The seeds for the economic meltdown that we face now were planted a long time ago, says David Bush
Oh there goes gravity. In short order, the COVID-19 pandemic has triggered an unprecedented global economic downturn, whose full force we have not even begun to register. Global supply chains — in ruins. Industries like airlines, tourism, hospitality, railways, entertainment, retail, restaurants, manufacturing, auto — smouldering craters. Stock markets — a carnival of shareholder carnage.
The cascading effect of country after country shutting down the majority of its economic activity in order to fight the virus means this will only get worse. In rapid succession, millions around the world could soon be out of jobs as company after company goes belly up or engages in mass layoffs to avoid annihilation. Governments around the world are scrambling, hoping that interest rate cuts, emergency injections of liquidity into the financial system and announcements of business bailouts will be enough to slow the economic inferno. This is unlikely.
The COVID-19 pandemic may have sparked the crisis, but the real fuel driving the global economic meltdown is how the capitalist system resolved the last crisis.
The crisis last time
The 2008 financial crash was, in reality, a series of interlocking economic crises that spread throughout the globe causing a worldwide recession. This ushered in what the economist Michael Roberts refers to as the long depression, a period of sustained but low growth.
Since the economic crisis of the 1970s, capitalists around the world have increasingly relied on neoliberal policies that have loosened regulation on finance and capital flows and put the screws to workers in order to boost profits. Capitalists firms grew, the rich got richer, and workers fell further behind. The system was unsustainable.
The integration of the massive Chinese economy into the global capitalist system, easy money from deregulated banking and cheap credit-fuelled growth. But the flip side to this growth was massive overproduction. The productive capacity of global capitalism was far exceeding what the system could absorb. By the end of the 1990s, a series of financial shocks in East Asia and a recession in 2001 showed that all was not well. For a time, however, the massive U.S. and Chinese economies could paper over the problems through debt.
But the ground was rapidly shifting. For instance, from 2004 to 2008, the Canadian economy saw more than one in seven manufacturing jobs — nearly 322,000 — disappear. The United States lost roughly one-quarter — 4.1 million — of manufacturing jobs between 1998 and 2008. Business investment in new plants and machines was slowing throughout the early 2000s in the United States and Canada. There was little incentive to invest in expanding production when there was already far more productive capacity than could be used. By 2005, the rate of productivity growth began to stagnate. All this signalled that the rate of profit which firms were earning was slowing. The crisis of overproduction was in motion.
The Great Recession
But debt kept the system afloat, and the stock market was pumped up through speculation. Money that otherwise would have been driven into business investment was driven into stocks and financial assets, most notably U.S. mortgage-backed securities. Growing investor demand in seemingly safe mortgage-backed securities drove banks to create ever more of these lucrative financial assets, opening the door to a frenzy of predatory lending and real estate speculation. Millions of risky loans were pushed, creating a ticking time bomb. When U.S. foreclosure rates started to double in late 2007, this triggered a massive crisis. Housing prices fell, the value of mortgage-backed securities tanked and financial institutions the world over were left with trillions in toxic assets.
The housing crisis became a financial crisis as banks and other financial institutions were at risk of outright imploding. By the fall of 2008 money markets began to freeze up, and corporations which rely on overnight or short-term money markets to fulfill payroll and payments could no longer do so. The entire system was on the verge of an outright collapse. Governments stepped in and bailed out the banks and other large corporations and injected trillions into the financial system. The Federal Reserve in the United States cut interest rates and bought trillions in toxic assets from financial institutions through quantitative easing and other extraordinary measures, many of which had never been used before.
As governments around the world bailed out their banks and propped up whole sectors of their economies, they more or less prevented a full-scale financial meltdown. Workers, on the other hand, were left in dire straits. Millions lost their jobs, their homes or saw their pay and hours of work cut. After governments took on massive debts to bail out corporations and the banks, they tried to pass this cost on to workers. Austerity budgets that cut public services were rammed through, deepening the economic crisis further and setting off the sovereign debt crisis in 2010.
The Long Depression
From 2009 to 2020 the global economy saw a return of economic growth, albeit at anemic growth rates. For the first six years, unemployment remained well above pre-recession rates, and labour force participation never recovered. Workers struggling through the weak economy had to also face down governments pushing austerity and employers demanding concession after concession.
As a result wages remained virtually stagnant across the advanced capitalist world. This meant that sustained low-interest rates and cheap government-backed credit propelled economic growth through the growth of household debt and more significantly corporate debt.
In Canada, the household debt burden has been on the rise for years as individuals access cheap money to pay expenses and purchase real estate, whose value has skyrocketed in most of the country. Households are now carrying $1.76 in debt for every dollar of disposable income. Canada’s household debt service ratio, which measures how much income goes to paying interest, was by the fourth quarter of 2019 higher than before the Great Recession. In the United States, household debt tops $14 trillion, which is an all-time high, but as a proportion of the GDP slightly lower than before the Great Recession.
But the real monster under the bed is corporate debt. As the OECD recently noted, the global outstanding stock of non-financial corporate bonds reached an all-time high of USD 13.5 trillion in real terms by the end of 2019. Companies from advanced economies, which hold nearly 80 percent of all corporate bonds, have seen their corporate bond volume grow by 70%, from USD 5.97 trillion in 2008 to USD 10.17 trillion in 2018. In short, a massive amount of corporations are over-leveraged. In the United States corporate debt has doubled since 2008, rising from USD 3.3 trillion to USD 6.5 trillion. In China, corporate debt has risen fourfold over the last decade.
This corporate debt is the result of easy money policies pursued by governments and central banks aiming to keep the economy afloat. The debt corporations have taken on has allowed them to engage in a flurry of stock buybacks that pushed the stock markets to ever greater heights despite weak economic growth. The surge in stock prices since the Great Recession is a result of this debt, not of the underlying health and earnings of stock issuing companies. Corporate debt has also financed a massive wave of mergers and acquisitions.
Corporate indebtedness has gotten so bad that 16 percent of all corporations in the United States and 10 percent of companies in Europe are classified as zombie companies — meaning they are able to generate revenue, but only enough to cover fixed costs and service interest on their loans. They are wholly dependent on continued bank loans. These companies have no ability to survive even a modest downturn in the economy, let alone a major one.
In the last three years, North America saw strong job growth, with mostly full-time work being added. However, unexpectedly this has not significantly pushed up wages (with the notable exception of the partially victorious Fight for $15 campaigns). Inflationary pressure has been minimal. In light of what seemed like a strong economic outlook central banks began to raise interest rates slightly in 2019. What was quickly exposed was the weakness of the real economy. In short order, the Federal Reserve had to pull back its planned hikes for fear of a recession. In Europe, interest rates plumbed new depths, as the European Central Bank and other monetary authorities experimented with negative interest rates. Corporations and the stock market valuations were wholly dependent on cheap credit.
At the beginning of 2020, economic forecasters predicted slow but modest growth for 2020 and 2021, though there were already signs that not all was well. The supposed Silicon Valley tech boom had already started to collapse.
As COVID-19 swept through Hubei province in January and February of 2020, economic activity in China began to decline rapidly. Factories were shuttered, which caused global supply chain chaos and plummeting domestic demand.
For instance, auto sales in China — the world’s single largest national auto market — dropped 80 percent in February (the expected drop had been around 30 percent). Industrial output in China dropped by 13.5% in January and February from a year earlier, retail sales fell by 20.5%, and fixed-asset investment dropped 24.5%. Meanwhile, 75% of U.S. companies saw their supply chains disrupted in February.
As the virus spread globally it has wreaked havoc with such speed that official statistics can barely keep up with the carnage.
The most high profile indicator is the stock market. Over the last 15 days the Dow Jones Industrial Average has had 3 of the top 15 worst days, as measured by percentage loss, in its history. The scale of the losses are one thing, but the troubling aspect of the stock devaluation only really became apparent last week when normally safe assets like bonds and gold were also experiencing devaluations at the same time as equities. This signalled that investors across the world are experiencing a liquidity crisis, which was one of the reasons the Federal Reserve stepped in with a 1.5 trillion liquidity injection into the markets. It followed with a further $500 billion only days later.
While the stock markets will go up and down daily, it is clear the trend line is towards devaluation as the scope of the global economic shutdown becomes apparent.
Roughly 70 percent of economic activity in the United States is accounted for by consumer spending. By early March it was clear there was already a pullback in consumer spending in response to COVID-19. Restaurant bookings over the last two weeks have fallen sharply, from 30 to 60 percent depending on the region (though the actual number is likely much worse), and major purchases are being held back in the wake of uncertainty. The rolling and inevitable closures of restaurants, bars, and other business establishments means a decrease of economic activity on a scale never before seen.
But it’s not just restaurants and bars that are suffering. Millions who work in the air transport, hotel, rail, and entertainment industries are facing massive job losses, which has a knock-on effect of further decreasing economic activity. Already the U.S. preliminary data for March points to the largest ever recorded monthly decline in factory activity. It is not simply that some businesses will close for a couple of weeks and reopen as if nothing had happened. This is a chain reaction and it is happening in a synchronized manner on a global scale.
These are uncharted waters. We are experiencing the largest global economic disruption since World War II.
For energy dependent economies like Canada, the situation could be worse as oil prices took a steep dive by 30 percent due to an economic and political conflict between Saudi Arabia and Russia layered on top of the COVID-19 disruption. Not only will this cause massive and immediate job losses in places like Alberta, it will also mean a massive drop in expected revenue to provinces such as Saskatchewan and Newfoundland and Labrador, the latter of which could imminently face a public debt crisis.
The typical tools governments have used to fight economic downturns will not work. The room to cut interest rates further is now extremely limited. The quantitative easing mechanism used to rescue the financial sector in 2008 is unlikely to be enough. While central banks can keep upping asset purchases, this will be of declining importance in an environment where interest rates on safe assets are already so low, and where the underlying issue is massive simultaneous supply and demand disruptions.
Airlines and railway companies are already asking for bailouts. Governments across the world are preparing bailout packages for business, but it remains unclear how much will be enough. While airlines may be the first to be hit, corporate liquidity and solvency crises will quickly cascade through much broader segments of the economy.
Governments are fighting a twin crisis that exposes a massive contradiction at the heart of capitalism. Public health and social needs are in direct opposition to the needs of capital. It is either people or profit. The everyday political and economic legitimacy of capitalism has been thrown into question.
What kind of future?
The crisis will pass, but it will require the marshalling of massive resources and the implementation of extraordinary measures. The question is not just whether it is workers or the bosses who will pay for this. As Lenin noted long ago “every crisis discards the conventionalities, tears away the outer wrappings, sweeps away the obsolete and reveals the underlying springs and forces.”
The 20th century demonstrated, like no other before it, the way that capitalist crises politically polarize. We see this already in the response to COVID-19 — on the one hand, calls for massive expansion of social programs and supports and on the other a demand to respond by fanning the flames of racism and throwing up borders.
The question we now face is whether the working-class movement will be strong enough to use this moment to begin to build a society based on human need and not profit and oppression.
This article was first published in The Spring Magazine.
Join David Bush along with Dr. Sonia Adesra and John Rees will be at our Virtual Public Meeting on "Coronavirus crisis: Government, herds & the left response" on Saturday, 21st March 3:00 PM UK time.