Most mainstream journalism tends to assume or report on the capitalist economy’s problems — and its politics — as emanating from “outside.” Be it the triumph of Brexit, Trump’s election, the U.S.-China “trade war,” the coronavirus pandemic, or the current stock market cataclysm, everything seems to emerge as if “lightning in a calm sky” or, in its most modern version, as a “black swan.”1
It is clear that there are contingent factors — not to mention multiple conspiracy theories — capable of catalyzing storms, which in this case must be understood as the particularly weak conditions of the post-Lehman economic recovery.2 The current trends in the global economic crisis, which emerge as the most acute threat since the euro crisis of 2010–12,3 call for summarizing some of these weaknesses and of how specific phenomena can amplify or accelerate them by unleashing forces that linger beyond their duration.
Coronavirus and Economic Contraction
It is clear that the coronavirus pandemic is playing a role in the development of the current global economic downturn. China — from which the disease apparently originated — is emerging, at least thus far, as the most marked case. After the outbreak began in December in the city of Wuhan, China has confronted the prospect of zero or negative growth during the first quarter of 2020. According to China’s official Purchasing Managers’ Index (PMI), manufacturing activity contracted in February at a rate even worse than during the 2008–9 crisis. However, while the country was at first thought to be the main economic victim, the epidemic seems to be under control there as the government (not without risk) began to take steps for a recovery. Nevertheless, the virtual “freezing” of China had almost immediate effects on the core of the world economy. After all, China supplies some 20 percent of the intermediate goods traded globally; it is a leading exporter of electronics, chemicals, and transport products, and at the same time it accounts for a tremendous amount of global demand for food and raw materials, and is a significant “exporter” of tourism. According to the United Nations Conference on Trade and Development, the fall in exports of intermediate goods resulted in a drop in exports of finished goods, mainly from the European Union, the United States, and Japan, as well as from South Korea, Taiwan, Vietnam, Singapore, the United Kingdom, and Mexico, among several other countries. As the epidemic spread, Iran and South Korea were hit hard, as was Italy, which is on the verge of recession, with its significant production, financial, and tourist regions paralyzed.
In response to the economic contraction and uncertainty, the world’s stock markets began a series of collapses, which were in some cases the worst since the 2008 crisis. Incidentally, this is a sign of the dependence — ultimately — on the valuation of financial assets and movement in the real economy. In other words, it is a testament to the reality that fictitious capital — or “anti-value,”4 which explains much of the price increase of such assets — cannot stand without some underlying value, that is, without goods and services being produced in the real economy. Along with the economic contraction, the price of oil also began to take a strong downturn that led OPEC to consider a cut in production. The failure to come to agreement — Russia refused to cut the quota, and Saudi Arabia responded by increasing its own production — is the immediate cause for the collapse in oil prices that, combined with a rise in the depth and extent of the epidemic, precipitated “Black Monday” on March 9, which shook all the world’s stock markets. That was followed by the declaration of a “pandemic” by the World Health Organization (WHO), the Italian government’s decision to place the entire population under quarantine, Trump’s decision to suspend flights from Europe, and the continuation of the catastrophic collapse of the stock markets that saw no respite until Friday, with an alarming peak on “Black Thursday,” March 12.
This process, as usual, has been accompanied by what is called a “flight to quality” — the flight of capital toward “safer” assets such as U.S. Treasury Bonds, which pushes their value up and makes their yield fall.5 As part of the same process, the dollar has revalued, other currencies have devalued, and the prices have fallen for raw materials that are typically the main sources of exports for most of the “noncore” countries (Latin American countries in particular).
Beyond the virus’s triggering effect, however, it would be difficult and unfair to blame it or the fall in oil prices for the world economy’s recessionary tendencies. It would also be difficult to blame the ill-defined “trade war” between the United States and China, whose deepest motives were never really about trade.6 Given the general background of the weak economic recovery after 2008, the origin of the recessionary tendencies must be placed around 2013–14, a two-year period that saw the beginning of a reversal of the two main factors that prevented a catastrophic outcome after the fall of Lehman Brothers. We have repeatedly referred to this combination, which Adam Tooze defines quite well: While the United States showed its global financial power by rescuing not only its own banks but also those of Europe, China qualitatively changed its position, presenting itself as a key element in supporting the world economy.7 But since then that virtuous combination has begun to unravel. China headed down a path of lower growth, and the United States has begun to withdraw its expansionary monetary measures.8 The slow but definite reversal of this once mighty combination revealed the deep structural weaknesses that had been dragging on since the beginning of the recovery: the weakness of investment growth, productivity, and world trade. We saw a global quasi-recession in 2016, and even after the following years brought an economic rebound combined with Trump’s huge tax cuts, the recessionary tendencies never stopped hovering over the medium term. Moreover, the limits of that “virtuous” combination and the outlook of greater economic stagnation gave rise to deep changes in the political arena, a clear sharpening of geopolitical contradictions, and, ultimately, a qualitative advance of the class struggle.
Of course, while the immediate effects do not cause the recessionary tendencies, they do act on them and can promote their coming to pass. In fact, the commercial form taken by the conflict between the United States and China has certainly set back the growth rates in world trade, and the coronavirus is fundamentally becoming a trigger — the magnitude of the ongoing economic contraction, as well as the possibility that it becomes a full-blown recession, depends in large part on the pandemic’s duration and intensity. It cannot, however, be ruled out that its mere momentum will be enough to unleash and perversely combine the latent weaknesses in the economy.
Debt: Public and Private Risk
If during the 2008–9 crisis the obvious fault line was banks flooded with dangerous instruments built on the basis of subprime mortgages, the main fault line now seems to be concentrated mainly in the public and corporate debt that has sprouted like mushrooms in the heat of the recovery’s weaknesses.
The International Monetary Fund (IMF) points out that total world debt — which includes public and private debt — was 226% of gross domestic product (GDP) in 2018. Public debt ratios are historically high in most countries: in the advanced economies, they represent, on average, almost 90% of GDP, exceeding the pre-2008 ratios; in countries the IMF defines as “emerging markets,” they have climbed to levels similar to those of the 1980s and 1990s; and in the “low-income” countries, they have continually increased. What is new, however, is the combination of the growth of public debt with that of private corporate debt in particular. According to the IMF, however, the distribution of private debt among countries is uneven. Overall, the corporate debt ratio in the “advanced economies” has already equaled the peak level reached in 2008. But while in Spain and the United Kingdom a process of debt reduction is taking place, corporate debt in the United States has been growing steadily since 2011 and had already reached an unprecedented peak at the end of 2018.
The IMF points to the growing use of debt as an instrument for taking financial risks (financing dividend distributions, share repurchases, and mergers and acquisitions) and to highly speculative debt as a trend commonly observed in some major economies. This is an issue that (still according to the IMF) could amplify shocks if companies default on payments or decide to resort to investment cuts to reduce their debt. The IMF concludes that, unlike before the global financial crisis, risks are not concentrated exclusively in the private sector but also in the public sector, partly because of the unresolved aftermath of the 2008–09 crisis. Excessive levels of private debt exacerbate vulnerability to shocks and could lead to an abrupt and costly process of debt reduction, but, in turn, debt reduction in the private sector can become a burden on an already over-indebted public sector.
The World Bank, for its part, points out that the current wave of debt differs from the previous three both because of the simultaneous accumulation of public and private debt and because of the presence of new types of creditors (for example, 50 percent of the public debt of “emerging” and “developing” economies is currently held by nonresident investors) and because it is not limited to one or two regions. While part of the increase in the “noncore” countries was driven by China, whose debt represents about 250 percent of GDP, the debt is double the nominal level recorded in 2007, even if China is excluded from that group.
In this context, were Wall Street to continue in “bearish territory” (as predicted in articles in the Financial Times and elsewhere) — that is, were Wall Street to maintain or exceed its fall of more than 20 percent since its February 2020 peak and effectively put an end to 11 years of nearly unprecedented post-20008 crisis financial gains — the situation with corporate debt could become extremely fragile. In the face of falling stock prices, large borrowers could draw down loans to preserve liquidity — as Boeing recently did. This could be combined with a wave of defaults by a significant number of borrowing companies, particularly in the oil, aviation, and hotel sectors — all seriously affected by the particular characteristics of the downturn. It is a fact that the situation of banks, particularly U.S. banks, is at present quite different from 2007–8. As The Economist magazine has pointed out, the banking system is highly capitalized, and the amount of toxic debt is limited and easy to identify. Oil companies and others affected by the coronavirus pandemic, such as airlines and hotels, have issued about 15 percent of nonfinancial corporate bonds. But the risk that now arises is the possibility of a liquidity crisis in a wide range of companies around the world, as quarantines lead to factory and business closures. A “stress test” of companies listed on the stock market suggests that 10 to 15 percent may have liquidity problems. Another Financial Times article notes that while the direct exposure of U.S. banks to oil debt is only 2 percent, indirect exposure to adjacent regions and sectors could be significant. It is clear, however, that the coronavirus cannot be held responsible for this tangle of debt.
On Debt and the “Expected Rate of Profit”
In fact, there seems to be a rather close link between the proliferation of corporate debt and claims — both generated by companies of different scales — and the weaknesses in investment growth that, in turn, explain the low increase in productivity and world trade as the deepest structural weaknesses that underlie the post 2008–9 recovery.
A few years ago, economist Martin Wolf, a Financial Times columnist, highlighted the existence of a structural surplus of savings over investment originating in the corporate sectors of high-income countries. The combination of strong earnings9 and a weakening of investment as a feature of the 2008–9 postcrisis recovery explains the increase in the corporate savings surplus. According to Wolf, this phenomenon limits the growth of potential supply as a result of relatively weak investment, but it also affects aggregate demand, that is, consumer and investment demand. So if the business sector suffers from a structural surplus of savings over investment, other sectors will have to compensate with structural deficits. In conclusion, explains the author, if investment is weak and profits are strong, the business sector becomes, surprisingly, a net financier of the economy. As is evident, this question establishes a link between low investment and excess savings, on the one hand, and the creation of debt on the other. In my interpretation, it also helps explain the concomitant existence of large creditor companies and smaller debtor companies, which take on the famous “corporate debts.”
Once the relationship has been established, however, it is necessary to figure out why a significant part of the profits of large corporations is transformed into debt and not into new productive investment. In my view, the phenomenon is closely associated with the scarce opportunities for new investments with a profit rate that justifies them. Without going into the subject here, it is worth remembering that the U.S. economist Alvin Hansen, an adviser to the Roosevelt and Truman administrations, distinguished during the 1930s between the “small recoveries” that emerge as a consequence of the need to replace capital and what he defined as a “full recovery” that requires a large capital outlay in new investments, which in turn requires the development of new industries and new techniques.10 The “future rate of profit” — what we would call, in Marxist terms, the rate of profit — for new investments was, according to Hansen, the active and dominant principle for these two types of recoveries. Despite extraordinary technological advances and the widespread propaganda about the advent of a “fourth industrial revolution,” we can assume that what is failing today are the dynamics of a “full recovery” based on an “adequate” future rate of profit. The limits of the complementary relationship between China and the United States — which once guaranteed a place for a good part of the surplus capital of the “center” — gave rise to growing friction beginning in 2013–14. These tensions, caused in large part by the change in China’s position from a recipient of international capital to a competitor for global accumulation arenas, help explain the decreasing opportunities for the transformation of profits into profitable new investment.11
On the other hand, the increase in public debts must be associated, in IMF terms, with the economic collapse during the 2008–9 global financial crisis and the measures taken in response to that crisis — specifically bank bailouts, quantitative easing,12 fiscal expansion to a lesser extent, and large tax cuts at present. In turn, in the “emerging” and “low-income developing” countries (again, as defined by the IMF), the growth of debt is linked closely to the effects generated by the fall in raw materials prices in 2014 and the need for rapid growth in expenditures. The IMF stresses that high levels of public debt and deficits undermine the ability of a government to implement sound fiscal responses if it needs to shore up the economy during a downturn.
As is quite evident, this phenomenon of double indebtedness — which emerges as one of the most important fault lines facing the catalyst of the coronavirus pandemic — is closely associated with the weaknesses of the post-2008–09 recovery.
If Wall Street Keeps Quiet …
As mentioned above, several analysts suggest that the “bull market”13 that characterized the entire period of the recovery in the United States may have come to an end. In fact, the surprise interest rate cuts by the U.S. Federal Reserve Bank (the Fed) and the Bank of England have had no effect, the WHO’s declaration of a “pandemic” weighing more heavily on the direction of the stock market. The European Central Bank and Bank of Japan also failed to provide monetary stimulus, although they have not cut interest rates as of this writing. As The Economist points out, the Eurozone in particular adds the contradiction that its economy is barely growing, its banks are better off than in 2008 but worse off than the U.S. banks, and interest rates are already below zero.
The Trump administration, seriously threatened in the very year during which reelection is at stake, has declared a “national emergency” and released more federal funds to combat the coronavirus while working on an agreement with congressional Democrats for an economic stimulus package. In response to the announcements, the stock markets recovered a significant portion of its losses on Friday. Meanwhile, as the New York Times points out, the WHO declared Europe “the center of the pandemic,” and European Union officials announced they would allow member countries to raise budget deficits to stimulate economic growth. France and Germany released their own stimulus plans, and so could Italy. To offer a prognosis of the crisis, at least for the immediate future, we must take into account that a sort of race is being run between the capacity and quality of the stimulus packages, on the one hand, and the advance of the pandemic on the other.
At the same time, in the context of muddied international relations, a virtual meeting of the G7 will take place to discuss the situation and the measures to be taken. It is clear that in the current context, any coordination between states — already extremely laborious, as was the case particularly during the aforementioned euro crisis of 2010–1214 — will be a much more complex objective to achieve. There are already symptoms of this, such as German Chancellor Angela Merkel’s indignation at Trump’s decision to suspend flights without even a warning to Europe, or the recent tweet from a diplomat in Beijing that the U.S. Army planted the coronavirus outbreak in China. The “real” actions, however, will also end up being measured by the development and seriousness of the situation.
One of the big dilemmas is that without the frantic pace of Wall Street, the weak fundamentals of the U.S. economy will surely be laid bare. Just as the growth of fictitious capital ultimately depends on some level of dynamism in the real economy, a real economy with weak fundamentals is likely to bring forward its recessionary tendencies without the impetus of the former. Some of this was seen at the international level when the United States began to backtrack on monetary stimuli and China entered a lower growth path, as discussed above. The near recession of 2016 proves the point. If Trump, on the other hand, entered office with a “plan” to raise interest rates, he ended up inducing the Fed to lower them and put the U.S. economy on the ventilator of tax cuts. Two-thirds of the capital that returned to the United States to take advantage of these stimuli was destined for share buybacks. Although the tax cuts helped reactivate consumption, the continued creation of low-quality jobs and very little investment growth did not contribute to the recovery of the main structural variables of the U.S. economy. The U.S. economy depends qualitatively on the stock market, and with the Chinese economy very weak, there is no doubt that the risks for the world economy are significant. We shall see.
First published on March 15 in Spanish in Ideas de Izquierda.
Translation: Scott Cooper
|↑1||Translator’s note: The reference is to the theory articulated by Nassim Nicholas Taleb in his 2007 book The Black Swan, which aims to explain high-profile, difficult-to-predict events that are allegedly beyond normal expectations.|
|↑2||Translator’s note: In September 2008, Lehman Brothers, then the fourth-largest U.S. bank investment bank and heavily involved in subprime mortgages, filed for bankruptcy — an event considered a major precipitant of the global crisis that then erupted.|
|↑3||Translator’s note: The reference is to what is known as the European sovereign debt crisis, which emerged amid the global economic crisis that began in 2008 and in which a number of European countries saw their financial institutions collapse, government debt reach new heights, and yield spreads in government bonds rise rapidly.|
|↑4||This term is borrowed from David Harvey, who gives it a broader and more complex content. See Harvey, Marx, Capital, and the Madness of Economic Reason (New York: Oxford University Press, 2017).|
|↑5||While the increase in bond prices was verified during the first days of the shock, the last days saw stock and bond prices moving in the same direction. Some analysts consider this a strange phenomenon that could be caused by the lack of liquidity. See Neil Irwin, “Something Weird is Happening on Wall Street, and Not Just the Stock Sell-Off,” New York Times, March 12, 2020.|
|↑6||For an explanation, see Paula Bach, “Reflexiones sobre la ‘guerra comercial’, la economia mundial y sus derivaciones latinoamericanas” (“Reflections on the ‘Trade War,’ the World Economy, and Its Latin American Derivations),” Ideas de Izquierda, December 8, 2019.|
|↑7||Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (New York: Viking, 2018).|
|↑8||Bach, “Reflections on the ‘Trade War’.”|
|↑9||Obviously, this concept of “profits” does not correspond to the Marxist concept of the rate of profit.|
|↑10||Alvin H. Hansen, Full Recovery or Stagnation? (New York: W. W. Norton, 1938).|
|↑11||Bach, “Reflections on the ‘Trade War’.”|
|↑12||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.|
|↑13||In stock market jargon, a rising market is called a “bull market.”|