Why the world economy is headed for a new recession. --PG
11 March 2016
Red Flag editor Ben Hillier speaks with US socialist Joel Geier, associate editor of the International Socialist Review, about the causes of the ongoing economic stagnation in Western economies, and the potential for a new world recession.
“You want to know what people are like in there? They’re pigs. No matter how much money they make, they want to steal some more. [The impulse] comes out of their class background.”
Joel Geier is explaining to me the finer points of economics and the moral character of those at the centre of US capital-trading markets. “They think that entitlements – social welfare, Medicare, pensions – should be cut, taxes should be cut, the government should be small. It’s just more money in their pockets. And it is presented by good chunks of capitalist economists as a solution to the crisis facing everyone else”, he says.
Geier once was an interest rate trader at the Chicago Mercantile Exchange, where he survived the 1987 Black Monday rout, the largest single-day percentage decline of the Dow Jones Industrial Average in history. “I can tell you, having been in there, why the capitalists are so incompetent. I had to deal with them on a daily basis”, he says.
Fast forward to 2008 – not 20 years after political scientist Francis Fukuyama declared “the end of history” with the triumph of free market capitalism over the Stalinist Eastern Bloc. Another huge market crash, this time centred in the North Atlantic financial system, plunged the world economy into crisis.
In October of that year, Alan Greenspan, former US Federal Reserve Bank chairman, fronted a congressional committee and said of the economic philosophy that had guided his oversight of the banking system for almost two decades: “I have found a flaw … I don't know how significant or permanent it is. But I have been very distressed by that fact”.
To put it mildly, there was a measure of hubris in claiming a discovery, rather than admitting incompetence. In the preceding month, one after another, almost all the major financial institutions in the US and the UK had collapsed and been bailed out or nationalised.
Today, most of the Western economies remain mired in a swamp of low growth, low investment and high unemployment. Economists refer to this secular stagnation as “the new normal” – a Western slowdown to be expected for the next two decades. What’s going on?
“The other recessions – of 1990-91 and 2000-01 – occurred in the context of the neoliberal world boom from 1982 to 2007”, Geier explains. “Capital on a world scale during that period grew two-and-a-half to three times, as did the US economy. And it led to the emergence and industrialisation of China. By contrast, the current stagnation comes in the context of a crisis of neoliberalism.”
The boom years were characterised by credit-driven consumer spending supplemented by asset-price inflation – stocks and housing – lower rates of non-financial business investment and a system of international financial arbitrage. In the decade leading to the crisis, the US was spending up to 7 percent more than it was producing. Money flowed from the rest of the world into US stocks and bonds, sustaining the flow of imports from China and expanding the supply of credit.
Productivity grew but wages were stagnant, leading to increased inequality. The working and middle classes increasingly relied on debt to tread water financially because the capitalist class had gone on the offensive from the late 1970s. Well-paid manufacturing jobs were replaced by low-pay service and sales jobs; welfare was cut.
It all came to a head when the gap between the debts that had been accumulated and the real incomes of the US working class was exposed in the collapse of the residential housing bubble from 2006.
Geier grew up in an income-poor working class family in New York. His father was a garment worker, as were both of his grandfathers. The foray into commodity trading came in the middle of a life dedicated to revolutionary socialism. In the early 1960s he was national secretary of the Young People's Socialist League – of which current US presidential hopeful Bernie Sanders was a member when at the University of Chicago – before becoming a leader, along with Hal Draper, of the Independent Socialist Club at Berkeley in the mid-1960s. Today he lives in Chicago and is an associate editor of the International Socialist Review.
Over a Skype call, his disposition comes across as cheery and generous. But the New York accent changes register when it turns to the crux of the issue of what has taken place in the US in the decade since the banking collapse. “This has been a disaster for workers. Income has not recovered to what it was in 2007; it’s still 10 percent below. The new jobs that are being created are low wage”, he says. “Think of it: the minimum wage is about $7 – in 1969 it was the equivalent to $11 per hour in today’s terms – but a Starbucks coffee in Chicago will cost you three to four dollars. Two hours’ parking in the city costs about $30. You do the math on trying to live …
“For the ruling class this has been a magnificent recovery. Profits and wealth have never been greater in the United States. The top 1 percent of income earners have taken 90 to 95 percent of all the growth during the recovery. At the peak of the last business cycle in 2006, after-tax profits hit $1.15 trillion. While for the last year, profits have been declining, they peaked in 2014 at $1.85 trillion. The profit growth has been due to a cut in corporate taxes and because of the low interest rates, which cut the cost of servicing debt.”
How do we understand the mismatch, which isn’t confined to the United States, between the tremendous increase in corporate profits, and low growth and investment in the economy as a whole?
“The mainstream economists can’t explain it; they just describe it”, he says. “Worse than that – they have no idea how to get out of it. The main thing they have done is drop interest rates and print money in order to create asset price inflation in stocks and bonds and hope that some of the wealth trickles down into the rest of the economy and restores investment and growth. That failed.”
Geier’s explanation is that the capitalists have not overcome the two main underlying causes of the crisis. “The first is the over-accumulation of capital – what they call industrial over-capacity – on a world scale”, he says. “Accumulation stalled in the US, Europe and Japan because what’s the point of investing in a new factory when there are too many of them already? Additional capacity would cut the existing rate of return on investments.” The other problem is that the debt that was accumulated to finance the neoliberal boom and the rise of China “has never been dealt with”.
If anything, the situation might be worse now than it was heading into the 2008 crisis. “In the United States, capacity utilisation has only partially recovered, and remains below 80 percent. Nobody knows what capacity Chinese industry is functioning at. Some people believe it is functioning at two-thirds, others believe it is functioning at 50 percent.” US trade deficits remain huge, and are still paid for by borrowing from the rest of the world – US debt has grown from US$10 trillion to US$18 trillion; global debt has increased by US$57 trillion to US$199 trillion, according to consultancy firm McKinsey & Company.
For a period, the so-called emerging economies, such as China, India and Brazil, were touted as a new, dynamic counterweight to the sclerotic advanced economies. They, and much of the underdeveloped world, escaped the recession that followed the 2008 financial crisis, or overcame it relatively quickly. Now, Geier notes, Western stagnation is spreading.
Chinese growth is slowing, profits are down 15 percent over the last year, there is massive capital flight, and the economy potentially faces a debt crisis greater than that faced by the US in 2008. Mainstream economists had predicted that China, like other export-dependent developing economies before it – principally Japan – would “rebalance” from export dependency to domestic consumption-led growth. Not only is this is not happening anywhere near the pace required, the export-led model of growth pursued by the Chinese government appears to be pushing its limits:
“China has been the biggest boom in world history. In the last 15 or 20 years the economy has grown from $1 trillion to $10 trillion. This boom was financed by the biggest credit creation in world history: $30 trillion in the last decade. It is much larger than the housing bubble, and the financial bubble attached to it, leading up to the crisis in the United States. Twenty percent of Chinese GDP now goes to servicing the debt. Corporate debt is 160 percent of GDP – this is coming up against the slowdown in the economy.
“For example, the Chinese produce more than 800 million tons of steel a year, compared to the US’s 80 million tons. And they are going to shut down possibly 300 million tons of that in the coming years. They have bet on a world recovery that has not eventuated. Now there is capital flight; in the last year US$1 trillion has left the country”, he says.
The Chinese slowdown and dramatically increased capacity in the global resource industries are also hammering primary-product export economies. Commodity prices, which Brazil, Russia, Venezuela and many Middle Eastern and African countries are reliant on for income, have collapsed. As they have fallen, national currencies have devalued, making dollar-denominated debt repayments significantly more onerous.
Geier argues that a mass of negative indicators in the developed and underdeveloped economies suggest that we may be headed toward a severe global recession. Perhaps. But what do we know and what don’t we know? “The known knowns are the spreading slowdown of the world capitalist system – trade, commodities, profits, growth etc; the increased market volatility; the return of all the toxic credit derivatives that played such a destructive role in the 2008 crisis”, he says.
“The known unknowns are whether there will be a more serious downturn in China – bigger capital flight, a bigger devaluation, a bigger collapse; and the effect of any global downturn on the US economy. The biggest unknown is the relationship of all of this to the financial system. We know that the European banks are the weak link in the global economy, but we really have no idea about how they would fare in a new recession.”