The Financial Times has an extraordinary admission in a lead article this week called The Seeds of the Next debt Crisis. This is an important mouthpiece finance capital in the UK and sometimes they are more honest when speaking directly for their masters (and don’t expect working people to read):
The shock that coronavirus has wrought on markets across the world coincides with a dangerous financial backdrop marked by spiralling global debt. According to the Institute of International Finance, a trade group, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn. The implication, if the virus continues to spread, is that any fragilities in the financial system have the potential to trigger a new debt crisis.
In the short term the behaviour of credit markets will be critical. Despite the decline in bond yields and borrowing costs since the markets took fright, financial conditions have tightened for weaker corporate borrowers. Their access to bond markets has become more difficult. After Tuesday’s 50 basis-point cut, the US Federal Reserve’s policy rate of 1.0-1.5 per cent is still higher than the 0.8 per cent yield on the policy-sensitive two-year Treasury note. This inversion of the yield curve could intensify the squeeze, says Charles
Dumas, chief economist of TS Lombard, if US banks now tighten credit while lending has become less profitable.
This is particularly important because much of the debt build-up since the global financial crisis of 2007-08 has been in the non-bank corporate sector where the current disruption to supply chains and reduced global growth imply lower earnings and greater difficulty in servicing debt. In effect, the coronavirus raises the extraordinary
The inversion of the yield curve always precedes a recession. 10-year US Treasury bonds are now at a record 1.3% as spooked investors seek a safe-haven. This is below short term market returns. It is a vote of no-confidence in the system’s future by the class of super-rich bondholders.
Jim Paulsen, chief investment strategist for the Leuthold Group, told the Financial Times the situation was “scary” and hard to ignore. “A lot of investors have been worried for a while that the bond market knows something that stocks don’t,” he said. “Stocks have been foolishly rising, while bonds have been suggesting a more sinister outcome.”
Even before the outbreak of the virus industrial production and world trade had been stagnating and then declining towards the end of 2019. Investment growth in the G20 group of the richest countries (excluding China) fell from 5% annually to only 1% in 2019.
China has truly become the workshop of the world. It now has 28% of world manufacturing output. This is 10 points ahead of the US who they surpassed in 2010. China has accounted for 37% of world GDP growth since 2008. Much of that growth was also sustained by a massive expansion of debt, which doubled from 2008 to 2018. Total government, corporate and household debt now stands at over 300% of GDP.
The shutdown of factories, cities, and restrictions on movement have radically cut production. But China is not just a producer of finished goods, it is also a vital part of the supply chain for parts and semi-finished goods worldwide.
Shipping from China has collapsed with only half of the expected number being shipped in February, a cut of around 300,000 a week.
China is now the number one market for NZ goods in almost all categories. We exported $17 billion worth of goods and services and imported $13 billion worth – trade worth twice that of the US.
But now policymakers are running out of policy tools to deal with a new crisis. One key tool is the interest rate used by the Central Banks for core lending between it and the commercial banks. This is now close to zero everywhere and new cuts seem to have minimal impact. Many governments also maxed out their own debt to deal with the last crisis and further borrowing will simply push interest rates higher, not lower. Additional direct printing of money will also threaten a new bout of inflation that could further destabilise the system
But as can be seen in the Financial Times report the 1% just keep going as before. The Financial Times again:
Policymakers in advanced countries have over the past week made clear their readiness to pursue an active fiscal and monetary response to the disruption caused by the virus.
Yet such policy activism carries a longer-term risk of entrenching the dysfunctional monetary policy that contributed to the original financial crisis, as well as exacerbating the dangerous debt overhang that the global economy now faces.
The risks have been building in the financial system for decades. From the late 1980s, central banks — and especially the Fed — conducted what came to be known as “asymmetric monetary policy”, whereby they supported markets when they plunged but failed to damp them down when they were prone to bubbles. Excessive risk taking in banking was the natural consequence.
The central banks’ quantitative easing since the crisis, which involves the purchase of government bonds and other assets, is, in effect, a continuation of this asymmetric approach. The resulting safety net placed under the banking system is unprecedented in scale and duration. Continuing loose policy has brought forward debt financed private expenditure, thereby elongating an already protracted cycle in which extraordinary low or negative interest rates appear to be less and less effective in stimulating
One important difference between the current debt mountain and that of 2008 in much of the world is that corporate debt has increased even more dramatically than other forms of debt – doubling to $13 trillion. Much of this is of doubtful quality and the companies would quickly find themselves unable to service debt if renewed world recession hits or interest rates rise once more.
The Financial Times points out that the system has become less stable in recent decades not more stable as wealth has become more centralised into fewer and fewer hands.
We need an emergency response to the coming economic catastrophe that is not just business as usual.
After the 2008 crisis, money was literally printed and handed out to those who had created the mess in the first place. Banks were effectively nationalised in the UK to save them from collapse. Even the mighty General Motors in the US was nationalised to save from collapse. Of course, these nationalisations weren’t designed to impose democratic socialist control over finance capital and the big capitalist commodity producers and have been reversed whenever the state can once the situation had been stabilised.
The massive expenditures required the state to take over as much of the bad debt as possible to protect the class of financial vampires from their greed and folly. The cost of that bailout was then imposed on working people through extra taxes and cutbacks on social spending.
As in all capitalist crises, the greed of the big banks, insurance companies and other holders of financial assets had led them to reckless over-extend credit. Debt levels for individuals, corporates and governments kept breaking new records. But as soon as this debt pyramid started breaking at its weak links (AIG Insurance in 2008) the entire system of credit seized up and there was a cascading series company collapses in the financial sector.
A credit crunch and a deep world recession followed.
The collapse into a new period of crisis like the Great Depression in the 1930s may have been averted, temporarily, by the bailouts, spending and debt expansion but the system was not challenged. So a new period of recession or depression we seem to be entering into now is the inevitable result.
The virus is simply the trigger, not the cause.
As soon a new crisis breaks out we should demand that a government that claims to be representative of working people as the current Labour Party-led government does, should put our interests first not the capitalist mismanagers of the system.
That means we need to prioritise the needs of ordinary people to access healthcare, educational opportunities, housing and jobs above those of the banks, insurance companies and commodity producers who were bailed out at the expense of working people the last time capitalism had a generalised crisis of overproduction just over a decade ago.
Doing what we did in 2008 again is not the solution. Giving money to the already rich to produce more debt and commodities that we often don’t need, is not the way out of a crisis of the system. The system needs to be challenged. The system needs to be transformed. The system needs to be overthrown and a new system based on production for human need rather than profit established. That new system also needs a radically informed and engaged citizenry empowered to make meaningful decisions in their workplaces and communities.
We need a Green New Deal that prioritises people and the planet above the pursuit of profit by the 1% class of private owners of the monopoly corporations that dominate all economic life. A Green New Deal can be the step towards the new system we need. It already has a name.
That system is called socialism. We just need a 21st Century version.