by Michael Roberts
The US Federal Reserve bank is planning to raise its basic
interest rate at its 15 December monetary policy meeting. This will be
the first Fed hike since 2006. That fact alone shows how long and how
deep has been the impact of the global financial crash of 2007-2008, the
subsequent Great Recession of 2008-9 and the ensuing and seemingly
unending long depression of below trend economic growth since.
For six years, the Fed has held its interest rate near zero to ‘save
the banks’ from meltdown, to avoid debt depression like the 1930s and to
revive the economy with cheap credit.Ben Bernanke, the Fed chief at the time, continues to argue that this
easy and ‘unconventional’ monetary policy did that trick. Bernanke has
recently published a book defending his strategy and does interviews for the same.
In this blog, I have analysed the success or otherwise of quantitative easing where it has been applied in the US, Japan and now in the Eurozone. It has been a dismal failure in reviving the major economies. It has been a great success in supporting a boom in the stock and bond markets and in financing new credit bubbles in emerging economies.
Apparently, a majority of Fed monetary policy makers reckon that, at
last, the US economy is growing fast enough to ‘tighten’ labour markets
and even raise the possibility of rising inflation perhaps eventually
beyond the 2% target that Fed looks to. But that conclusion is
debatable at the very least.
It’s true that the unemployment rate has halved to 5% from its peak
of 10% at the depth of the Great Recession, but it is still above the
pre-crash lows. And inflation remains well below the Fed target.
Headline inflation which includes energy and food prices is near zero,
and even excluding these items, ‘core’ inflation, although rising is
still below the Fed target at 1.9%. And if you look at the prices that
average Americans pay for the goods and services they use, based on the
personal consumption expenditure (PCE), then inflation is very low.
Moreover, real GDP growth remains pretty pathetic at around 2.2% a
year on average, well below the average of 3.3% a year before. The
‘trend gap’ shows no sign of being bridged. Indeed, what is happening is
that the official economic bodies are lowering their estimates to
potential GDP growth towards the actual level of growth so that the
‘output gap’ disappears.
In other words, it is being admitted that the US economy is now set
on a permanent path of lower long-term growth, based a low growth in
population (despite one million net immigrants a year) and very low
productivity growth (as business investment growth slows).
The damage to the US economy from the Great Recession has left a
permanent scar; what is called ‘hysteresis’. In a new study, Professor
Laurence Ball of Johns Hopkins University (http://www.nber.org/papers/w20185),
from a sample of 23 high-income countries, concludes that losses of
potential output as a result of the Great Recession ranged from zero in
Switzerland to more than 30 per cent in Greece, Hungary and Ireland. In
aggregate, he concludes, potential output this year was thought to be
8.4 per cent below what its pre-crisis path would have predicted. This
damage from the Great Recession is, he notes, much the same as if
Germany’s economy had disappeared.
This measures the permanent loss of
resources and value caused by capitalist slumps.
Indeed, work by Keynesian economists Larry Summers, Olivier Blanchard (ex-IMF chief economist) and Eugenio Cerrutti found
that a high proportion of recessions, or about two-thirds, are followed
by lower output relative to the pre-recession trend even after the
economy has recovered. In about one-half of those cases, the recession
is followed not just by lower output, but by lower output growth
relative to the pre-recession output trend. That is, as time passes
following recessions, the gap between output and projected output on the
basis of the prerecession trend increases. They suggest important
hysteresis effects and even “superhysteresis” effects (the term used by
Laurence Ball for the impact of a recession on the growth rate rather
than just the level of output).
This can be looked at from various angles of economic theory: from the neoclassical Wicksellian view that the ‘natural rate’ of interest (or profit) is permanently lower; from the Keynesian one that the US economy is in ‘secular stagnation’ and/or a permanent ‘liquidity trap’; or from a Marxist one that the US (and major economies) is locked into a depression because of low profitability created by excessive accumulation of tangible capital and financial debt in the past.
The first two theories in some way suggest that the Fed should not
hike rates in case they take the cost of borrowing either above the
‘natural rate’ or burst the credit bubble and push the economy into a
deeper liquidity trap. The Marxist view is that, just as zero interest
rates and quantitative easing made little difference in restoring a low
profitability, high debt economy, so raising them will solve nothing
The Keynesian answer (at least among those Keynesians like Krugman,
Summers, DeLong and Wren-Lewis) is: keep going with the easy money
policy but add to it a round of government spending, financed by
government borrowing. You see, the main cause of the Great Recession
was ‘lack of demand’ and the main cause of the subsequent weak recovery
or depression was the application of ‘austerity’ (i.e. cuts in
government spending in trying to balance the books as though an economy
was like household finances). Rising debt does not matter because one person’s debt is another’s asset.
Well, there are a number of questions there. First, did governments
in the major economies apply austerity? Well, some did and some did not
too fiercely despite the neo-classical rhetoric of many finance
ministers. Second, did more or less austerity correlate with slower or
faster growth? The Keynesians say it did. They proclaim the power of the Keynesian multiplier,
namely that one unit of extra government spending over taxes will
deliver a multiple of one unit of real GDP, especially in times of
slump. They usually cite a ratio of 1.5 times.
The evidence for this is weak and a matter of intense debate,
although only this week, Paul Krugman made another attempt to prove that
austerity was the cause of global weakness.
I did a correlation between fiscal deficit expansion by various
governments against an increase in real GDP and found little
correlation, especially if Greece is removed.
And in the latest study of the impact of austerity on growth, Alberto Alesina and Francesco Giavassi found that
“fiscal adjustments based upon cuts in spending are much less costly,
in terms of output losses, than those based upon tax increases.
….spending-based adjustments generate very small recessions, with an
impact on output growth not significantly different from zero.” And “Our
findings seem to hold for fiscal adjustments both before and after the
financial crisis. We cannot reject the hypothesis that the effects of
the fiscal adjustments, especially in Europe in 2009-13, were
indistinguishable from previous ones”. In other words, cutting
government spending (austerity) had little effect on the real GDP growth
rate and that applied to the post-crisis ‘austerity policies of
G Carchedi and I have considered the mechanism of government tax and spending policies on economic growth from the Marxist viewpoint. We started from the premiss that economic growth in capitalist economies depends on an expansion of business investment
and that depends ultimately on the profitability of those
investments. So we looked at the multiplier effects of government
spending, taxation and borrowing on growth through the prism of
profitability – a Marxist multiplier, we called it.
Our Marxist multiplier analysis revealed that it was very unlikely
that extra government spending, whether financed by taxes of borrowing,
would boost profitability in the business sector and therefore raise
capitalist investment and economic growth.
I have tested our premiss that it is the profitability of business
capital that matters not government spending. I found that there was a
significant positive correlation between changes in profitability of
capital and economic growth, unlike the lack of correlation between more
government spending and growth, as the Keynesians claim, at least in a
That again tells me that if we want to know what is going to happen
in the major capitalist economies we must look at the key indicators of
business investment and the profitability of capital, not at inflation,
employment or the level of ‘austerity’ as mainstream economists do.
So what are the prospects for global capitalism on those Marxist
criteria and what is the likelihood of a new slump as the Fed prepares
to hike? I have discussed these questions ad nauseam on this blog in the past. But let us consider the latest evidence.
At the recent meeting of the G20 in Turkey, apart from discussing the
mess in the Middle East and the migration crisis in Europe, the
ministers reaffirmed their pledge or expectation that the major
economies by an extra 2% by 2018. What an ‘additional’ 2% of G20 GDP
means is difficult to judge. But anyway it is really a sick joke.
Far from accelerating, global growth is slowing down further. In its
twice-yearly outlook, the Organisation for Economic Cooperation and
Development (OECD) cut its forecast for global economic growth to 2.9% in 2015 and 3.3% in 2016, down from 3.0% and 3.6%, respectively.
Presenting the outlook in Paris, OECD secretary general Angel Gurría said: “The
slowdown in global trade and the continuing weakness in investment are
deeply concerning. Robust trade and investment and stronger global
growth should go hand in hand.” Catherine Mann, OECD chief economist said: “Global
trade, which was already growing relatively slowly over the past few
years, appears to have stagnated and even declined since late 2014. This
is deeply concerning. Robust trade and global growth go hand in
hand….“The growth rates of global trade observed so far in 2015 have, in
the past, been associated with global recession.”
We also have the preliminary real GDP figures for the most important
capitalist economy in the world, the US. In third quarter of 2015 (June
to September) US economic expansion slowed sharply. The economy grew at a
1.5 per cent pace annualised pace in the three months to September,
down from 3.9 per cent in the second quarter. The US economy has
expanded in real terms over the last 12 months by just 2%, down from
2.7% in Q2 and business investment slowed to its lowest yoy rate for
over two years; at an annual rate of 2.1% compared with 4.1% in Q2. And
investment in new plant actually dropped 4% and investment in software
and such rose at the slowest pace since 2013.
Meanwhile Japan’s economy contracted in the third quarter. Real GDP
declined an annualized 0.8 percent, following a revised 0.7 drop in the
second quarter. Again, the biggest worry was the weakness in business
investment. This was the fifth ‘technical recession’ since Japanese PM
Abe launched his ‘Abenomics’ and quantitative easing programmes. And in
the Eurozone economic growth slowed to just 0.3% in Q3, from 0.4% in Q2.
And then we have the so-called emerging economies. I have reported on their demise in several previous posts.
The policy of easy money and quantitative easing did not only lead to a
stock and bond market boom in the major advanced economies, it also led
to a similar boom in emerging economies as Asian, Latin American and
‘emerging’ European corporations borrowed heavily from cash-rich Western
banks at cheap rates, mostly in dollars, to generate mainly a property
and construction boom. Emerging market corporations now have debts near
100% of GDP on average, matching those for corporations in the advanced
capitalist economies. But the commodity price boom upon which much of
growth was based has collapsed. Global demand for oil and basic metals
has slumped and this has spilt over into the demand for Asian exports.
Export prices have slumped, currencies have dived and yet debts remain,
mainly in dollars. And now the Fed is set to hike the cost of borrowing
So does all this mean we are heading for a new global slump? Well, I have raised the risk that a Fed rate hike could be the trigger for a new slump, just as it was in 1937 when it brought to an end to recovery from 1932 during the Great Depression of the 1930s. Only the preparations and beginning of the world war ended that slump.
The strategists of capital are not stupid. They have tried to
estimate the likelihood of a new recession. Goldman Sachs pointed out
that the current economic expansion — beginning in July 2009 — was now
76 months old. Using data since 1950, they calculate that the
unconditional odds that a six-year-old expansion will avoid recession
for another four years—and mature into a 10-year-old expansion—are about
60%. So the odds of recession over the next year are only 10-15%.
And mainstream economic indicators for recessions using a range of
economic variables suggest little likelihood of a slump in the US.
But this sort of indicator is pretty useless and it is backward
looking, so recessions are on you before the data indicate them. And
mainstream economics never forecast the Great Recession anyway. Indeed,
we know that all the leading international economic agencies, the
leading economists and investment gurus were predicting faster growth in
2007-8 as the global financial crash unfolded.
Moreover, in my view, modern capitalist cycles of slump to slump have
not been just six years or less, but generally 8-10 years: 1974-5,
1980-2, 1990-2, 2001, 2008-9. If that were to hold again, then the next
slump would not be due to start before next year at the earliest. And
if the Fed’s rate hikes are to have an impact, they won’t be felt on the
cost of debt and investment for at least six months.
It is best to consider the Marxist indicators that I have referred
to: profitability and profits and business investment. There has been
some debate in Marxist economic circles that profitability is not low or
falling and that there is an excess not a dearth of profits in the
major economies. I have discussed these arguments that the capitalist world is ‘awash with cash’ in previous posts.
All I can add is that cash and profits are the not the same and profits
and profitability are not either. I have not measured US profitability
for 2015 and final
proper data for 2014 is only just becoming available, but 2014 showed a
decline, with rate still below the peak of 2007 and the higher peak of
I have shown before in previous posts that global corporate profit
growth has nearly ground to a halt and in the US on some measures, it
has gone negative.
The latest earnings results for the top 500 companies in the US
confirm that both revenue and profits fell in the most recent quarter.
And as I have shown before, where profits go, business investment is likely to follow, with a lag.
Watch this space.
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