By Kumar David –
Hyman Minsky (1919-1996) is celebrated for his thesis that economic recessions seemed to be triggered by shocks to the financial system. Downturns in the last 70 years were prompted by stock-market crashes, financial defaults and in 2008–09 a shock in the banking system. Though the underlying cause may lie in declines in the rate of profit, disruptions in production, surplus value extraction bottlenecks or supply-demand dislocations, the actual breakdown first manifests itself in the financial system not in the production systems – the oil crises of the 1970s was an example of an exception. Marx was well aware of that crisis first manifests itself in the “circuit of capital”, vide Kapital Volume II, but it was Minsky who spelt it out most clearly. The actual instant of free fall inauguration has even earned the name Minsky Moment. The current (2020) recession is different: it was triggered by a global pandemic although the conditions for a recession had been maturing in the womb of global finance capital for several years. Covid was the catalyst, imbalances in global finance capital the cause. I do not need to expand on this remark since it is recognised. Recall the reckless expansion of money-supply as otherwise capital would have gone under the bus globally (quantitative expansion); exploding debt (for example US Federal Debt will reach 100% of GDP at end 2020); income and wealth inequality at grotesque levels; and QUAD a US led group including Japan, India an Australia has commenced, de facto, a strategic and economic cold-war against China which will fracture already dislocated global supply chains.
Nevertheless, the pregnancy remained under wraps until Covid tore off the cover and exposed a wobbly global economy. Covid proved to be more than a catalyst it has turned into a calamity. Let me quote a few simply unbelievable events. The Australian government has announced that international travel won’t resume until the very end of 2021. “International travel by tourists and foreign students will remain closed until late next year”, said Finance Minister Josh Frydenberg in a statement after the federal budget last week. “Citizens are banned from leaving the country and no international travellers are allowed in except for those on a short list of exemptions”. The Country has gone into lockdown, literally. What will happen to Australia’s economy? Where are India and Brazil going? It seems that the Modi and Bolsonaro governments have given up; they are unable to cope. With seven and five million cases respectively, they have neither the hospital facilities nor quarantine accommodation. In country after country, the less said about the USA and UK the better, a despondent message is coming through: “It’ll never be the same again; there will be, there has to be transformative change in the global economic and political order”. This short essay will make some comments on the future of global finance capital with brief asides about Sri Lanka.
Livelihood and employment will be the imperatives driving any government and any economic arrangement that hopes to survive. I don’t know if the revolution, anarchy or psychological depression is around the corner, but look down the road a few years and surely it cannot continue like business in the past. The World Bank predicts that the pandemic will force 150 million into extreme poverty globally (less than $1.90 per person per day); and how many more into not so extreme poverty? You have to dig it out of the report but it seems more than a quarter of the world’s population will have to survive well below the $3.20 line. Nope, it’s impossible prevent that drastic restructuring. Even if capitalism, with finance capital at the helm survives, how will it be transformed by international pressures, domestic class warfare (make no mistakes it’s on the way) and by government actions?
At a minimum a tough new regulatory environment will slot in to place in all countries. These will include new health & occupational safety requirements, income protection and environmental regulations. Income protection will be a major concern in the coming years because Covid related disruptions will not go way tomorrow. My guess is that economic disruptions related to Covid are unlikely to abate for three to five years. (Sri Lanka can kiss goodbye to bikini and beach tourism for the next three years but culture and nature related tourism may revive sooner). Income protection is an idea that is catching on. In some places including some Indian states the government will pick up two-thirds of the salary bill when factories are closed due to Covid induced shutdowns. This can be recommended to our two-thirds besotted regime but the problem is that it is of no help to the self-employed (think three-wheeler wallahs) and the informal sector (think itinerant journeymen and kerb-side hawkers).
My topic today however is not these small potatoes abut finance capital. Research in the US has shown that contrary to expectations lockdown did not have a much different impact on the three sectors, services & retail, manufacturing, and finance. All three sectors, given their heterogeneous exposures to demand and supply factors, suffered similarly, but for differently nuanced reasons. Banks due to curbs on interest rates and limited borrowing, manufacturing due to factory shut down, and itinerant workers, the informal sector and retail were killed by curfew. Both the manufacturing and banking sectors witnessed reduced net portfolio inflows. Fiscal and monetary stimulus – that is exertion by the state to save capitalism – played an important role in attenuating the negative impact of the global shock.
A curious factor in the US is that yield on the Treasury Bond has plunged; the ten-year bond for example it is trading at well below 1% and this underpins interest rates in general. The bond yield falls when folks rush into bonds because they have lost confidence in the future of the investment economy and seek a safe haven. When bond prices rise interest rates fall, driving savers, pensioners and even banks into difficulty. It should be attractive for investors to borrow and build but in the prevailing post-2010, and now worse, gloomy scenario the well-heeled borrow only to invest in stocks (for asset price inflation) and property (a safe haven) exacerbating wealth inequity. Companies in the US and the UKare not investing in manufacturing or the production economy.
Finance capital is typified by the big banks, hedge and other funds and investment houses and billion-dollar investors. Banks have felt massive effects from the crisis and are not able to play their usual role in getting the economy back on track— they are fearful of providing loans to businesses that have buckled. Banks are taking massive protective provisions and offering negative guidance for the coming quarters. If the next three years go badly bank capital will fall below what is called CET1, a capital benchmark used as a precautionary means to protect banks from buckling. If the financial system’s plunges then liquidity and assets can evaporate quickly in a plunging market.
Hence a major expectation in the coming period is the introduction of stringent new controls on banks and investment houses, that is on finance capital which is playing Ludo with other people’s money; that is market money. But in the wake of these changes will also come politically and socially driven adjustments. Demands for the protection of livelihood, that is provision of decent food and adequate housing even when the virus disrupts employment will soon become a mass demand. No government or economic system that is unable to satisfy these needs is likely to survive. True food riots and civil disobedience are not on the horizon, the infection itself makes collective action of this nature very difficult but there are limits to patience and the example of the USA where mass disregard of sensible protection, beginning with an asinine President Trump, could catch on. But governments all over the world are becoming unpopular; Gotabaya backed out a referendum on certain clauses of 20A because he knows as sure as night follows day that he will lose. The pendulum has swung halfway back and Covid gets much of the credit.
Deeper and stronger government regulation will curb the freedoms of finance capital and the run of market forces. The writing is on the wall. Even the IMF in its 2020 Global Financial Stability Report praises China for its financial stability during the pandemic and ascribes it to “limited external financial linkages, a strong role of government-owned financial institutions, and proactive efforts by the authorities that helped stabilize market conditions.” Indeed, China’s commercial banks remained healthy and posted good profits in the first quarter of 2020; however, the banking sector is now coming under challenge. China’s financial opening and reform could indeed undermine banks though the government remains committed. Majority foreign ownership in securities, futures, insurance and currency brokerage are still allowed but it is possible that some of these trends will be reversed.
In Sri Lanka traditional economists constantly repeat a call on the government to reduce expenditure and increase revenue. Both may prove impossible; it is untenable for political reasons to cut welfare or raise prices of essentials if the government wants to survive. A second wave of Covid will make it utterly impossible to do so. Increasing revenue can only be done by raising taxes on the rich and the superrich; the government is quite unwilling to do this as it will anger its class and business base and those who financed its election campaigns. Even the Brandix fracas has put the current Administration in a bind because the multimillionaire Brandix owners are said to have financed its two election campaigns.