and the impossibility of returning to normal, the weak link in corporate debt will eventually explode and lead to a recession that is even deeper than the trend so far.
The course of China and its economy, though, remains a great unknown with implications for the possible future scenarios. While there is talk of a faster-than-expected recovery, the most optimistic forecast for China’s GDP growth for 2020 barely exceeds 1 percent. It is tricky to assume that under these conditions China can play the same role as international motor of the real economy that it developed in the face of the 2008–9 crisis. The approximately $600 billion fiscal stimulus plan, which back then led to a very solid rebound of the Chinese economy, today faces contradictions such as internal overinvestment, overcapacity, and overindebtedness — although in yuan, it is true — contradictions that were absent at that time. In any case, the story is yet to be written. China is a new economy, and even after the crisis it can regain its strength. The distinction is that, if this happens, it will almost certainly take on a very different form than that of the first years after the Lehman crisis. At the very least, we can expect a greater confrontation over global spaces for capital investment, leading to an intensification of the fight for spheres of influence.
Finally, the question of China raises the question of the fate of “globalization.” National economies’ levels of dependence on the globalization of capital and so-called value chains are very high. In fact, the pandemic has revealed how deeply the United States depends on China for its supply of basic medications and health equipment. The stagnation of globalization, which has been going on for a little over a decade, and its questioning, which has taken on political and economic forms in recent years, is now more explicitly manifested as a problem of “national security.” The high degree of internationalization of the dominant capitalisms deepens the contradiction with the structure of the national states that ultimately guarantee them the global and local conditions for accumulation. There will undoubtedly be pressure to dismantle certain global value chains, particularly in the health sector, and there will certainly be changes in other areas.
But to address this problem on a larger scale — which will also be colored by the U.S. presidential election — at least three factors must be taken into account. The first is the resistance of the most concentrated capital to pressures that run counter to globalization. The second is that reindustrializing and rearming production in the major countries will require knocking wages down in those countries to be closer to what the big American and other multinational companies are able to secure in, say, China. Third, dismantling the value chains — an extremely complex arrangement that is even difficult for researchers to perceive — implies a massive investment of capital in the centers, that is, overcoming one of the deepest weaknesses of the last decade and a half. Remember, the greatest investments in new labor-saving technologies in the major countries over the last 40 years took place during the 1990s and early 2000s as a complement to the relocation of manufacturing labor to Mexico, Southeast Asia, Eastern Europe, the former Soviet Union, and China.16 There is an acute contradiction in the international division of labor established during this last period, but transforming it will take far more than simple solutions.
It is clear that within these complexities, policies are underway to move toward making labor far more flexible. It is an attack that, as conditions recover a certain normalcy, will have to face the continued unfolding of the class struggle that emerged as the most significant characteristic of the prepandemic world. In fact, this crisis has demonstrated that human labor, categorically, is the engine of the economy; technological advances, while quite profound, are still complementary. In the coming period, in addition to facing attacks on working conditions, the working class will need to inscribe in its program the fight over who gets to appropriate the advantages of new technologies. If it is the big capitalists, it will increase exploitation and suffering. If it is the vast majority, it will improve the conditions of human existence.
First published on April 10 in Spanish in Ideas de Izquierda.
Translation: Scott Cooper
Notes [ + ]
|1.||↑||Translator’s note: In economics, exogenous refers to something imposed on an economic model from the outside — that is, it is not built into the model.|
|2.||↑||See Andrés Malamud, “La globalización en peligro” [Globalization in danger], Le Monde diplomatique, edición Cono Sur, no. 250, April 2020; see also Rob Wallace, Alex Liebman, Luis Fernando Chavez, and Rodrick Wallace, “El COVID-19 y los circuitos del capital” (Covid-19 and the circuits of capital), Ideas de Izquierda, March 29, 2020.|
|3.||↑||That is, the period following the bankruptcy of the Lehman Brothers investment bank in September 2008, which was the major precipitant of internationalizing the recession that had begun in the United States the previous year.|
|4.||↑||Translator’s note: Nonfinancial corporate debt is the debt of privately held and publicly traded enterprises that produce goods and nonfinancial services.|
|5.||↑||Susana Lund, “Are We in a Corporate Debt Bubble?,” Project Syndicate, June 19, 2018.|
|6.||↑||Financial Times, “Will the Coronavirus Trigger a Corporate Debt Crisis?,” March 12, 2020.|
|7.||↑||Translator’s note: Quantitative easing involves a central bank buying predetermined quantities of government bonds or other financial assets as a way to inject money directly into a national economy.|
|8.||↑||David Harvey, Marx, Capital, and the Madness of Economic Reason (New York: Oxford University Press, 2017).|
|9.||↑||Nick Srnicek, Platform Capitalism (Boston: Polity, 2016).|
|10.||↑||Paula Bach, “Will Coronavirus Unleash the Next Great Recession?,” Left Voice, March 16, 2020.|
|11.||↑||Translator’s note: John Maynard Keynes, a British economist working in the first half of the 20th century, developed as his central theory that government intervention can stabilize an economy. Most specifically, he advocated increased government expenditures and lower taxes as a way to stimulate demand and pull an economy out of downturn. His idea had a fundamental impact on government economic policies. New Keynesian economics is based on classical Keynesianism, but with a disagreement over how quickly wages and prices adjust — and so the New Keynesians advocate economic models that recognize what they call “sticky” wages and prices, meaning they adjust more slowly to short-term economic fluctuations. They contend that this “stickiness” explains economic factors such as involuntary unemployment and the impact of government monetary policies.|
|12.||↑||Translator’s note: Hysteresis in the physical sciences refers to the dependence of a system on its history. In economics, the term has been adopted to refer to an event in the economy that persists even after the factors that created it have been removed — such as unemployment continuing to grow after a recession despite growth in the economy.|
|14.||↑||Bach, “Will Coronavirus Unleash the Next Great Recession?”|
|15.||↑||See Husson and Michael Roberts, “The Scarring,” May 2, 2020.|
|16.||↑||Paula Bach, “Revolution in Robotics or Stagnation of Productivity?,” Left Voice, March 24, 2016.|