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A House of Cards


Meltdown II heading for a town near you

A new report says that debt has actually grown in relation to the real economy since the 2007-8 financial crash, threatening another meltdown. It is the starkest warning yet from insiders that the global crisis has reached a critical point.

Gerry Gold reports

Years of austerity, driving down living standards and cutting public expenditure, have failed to dig capitalism out of the hole it made for itself. The financial system remains heavily “leveraged” – or, in plain language, groaning with the burden of debt. This time the eye of the storm is in China and other emerging economies, which have piled up debt at a record rate.

The signs of a new mega-crisis have been appearing since the start of 2014. Early in the year, the hilariously named mining investment fund China Credit Equals Gold #1 failed. This is just one of many similar collapses hitting China’s private, shadow banking sector and threatening the entangled public sector.

On August 1, Argentina went into a technical default, failing to make payments to a vulture fund, which had refused to join other creditors in a restructure of its otherwise unsustainable sovereign debt. In October, the continuing recession in the eurozone led the European Central Bank to start printing money – aka quantitative easing – in a desperate bid to revive the region’s growth.

But despite the fears of many – especially Germany – that massive injections of money by governments and central banks would lead to spiralling inflation, an era of falling prices, known as deflation, is the new concern. Why? Because when inflation rates exceed interest rates the burden of debt repayments declines. But when prices fall, debts mount and rapidly turn bad.

Just as October loomed, “Deleveraging? What Deleveraging?” a study (known as the Geneva Report) from the International Centre For Monetary and Banking Studies, warned of the imminent dangers contained in the “poisonous” global combination of failing growth, spiralling debt and declining inflation.

It predicts “a high likelihood of either a prolonged period of very low growth or even another global crisis”. Its advice to policymakers around the world amounts to preparation for the worst case scenario. Reducing the ratio of debt to gross domestic product is known by the polite term of “deleveraging”. In practice, it means throwing people out of work and cutting their wages.

World debtAlthough the 2007-8 crash was precipitated by a mountain of debt that became unsustainable when economic contraction in the United States led to repayment failure by households with no income but with mortgages, the picture in 2014 is actually worse.

“Contrary to widely held beliefs, the world has not yet begun to delever and the
global debt-to-GDP is still growing, breaking new highs,” increasing at an “unabated rate”, says the report. The total burden of world debt, excluding the financial sector, has risen from 180% of global output in 2008 to 212% last year, according to the report. In Japan, the increase in leverage is said to be “off the charts”.
The economists add:

Deleveraging and slower nominal growth are in many cases
interacting in a vicious loop, with the latter making the deleveraging process
harder and the former exacerbating the economic slowdown. Moreover, the
global capacity to take on debt has been reduced through the combination of  
slower expansion in real output and lower inflation.

Within days of the Geneva Report’s release, extreme lender Wonga was obliged to acknowledge that hundreds of thousands of its borrowers couldn’t and wouldn’t be making any payments – either of interest or of capital. Other lenders are expected to follow. This is a familiar scenario.

None of the measures taken since 2008 have succeeded in putting global capitalism back into growth mode. How could demand increase with real incomes being driven down as much as 15-20% in the richer, developed countries? As a result, new capital investment in production has not taken place and productivity has lagged.

Far from bringing about any more than an extremely localised, temporary appearance of recovery in the form of soaring property prices, a frothy stock market and financial markets, and accounting manoeuvres to increase profits (thank you Tesco), global growth is slowing.

This is how the tendency of the rate of profit to fall, as elaborated by Karl Marx in the mid-19th century, works itself through in the real economy. After the initially highly profitable post Second World War rebuilding, the rate of profit went into decline in the 1960s, and the tendency has continued – accelerated by a series of technological revolutions.

Growth, by volume and value was necessary for capital to be able to compensate for the falling profit tendency, maintain dividends to shareholders, and attract new investment. But it still was not possible to generate enough capital for reinvestment from the surplus value generated in the production of commodities to keep growth on track.

This discrepancy was the source of the demand for credit, not the avaricious “human nature” cited by the Geneva report. And with productivity static or declining, the demand for credit against falsely-promised future profits grows all the more intense. 

The celebrated “return to growth” in the US – the slowest recovery from recession since 1945, and like most of the rest of the world way lower than the pre-crash trend – was founded upon a highly volatile combination: state-sponsored credit expansion (now ending), historically low interest rates (as elsewhere), the climate-changing exploitation of extreme energy, and rapidly declining real incomes for the majority. 

The most obvious result of the continued, but failed attempts to pump up the economy using a combination of credit and austerity is the astonishing scale of the transfer of value from the majority to the minority.

The concentration of wealth and the accompanying rapidly widening gulf of inequality reached an intensity that triggered alarm bells of threatening revolt around the world – as seen in the best-seller status for Thomas Piketty’s Capital in the 21st century.  

Simple numbers can’t give the real impact, but the news that during 2014 the number of the super-rich who, added together, own as much as half the world’s population (3.5 billion) shrank from 85 to 67 (and then to 66 as the sums were being gathered) is a clue.

The crash of 2007-8 came about because the credit-led boom reached its limit. Whilst, pumping in credit had stimulated recovery from recent, but comparatively less widely spread crashes in the 1990s and early in the 2000s, this time it has failed.

In the wake of the crash, governments, central banks, the International Monetary Fund and the European Union demanded the imposition of the austerity solution on the 99% – forced to repay what they never borrowed, deepening the recession.

Never before seen levels of unemployment appeared in Southern Europe, reaching greater than 25% in Spain and Greece, and more than 50% amongst young people. There’s no sign of any relief. The social tension finds its expression in political polarisation and the drumbeat of demand for “real democracy now” and self-determination.

global debtSince 2008, the debt disease has effectively been transmitted from the developed capitalist economies into the so-called emerging economies. This is what concerns the authors of the Geneva Report most as the mechanisms for dealing with a new meltdown in these regions barely exist. They note that the US, Britain, Japan and so on, led global debt accumulation until 2008:

Since then, it has continued under the impulse provided by a sharp rise in the debt levels of emerging economies. This group of countries are a main source of concern in terms of future debt trajectories, especially China and the so-called ‘fragile eight’, which could host the next leg of the global leverage crisis.

In fact, since 2008, the debt-to-gdp ratio in developed economies has increased by 25% while it soared by 36% in “emerging markets”. China’s multi-decade growth is slowing, after five years of credit expansion following the crash held the decline back. Without state-sponsored credit, China’s growth would have followed the decline in the West’s demand for its products. 

But now, as the Daily Telegraph puts it: “All can now see that China has picked the low-hanging fruit of catch-up growth, and has reached the limits of credit.”

The scale of the crash and the attempts to deal with it within the framework of capitalist social relations extended the financial and economic crisis into the political, disrupting the global system of nation states, and provoking an unstoppable wave of revolutionary demands for democracy, from Tunisia to Egypt and Spain, to Scotland, Catalonia and Hong Kong. The coming financial tsunami is certain to intensify these struggles and open up real opportunities to delever capitalism itself.

5 October 2014

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