Capitalism expands in booms and slumps and we're due a slump, writes Michael Roberts
Another global economic slump is coming. The last one, called the Great Recession because of its significantly large fall in production, investment and employment, ended in June 2009. Modern capitalism expands in a series of booms and slumps, recurring at broadly regular intervals. In the post 1945 period, slumps in economic activity have occurred every 8-10 years. So we are due another one.
The current expansion since June 2009 is now the longest on record, but it is also the slowest. It has taken years for the major capitalist economies to return to the levels of production and employment achieved just before the Great Recession of 2008-9. Indeed, in many economies manufacturing output and business investment is still below 2007 levels. In particular, although some economies have seen unemployment rates fall to lows, average real wages have stagnated and in many cases are still below 2007 levels. The Bank of England reckoned that the stagnation of real wages in the UK (that’s after inflation is deducted) has been the worst in 167 years of records.
That’s why many mainstream economists call the last ten years a period of ‘secular stagnation’ and why I call it a Long Depression, similar to that of the Great Depression of the 1930s or the depression that lasted more than a decade in the late 19th century.
But a new recession is coming. The economic indicators are flashing amber to red. First, real GDP growth in the major economies is slowing fast. The US economy, which has performed better than most, is now growing at just 2.3% a year; The UK economy has slowed to 1.2%; Japan is closer to 1% and Germany virtually in negative territory. And if you measure GDP per person (thus accounting for population changes), growth rates are even worse. It’s even worse in some of the so-called ‘emerging’ capitalist economies, like Brazil, Mexico, Turkey, Argentina and Russia. They are already in recession or slump. Look at this list:
Canada: 1.3%; France 1.3%; Japan 1.2%; UK 1.2%; Russia 0.9%; Brazil 0.5%; Germany 0.4%; Italy 0.0; Mexico -0.7%; Turkey -2.6%; Argentina -5.8%. Only China, India and Indonesia can record decent growth rates and even here, there is a rapid slowdown. The world capitalist economy is close to ‘stall speed’, a point where investment and production is so low that it stops.
There are other indicators that are more up to date. Economic activity surveys, called purchasing managers indexes, for countries show that many economies are either contracting or slowing fast. On these measures, the global manufacturing sector is already in recession. Manufacturing has collapsed along with trade in manufacturing goods, partly because of the ongoing trade war between Trump’s America and China. Only consumer spending on services is keeping things going for now.
Desperate to avoid a new slump, the government and monetary authorities of the world are driving interest rates on borrowing down, such that interest rates have gone negative. In other words, buyers of government bonds are paying the borrower (the government) interest to hold them. That’s because investors are so worried about a new slump that will hit the stock market, that they want to hold ‘safe assets’ like government bonds because governments cannot go bust. It’s a borrowers’ market. In Denmark mortgage lenders are paying interest to the borrower to take out a mortgage!
This is the fantasy world of finance. But it won’t stop a slump. That’s because even if interest rates are zero or negative, capitalist companies will not invest more or step up production. You can take a horse to water, but you cannot make it drink. What matters for capitalist investment is not so much the cost of borrowing or even uncertainty about the trade war or the stock market. What matters is profit. Capitalism is a profit-making mode of production.
What drives capitalist economies and capital accumulation are changes in profits and profitability. Economic growth in a capitalist economy is driven not by consumption but by business investment. That is the swing factor causing booms and slumps in capitalist economies. And business investment is driven mainly by one thing: profits or profitability – not interest rates, not confidence and not consumer demand. This explains the recurring booms and slumps in capitalism.
And it is why a new recession is coming. Despite the end of the Great Recession, the profitability of capital in the major economies has remained below levels reached up to 2006. As a result, business investment growth has been weak. And now corporate profits in the major economies are stagnating. Indeed, in the world’s largest capitalist economy, the US, corporate profits outside of the financial sector ie in the productive sectors, have been declining for some time. You may read in the headlines of the huge profits of the likes of Amazon, Microsoft, Google etc. But they are the exception at the top of pyramid. Further down, companies are only scraping a profit by avoiding new investment and by employing more workers at very low wages on temporary or part-time, or zero-hour contracts.
If profits in the US and elsewhere continue to fall, then as night follows day, investment will collapse and weaker companies will go bust and unemployment will start to rise. Corporate debt globally is at record levels, but because of very low interest rates, servicing that debt has been possible. But if companies go bust, the debt mountain will start to weigh down on investment and jobs causing more busts.
Compounding this underlying trend towards a new recession are particular factors, like another gear-up in the trade war; or in the case of the UK, a no deal Brexit. A no deal Brexit will quickly drive Britain into a slump, even before the rest of the world. And if there is a general election before the year is out, a new government in Britain will face the double whammy of a Brexit slump and a new global recession.
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