Warnings that financial speculation is out of control underline the lack of wisdom in Labour’s business-orientated economic policy, argues Dominic Alexander

It is welcome news that Rachel Reeves intends to raise taxes on the wealthy in the autumn budget, although we will have to see how far she goes with it, and whether it will mean more money for public services. There is, however, no other indication that the direction of government economic policy will undergo any major change.

The mantra for Labour in opposition, and now for over a year in office, has been the deeply unwise promise to ‘kickstart economic growth’. A major, multi-dimensional cost-of-living crisis after years of austerity and decades of underinvestment was never going to be turned around fast, even in the best of economic circumstances. Yet, pledging growth without any other plans to relieve the crises being experienced by working-class people has put Labour into the weakest possible position in relation to big capital interests and the right-wing establishment.

The instincts of the crew around Starmer were always to cleave as closely as possible to economic orthodoxy and to major City interests, but politicians with any skill or sense would give themselves some room for manoeuvre. Not so Starmer and Reeves. Instead of developing an investment plan for renewable energy that could bring down energy costs relatively quickly, and investing in public services, they have effectively maintained the regime of austerity. They have downgraded and attacked their previous sustainable energy ambitions, and run full tilt for the most dangerous and destructive of finance investment bubbles. This is because they believe that the only way out of austerity is to raise the rate of capitalist profit, so that workers and social need can take a small share, rather than dealing with the structural flaws in the economy.

Labour’s enthusiasm for capital-pleasing high-tech investment has been painfully evident, with billions being allocated for unproven nuclear technologies, including fusion, alongside carbon capture and storage research, and expectations of 5% savings in government departments from the use of AI. Reeves has announced relaxations of financial regulations to ‘encourage’ growth, which will please speculators but do little to nothing for real growth, and may well help to fuel the next crisis. Deregulation for the big finance institutions already follows the deepening complexity of deregulated economic zones, which remove workers’ rights and democratic controls over industry. Meanwhile, they claim that investing in public services is the thing that is irresponsible.

Tech mania

All of this was bad enough, but towards the end of September, we had the ‘Tech Prosperity Deal’, whereby Microsoft, Nvidia and other tech giants will invest over $40 billion for AI investment including the building of data centres, which will be an environmental disaster. It is claimed that they will create 5,000 jobs in the north east, but this is very few jobs for the sums involved, and will do little to redevelop the north east. As has been pointed out, this plan threatens to turn the UK into ‘no more than an aircraft carrier for US big tech’. Labour’s planned ‘National Wealth Fund’ was meant to provide public investment by ‘crowding in’ private investment. But this neoliberal approach to investment will be an abject failure.

It appears as if Starmer and Reeves are resting the economic fortunes of the UK almost entirely on the continued health of financial speculation in the City, and the vast hype over AI. The problem with this is not just the widespread doubts about whether AI will really turn out to be the productivity boosting breakthrough that capitalists hope for, but whether the massive current valuations of tech companies chasing profits from AI amount to a dangerous bubble. Leaving aside the first question for the moment, there is now a chorus of voices that includes the IMF, airing concerns that a financial bubble has inflated, and which, when it pops, might prove highly contagious for the US and world economies. Comparisons with the 2000 dot-com bubble are becoming more concerning in economic circles.

One sign of an impending crash is when investors start putting money into stocks, not because they are confident that profits will flow, but to make money from the bubble and get out before it bursts. An indication that this may be happening now is that a poll of global fund managers this month revealed that 50% of them now think that there is a bubble, which was not the case only a month ago.

The second sign of an impending crash is that investment funds become more speculative and are being misallocated. The scale of investment in data centres that are never likely to repay their costs points to just such a misallocation of funds.

The third sign of an impending crash is when the boom is fuelled by debt, which is where the news that ‘OpenAI will pay Nvidia in cash for chips, and Nvidia will invest in OpenAI for non-controlling shares’ comes in. This circular arrangement is called ‘vendor financing’ and was a feature of the dot-com bubble.

The scale of the increases in the valuation of companies like Anthropic and OpenAI, both of which have nearly trebled in value over the last year, indicate further speculation, since actual profits lag far behind the capitalisation of most of these companies.

This is not to say that a market ‘correction’ couldn’t save a smaller number of AI companies that do become profitable. However, if such a correction led to a clearing out of the market, the ripple effects would likely be very damaging, given the weakness in the rest of the economy. For example, speculative investment is propping up much of the US economy, as almost ‘40% of the US real GDP growth last quarter was driven by tech capex [capital expenditure, i.e. investment] and the bulk of that capex was in AI-related investments.’ Outside of the ‘magnificent seven’ tech companies, we are told that, ‘the US non-financial corporate sector is beginning to see profit growth disappear’.

This makes the US economy quite vulnerable to a tech-stock crash, which would certainly have major implications for the world economy. For a satellite economy like the UK, which is currently hoping for billions in investment from precisely those US tech companies, it could well be disastrous.

Vulnerabilities and alternatives

There have been various other straws in the wind pointing to a crisis. For example, the bankruptcies of US auto parts supplier First Brands and car dealership Tricolor, which have been causing worries about contagion in wider credit markets. The JPMorgan CEO said that when ‘you see one cockroach, there are probably more, and so everyone should be forewarned of this one,’ and the day after, the revelation of large bad loans held by two US regional banks caused the sector’s shares to drop sharply. These are not tech companies, but are indicative of how implosion in one part of the economy could expose many other weak points elsewhere. The repercussions from these vulnerabilities have already given global stock markets a sharp shock.

Corporate failures are connected to increasing concern in the expansion of non-bank financial institutions. These are insurance companies, pension and investment funds, and others, which now hold about half the world’s financial assets, and yet are not regulated nearly as strictly as banks are. Banks themselves are, however, increasingly ‘exposed’ to the liabilities of these ‘non-bank’ financial institutions, which often include volatile cryptocurrency. As the IMF puts it, ‘the vulnerabilities of these nonbank intermediaries can quickly transmit to the core banking system, amplifying shocks, and complicating crisis management.’ The valuations of AI investments are said to ‘rhyme’ with the dotcom bubble of 2000, but the kinds of non-regulated financial moves that are happening in the background point to the kinds of dubious behaviour that predicated the 2008 crisis.

The sheer scale of the stock mania is quite frightening: Michael Roberts points out that the AI investment bubble is seventeen times that of the dot-com mania of 2000, ‘and four times the subprime mortgage bubble of 2007.’ A crash may not come next month, or next year, but will surely come soon enough, and when it does, the government will be forced, as it was in 2008, to bail out banks or other institutions which are ‘too big to fail’, at the cost of many billions to the public. This will once again become an argument about private bailouts and public poverty. More privatisation and more austerity will be required to service the government’s ballooning debt, while we are told that there is no money for schools, hospitals, social care, or renewable energy.

Rachel Reeves ability to act decisively is hemmed in by the fiscal rules she set herself. The rules were adopted as a kind of penitentiary hair shirt to prove to the City that she could be trusted. However, the incessant demand from the City that Reeves must find more financial ‘headroom’ in her fiscal plans has been gleefully used by the right to insist that the Chancellor has to maintain austerity at all costs. The government is clinging to the idea of a ‘black hole’ in public finances because it is aware that when the next financial crisis comes, it will need lots of room to take on massive amounts of fresh debt to prop up the system.

There is an alternative to this finance doom-cycle, however, and that is to make the economy far less dependent upon speculative capital. Rather than seeking out foreign firms to invest in ecologically damaging white elephants, why not make Britain energy independent with a massive renewable investment programme funded by closing tax loopholes, and making other reforms to the tax system? This would provide many more jobs than AI investment, and that in turn would help improve government finances so that it could support public services. Then, nationalise the utilities and make their creditors take at least a ‘haircut’, given the estimated £200bn that has been taken out of them in dividends since the 1990s. If the banks do get into trouble, then take them into public ownership properly, rather than do as was done after 2008. Certainly stop the process of quantitative tightening.

This is just the beginning of what could be done. But to get there, our movements must begin the fight now to ensure that the next financial crisis does not turn into a repeat of the disastrous fifteen years of austerity we have suffered. Labour has proven that it is so subservient to capital that only severe pressure will make it contemplate the slightest deviation from the increasingly irrational pressures of capitalist interests. Another economics is possible, but we have to get organised and fight for it.