Capitalist commentators seem to be extremely puzzled by the state of the world economy. In a recent article, the Economist writes
“What is the Mona Lisa doing? At first glance, the protagonist of the most famous painting in the world seems to smile. But when you look at her again, that smirk disappears. When it appears again, it’s a completely different smile… No matter how many times one looks, one remains unsure of what is happening… The post-pandemic economy is like the Mona Lisa. Every time you look at her, you see something different,”
They go on to say that forecasting has never been more difficult and quote the ECB president Christine Lagarde, who said
“It is not possible to determine at this point in time what the path will be going forward,”
Undoubtedly, we are going through an era of extreme volatility and see a number of developments, namely the recent banking crisis, a coming debt crisis, sticky inflation, the expected recession, the prolonged energy crisis and the moves to challenge the dollar as a world currency, which are all interlinked.
In March, at the time of the Silicon Valley Bank collapse, US president Biden said
“Americans can have confidence the banking system is safe”
To avoid a banking sector meltdown, which would definitely throw the world economy in a crisis, the US, the Swiss and other governments made swift and generous interventions. These seemed to temporarily calm down the markets, especially the SVB bailout and the Credit Suisse takeover by UBS. But the recent collapse of the First Republic Bank (FRB), now the second largest in US history, opens up again the prospect of the continuation of the banking crisis. FRB faced a $100bn bank run during the previous 3 months and its stock plummeted from $120 in March to just $3.5 on April 28. In fact, the three largest failed banks this year (Signature,SVB, First Republic) held $532 billion in total assets, which is almost the same amount compared with the 25 banks that failed in 2008 when adjusted for inflation (excluding failed investment banks such as Lehman Brothers and Bear Stearns).
a. There is a general pressure on bank reserves as there is a heightened demand by customers, who withdraw their deposits. Individuals are burning on their cash reserves to cope with the cost of living crisis. Many companies face cash pressures because the extraordinary profits they made during lockdowns and the state funding they got has stopped. And, of course, as inflation eats away cash reserves, some customers are looking for investments with better returns.
b. Bank investments on government bonds made before the interest rate hikes are losing their value. Banks keep a very small amount of money in the ‘vaults’ (nowadays, most are in digital form anyway). For large banks this amount is 10% of their deposits, for smaller ones it’s 3%. The rest are being invested to make a profit. A big number of banks have invested in government bonds, which, when interest rates were low, produced low returns. Now that government bonds have higher return rates, the old bonds lose their value, and they have to be sold at a lower price if the banks need the cash before they mature. So, when the banks face liquidity pressures, they have to liquidate their assets at lower prices, thus recording liabilities in their books. This spread panic in the markets.
c. The lifting of the (inadequate) controls by the Trump administration played its role in the fact that stress tests and checks could at least warn authorities about possible risks. In fact, the banking sector oversight history is a rollercoaster where usually after a crisis some checks are imposed in order to avoid bank collapses, and after a while they are withdrawn, which eventually leads to new crises, in which new checks are imposed, and so on and so forth.
As one can easily see, these are not problems of the specific banks that failed until now, or problems of the US banking sector alone (although, as usual, the US is the eldorado of financial speculation). This explains why “the markets” are jumpy, and try to predict the next failure in order to save their money. The banking crisis will definitely continue in one way or another. The governments will try their best to contain it, as the banking sector is intertwined with actually all the economy. The extent to which they can contain it will depend on other factors, mentioned below.
Impending debt crisis
The impending debt crisis has similar characteristics with the banking crisis. The growth model of the last decades for all countries was based on a never ending borrowing spree. When loans matured and had to be paid, states got new loans to repay the old ones (this was called restructuring), in a seemingly endless process. But inflation and the hikes in interest rates have signaled the end of the era of easy-cheap-free money (as it was dubbed). That means that new loans will be more expensive, threatening to choke emerging economies.
According to the World Bank, about 60% of the poorest countries are already at high risk of debt distress or already in distress. Lebanon, Sri Lanka, Suriname, and Zambia are officially in default, while Argentina, Ghana, Pakistan, and El Salvador are likely on the brink of a debt crisis (source).
Even the US faces a debt problem, which is reflected in the current debate over the ‘debt ceiling’.US Treasury Secretary Yellen said that a failure to raise the debt ceiling (the amount of money that Congress allows the government to borrow) would trigger a default and an ‘economic catastrophe’, throwing the world economy into recession. This is, of course, not the most probable scenario. Already, the Republicans have agreed to raise the debt ceiling, but demanding austerity and tightening measures to accompany it (such as the scrapping of Biden’s student loan relief and others).
Whatever the final outcome of this debate, the sole fact that the strongest capitalist economy in the world has a staggering debt of 123,4% of its GDP (more than $30 trillion!), and the fact that a default and austerity measures are being seriously discussed, says a lot about the state of its economy.
Inflation still remains the main focus of governments’ economic policy. Interest rate hikes have helped to cool it down in some countries, but it still remains ‘sticky’ (as economists call it) and is definitely way above the 2% target that Central Banks aim at. As we have written before, there is no way for capitalists to tame inflation, if they don’t generate a recession, and this is actually what they are doing at the moment, even though they would like to avoid that. .
In an CNN interview, David Rubenstein, a billionaire investor and co-founder of The Carlyle Group, explicitly said that the Fed is actively trying to spur up unemployment. Speaking of Jerome Powell, he said
“He can’t quite say this, but if the unemployment rate goes up to 4% or 5% or 6%, inflation will [probably] be tamed a bit… But he can’t come out and say, ‘I hope the unemployment rate goes up to 6%.’ That doesn’t sound politically very attractive to say that.”
Rubenstein went on to say
“Nobody knows for certain, and I don’t like to use the word ‘recession… When I worked in the White House under President Carter, the inflation adviser there was told not to use the R-word. Recessions scared people. So he came up with another word: banana.”
Well, banana or recession, the fact remains that under capitalism, the battle against inflation means that people will have to lose their jobs. This is what scares them, not the word. According to Mark Zandi, chief economistat Moody’s Analytics, every 1 percentage point increase in the unemployment rate translates to a loss of around 1.6 million jobs in the US. So if the US enters into a typical recession, where the unemployment rate is around 6%, that would mean that 5 million people will lose their job. One can imagine what will happen to less advanced economies. And these are not just numbers, they are people whose life will be turned over or even shattered by unemployment.
At the same time, Rubenstein says there is an advantage to recessions:
“There’s always going to be recessions, but that’s when great fortunes are made,”
Shocking and enraging as this is, it is actually the truth. Big capital amasses more wealth during crises, on the one hand by over-exploiting the working class, and on the other by absorbing smaller capital. As Marx puts it (Capital, vol I & III)
“From time to time the conflict of antagonistic agencies finds vent in crises. The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium.”
“Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many.”
“Therefore, the larger capitals beat the smaller.”
IMF growth forecasts
In April, the IMF produced its World Economic Outlook report. It forecasts that global growth will slow from 3.4 percent last year to 2.8 percent this year. It refers to
“heightened chances of a hard landing”
“In a plausible alternative scenario with further financial sector stress, global growth would decelerate to about 2.5 percent in 2023.”
This is, of course, the median figure, and some economies are expected to enter a full-blown recession. But the most striking figures are the forecasts for the next five years.
“Looking further ahead, growth is expected to remain around 3 percent over the next five years. This baseline forecast of 3 percent five years ahead for 2028 makes it the lowest medium-term growth projection since 1990, and well below the average of 3.8 percent from the past two decades…
The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, Russia’s war in Ukraine, and growing geoeconomic fragmentation.”
But even this “anemic” scenario does not tell the full story, as the advanced economies will be in stagnation (around 1% growth), while the emerging ones will grow at a much higher pace.
Geopolitics complicating world economic developments
As we have extensively analysed in our recent Internationalist Standpoint Conference documents, the geopolitical rivalry for world domination between the US and the China bloc will be a crucial and determining factor for world developments in the coming decades. This confrontation also affects and determines developments in the world economy.
The recent Iran-Saudi Arabia peace deal brokered by China, the “hi-five” greeting of Mohammed bin Salman with Putin at the G-20 summit, and the latest OPEC+ decision to cut oil production, all signal bad news for the West. The official request of the Saudi cabinet to join the Shanghai Cooperation Organisation (SCO) and the BRICS are quite telling of the shift that is happening. The cut in oil production creates problems in the West’s bid to fight inflation and to avoid a recession, while at the same time it helps Russia fund its war in Ukraine.
In the last few months, a talk of the prospect of ‘de-dollarisation’ has been opened up. It’s a discussion about the possibility to dethrone the dollar from its world currency status- that means its prominence in global trade between countries, and its role as the currency in which bank reserves are kept all over the world. In a short period of time:
- Brazil and Argentina are discussing the creation of a common currency
- Kenya is planning to trade oil with the UAE in its national currency
- The UAE and India held talks to use rupees to trade non-oil commodities
- India and Russia are trading in their national currencies
- Saudi Arabia said that it is open to trading in currencies besides the U.S. dollar
- Russia and China are trading in Yuan after the sanctions imposed by the West
- China and Brazil agreed to trade in their own currencies
Ironically, the movement away from the use of the US dollar has been significantly boosted by the West’s freezing of Russian state assets after the war in Ukraine. A lot of ‘non-aligned’ governments came to the conclusion that they need to move away from their dependency on the US dollar, as they could face similar consequences if they fall out of line.
Despite these developments, the process of challenging the dollar’s global currency status will be prolonged, since its reign is still very powerful. Still, nearly 60% of foreign exchange reserves in central banks are kept in dollars. According to the Bank of International Settlements, half of global trade is invoiced in USD, although the United States accounts for just over one tenth of global trade. So, there is still a long way to go in order for another currency (or a basket of currencies) to challenge the dollar. But this process has started, and it goes hand in hand with the process of decline in the power of US imperialism.
As Lagarde put it
“Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia… These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.”
Impact on consciousness and struggles
The current crisis has sparked a number of mass movements or strike actions, the most important being the UK strike wave, the French revolt against Macron, the surge in US industrial struggles, important strikes in Germany, Portugal, Norway, Belgium, etc, the uprising in Sri Lanka, struggles in Latin America, ect.
Inflation and the cost of living crisis forces people to come out to struggle. But the bourgeoisie add insult to injury, fuelling anger in working class people.
Huw Pill, the Bank of England’s chief economist, recently said that British households “need to accept” they are poorer and stop seeking pay increases. Bank of England governor Andrew Bailey urged workers to show ‘restraint’ in wage claims. These comments were published at a time when Nestlé, PepsiCo and McDonald’s have all reported that higher prices boosted their sales this year, while UK families face 17.3% grocery inflation in supermarkets.
This is part of a campaign to shame wage increases and put the blame for inflation on workers. But the so-called ‘wage-price spiral’ is simply not true. Even the ECB, in its March meeting minutes, concluded that wages
“had only a limited influence on inflation over the past two years.”
Even Yellen explicitly said
“we’re not seeing a wage-price spiral”
On the contrary, the ECB noted that the
“increase in [corporate] profits had been significantly more dynamic than that in wages.”
Some have launched the term ‘greedflation’ to describe the role a rise in profits plays in raising prices. Economists at ING looked at Germany, and concluded that
“from the second half of 2021 onward, a significant share of the increase in prices can be explained by higher corporate profits.”
They call this a profit-price spiral. Calling workers to bear the burden of the crisis while the capitalists record huge profits, naturally stirs up anger. But there is another element, which is the West’s arrogance towards the rest of the world. In an opinion piece in Bloomberg, Hal Brands, an American international relations scholar of U.S. foreign policy says that
“The global South owes America some thanks”.
And goes on to elaborate that the global South should be grateful to the US, which yes, is imperialist, but a kind one, not like the vulgar imperialists of Russia and China… And, of course, that There Is No Alternative as a world dominated by China would be less free for the poor.
Probably Western bourgeois analysts cannot understand this, but such articles instead of propping up Western imperialism’s profile, serve to disgust the peoples of the South even more.
Overall, capitalism is once again entangled in a series of devastating crises. In order to keep the system and their interests intact, capitalists need to put the burden on the working classes’ backs. Only resistance to the new attacks can halt them, and only a fighting revolutionary alternative can put an end to the system which drags society into barbarism.