By Kumar David –
The short-termists and long-termists profoundly disagree: Is global capitalism headed for a bust?
This piece is not about my Marxist inclinations; it is about what market watchers and serious bourgeois economists are saying; that is to say it is about divergences within the world of bourgeois stock-market, financial and economic discourse. I will add one remark as a Marxist, as a preface, and move on. I think the pessimists are right, not only for their own reasons but also because the natural evolution of capitalism has brought it to a point of profound instability by virtue of its own natural dynamics. Now back to my role of honest umpire.
What market watchers say is: “Look at equities worldwide, look at house prices (in the US), look at unemployment (moderately flat in the US and not skyrocketing any more in Europe), look at the revival of consumer confidence in the US, and where’s the inflation that the Casandras predicted’. It’s a fair short-term case; if you simply do straight-line projections of these trends the world looks good; buy stocks, invest in property, shun gold, laugh at rigid New Zealand and trust capitalism; all is well, we live in the best of all possible worlds”.
What is their evidence? The Dow and Nasdaq have been hovering around their all-time highs for a few months, the financial sector is back to its bad old ways thinking up high-risk gimmicks again and paying itself extraordinarily well, US house price 10-city index is up at 80% of its all-time looney valuation before the 2008 crash and still rising, the US Consumer Confidence Index which stood at 110 before the crash and plunged below 30 in December 2008, is now up again in the 80 to 85 range. US unemployment is above the 4% mark which is deemed natural at 6.7% but well below the 10% it touched in October 2009. The Fed has injected about $4 trillion into the economy in bailout packages and Quantitative Easing (euphemism for printing money) since 2008. Despite this Federal Reserve Chair Janet Yellen said a few days ago “Persistently low inflation poses a more immediate threat to the US economy than rising prices”. She was echoing the IMF’s Christine Lagard.
The Bank of Japan is churning out Yen with a yen gone out of control but inflation is still 1.6% and below the Bank’s target of pushing it up to 2%. I must not impose any more statistics from all the big capitalist economies on you, but take it that, superficially, the patient’s temperature, blood pressure and bowel movements are OK. So what’s the worry, why are many “respected” bourgeois economists wringing their hands in anxiety?
What the Casandras say
Despite huge money pumping by the central bank and record low (actually negative) interest rates companies are not investing. This monetary policy has failed to energise capitalism and tapering it out is going to create new problems. It seems clear to me that there is no policy framework that will rescue capitalism from stagnation and a potential second great recession in 2014 or 2015; the crisis is systemic. If the current monetary policy had not been used, unemployment allowed to increase to 20% (in the US), and banks and financial institutions allowed to fail, the streets would have been spattered with blood. It seems to be that capitalism’s ‘Damned if I do damned if I don’t’ moment has arrived.
Let me give you a few samples of what they are saying. Raguram Rajan, Governor of the Bank of India:
“A good way to describe the current environment is one of extreme monetary easing through unconventional policies. In a world where debt overhangs and the need for structural change constrain domestic demand, a sizeable portion of the effects of such policies spill over across borders. The key question is what happens when these policies are prolonged. 1) Is unconventional monetary policy the right tool once the crisis is over? Does it distort behaviour and stand in the way of recovery? Is accommodative monetary policy the way to fix a crisis caused by lax policy? 2) Do such policies buy time or does the belief that the central bank is taking responsibility prevent more appropriate policies being implemented? 3) Will exit from unconventional policies be easy? 4) What are the spill-overs from such policies to other countries?
And he concludes:
“The current non-system in international monetary policy is a source of substantial risk, both to sustainable growth as well as to the financial sector. It is not an industrial country problem, nor an emerging market problem; it is a problem of collective action. We are being pushed towards competitive monetary easing. If I use terminology reminiscent of the Depression era non-system, it is because I fear that in a world with weak aggregate demand, we may be engaged in a futile competition for a greater share of it. In the process, unlike Depression-era policies, we are also creating financial sector and cross-border risks that exhibit themselves when unconventional policies come to an end. Extreme monetary easing is more cause than medicine”.
Gonzalo Lira, a Chile born writer and filmmaker has blossomed out as an economic commentator and author. His blog-site said this in December 2013.
“We are due for a recession. Rather than take the hit, work out the bad loans, and organically regrow the economy, the Treasury and Fed measures were essentially morphine—or heroin—to dull the pain of the Global Financial Crisis: They made us feel great, but the disease is still there; over indebtedness, bad debts piled on top of bad debts. What if there’s a Recession in 2014? If policymakers were gunfighters, they’d be out of bullets. They have run out of effective policy tools to improve the economy. So the question is simple: If there is a recession in 2014, and policymakers are out of bullets, how will it play out across the American economy?”
Tim Morgan of the brokers Tullett Prebon provided an answer in an 82-page note:
“The economy as we know it is facing a lethal confluence of four critical factors – the fall-out from the biggest debt bubble in history; a disastrous experiment with globalisation; the massaging of data to the point where economic trends are obscured; and, most important of all, the approach of an energy-returns cliff-edge”.
And James Saft of Reuters piles in:
“Americans are richer and willing to take on a bit of extra debt and yet the overall atmosphere and the economic recovery are flat because the rise in wealth is highly concentrated, consumer debt is going towards maintaining living standards in the absence of adequate income, and most importantly, businesses are simply not investing. A look at the data shows a willingness to take on more consumer debt, notably student loans. Despite record wealth and growing debt, we are looking at a spluttering economy, still growing well below its long-term trend.
The amount of student loans outstanding has more than doubled since 2008, now $1.1 trillion, yet borrowers are spending it on things other than education. Evidence shows people simply borrowing to live. The Inspector General of Education found eight programs with more than $220 million in loans made to 42,000 students who didn’t earn any credits. An economy divided between asset owners spending bubble gains, and hard-up people taking out student debt to live, is clearly not sustainable.
We see clear evidence of why growth is low: sparse investment by corporations. Corporate capital expenditure minus internal funds was negative $159 billion during the fourth quarter of 2013; meaning rather than borrowing to invest companies are piling up cash. This marks the 20th straight quarter of this behaviour”.
The gist of it
The gist of the matter is that despite a $4 trillion cash injection and negative real interest rates it has proved impossible to generate large scale capital investment in the US. Most of Europe is still in recession or struggling to keep its head just above water. The news from Japan is not good either. After decades of depression and deflation economics Japanese companies had hoped that Abenomics would spell a turn around, but developments in Q1-2014 were a disappointment. An expected annualised growth rate of 2.8% for 2014 turned into 1% on Q1 projections. Exports declined steeply despite the weak Yen and raising the value-added tax from 5% to 8% at the end of April will dampen consumer demand further. Worst of all, Japanese companies are following the example of American corporations and moving investments offshore to benefit from lower wages and be closer to consumers. If the US, Europe and Japan are all not doing well simultaneously the answer to the question posed in my title is Yes.
It is in the nature of capitalism to seek ever feverish growth. A few sentences from an all too well known text fit the present like a glove:
“The bourgeoisie, historically, has played a most revolutionary part; it cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. The need of a constantly expanding market for its products chases it over the surface of the globe. It must nestle everywhere, settle everywhere, establish connexions everywhere. (Then) the productive forces at the disposal of society no longer further the development of bourgeois property; on the contrary, they become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by it. And how does the bourgeoisie overcome crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets and more thorough exploitation of the old ones. That is by paving the way for more extensive and more destructive crises and by diminishing the means whereby crises are prevented”.