by Michael Roberts
There is a growing talk among mainstream economists and the
financial media of a new global economic recession. Until the last few
weeks, the locus of this new slump has been focused on China. But, as I have argued in a previous post, it is unlikely to start there.
Much more important to the world economy is the largest economy in the
world in terms of national output and financial fire-power, the US.
In the last few weeks, there has been a continuous series of poor data for the US economy:
falling manufacturing output, weakening business sentiment and capital
goods orders and falling corporate profits. And globally, international
agencies by the week seem to announce reduced forecasts for economic
The latest of these agencies, after the IMF, the World Bank and the
OECD, is the United Nations. In its report on global economic
perspectives, it concluded that “the world economy stumbled in 2015
and only a modest improvement is projected for 2016/17 as a number of
cyclical and structural headwinds persist”. 2016wesp_full_en
UN economists downgraded their final estimate for global growth in
2015 from 2.8% to just 2.4% – remember the average prior to the Great
Recession for global growth was 4-5% a year. Naturally, like the other
agencies, it expects an improvement this year and next: “The world
economy is projected to grow by 2.9 per cent in 2016 and 3.2 per cent in
2017, supported by generally less restrictive fiscal and still
accommodative monetary policy stances worldwide.” But then each year these more optimistic forecasts are dashed and revised.
The UN also confirmed a key indicator of the Long Depression, that I
call the period since the end of the Great Recession of 2008-9. As
Professor Joseph Stiglitz put it in a recent article: “Moreover,
the UN report clearly shows that, throughout the developed world,
private investment did not grow as one might have expected, given
ultra-low interest rates. In 17 of the 20 largest developed economies,
investment growth remained lower during the post-2008 period than in the
years prior to the crisis; five experienced a decline in investment
during 2010-2015.” Indeed, the average growth rate in developed
economies has declined by more than 54% since the crisis. An estimated
44 million people are unemployed in developed countries, about 12
million more than in 2007, while inflation has reached its lowest level
since the crisis.
Stiglitz went onto consider “what’s holding back the world economy?” He
noted what some of us have been saying for years: that quantitative
easing by central banks, as used in the US, Japan, the UK and belatedly
in the EU, has failed to boost growth and investment. The problem was
that the banks used the cheap cash from central banks not to lend onto
companies to invest or households to spend, but to build up their cash
reserves or buy government bonds or their own shares.
As Stiglitz concluded: “Clearly, keeping interest rates at the
near zero level does not necessarily lead to higher levels of credit or
investment. When banks are given the freedom to choose, they choose
riskless profit or even financial speculation over lending that would
support the broader objective of economic growth.” Of course, this
is something that many Marxist economists have been saying for years –
in opposition to the hopes of Keynesian economists like Paul Krugman or
Noel Smith. Moreover, what
could provide a better case for the public takeover of banking systems
in the major economies so that credit can be directed productively and
not for bank profits?
Stiglitz also directs our attention to the massive reversal of capital inflows to so-called emerging economies. “An
unintended, but not unexpected, consequence of monetary easing has been
sharp increases in cross-border capital flows. Total capital inflows to
developing countries increased from about $20bn in 2008 to over $600bn
in 2010. Very little of it went to fixed investment. This year,
developing countries, taken together, are expected to record their first
net capital outflow – totalling $615bn – since 2006.” Actually, according to the Institute of International Finance, the outflow figure was even larger, with net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988!
As another international agency, the Bank for International
Settlements (BIS), put it in its latest quarterly review, the surge in
lending to emerging markets that
helped fuel their own — and much of the world’s — growth over the past
15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn. “In
the risk-on phase [of the global economic cycle], lending sets off a
virtuous circle in financial conditions in which things can look better
than they really are,” said Hyun Song Shin, head of research at the BIS, known as the central bank of central banks. “But flows can quickly go into reverse and then it becomes a vicious circle, especially if there is leverage.”
The BIS reported that the total stock of dollar-denominated credit in
bonds and bank loans to emerging markets — including that to
governments, companies and households but excluding that to banks — was
$3.33tn at the end of September 2015, down from $3.36tn at the end of
June. This was the first decline in such lending since the first
quarter of 2009, during the global financial crisis, according to the
In previous posts I have pointed out
that the huge rise in credit to emerging markets threatens a major bust
especially if the profitability of capital should begin to fall in
And that is just what is happening. The return on equity capital in
advanced capitalist economies is below levels before the Great Recession
but it partially recovered from 2009 and only started to fall in the
last year or so. But profitability in emerging economies has been
falling since 2012 and is now below that of advanced economies for the
The head of IIF, Caruana commented, “The issue is not just for
emerging markets. It is spilling back into developed markets. The
broader financial markets are recoiling from risk, and that spreads
across all markets. The problem now is that the real economy is being
In my last post,
I took up the issue of negative interest rate policy (NIRP). This is
the new policy forced upon central banks to try and get the world
capitalist economy out of this Long Depression. Zero interest rate
policy (ZIRP) has failed, quantitative easing (QE) or printing money has
failed, so now let’s charge banks and other financial institutions for
keeping cash and try to force them to lend or invest. Several small
central banks had already adopted NIRP (Switzerland and Sweden) but last
week, one of the largest, the Bank of Japan, applied NIRP.
The BoJ vote to do so was only 5-4 because the minority were not
convinced that it would work. Indeed, NIRP could make things worse,
they thought. NIRP is the last throw of the dice in monetary policy and
if it did not work in getting the Japanese economy out of its
stagnation, the Bank would be seen to be helpless. And why should NIRP
work any better in stimulating business investment than ZIRP or QE?
Within weeks, it is becoming clear that NIRP is not working.
Japanese government ten-year bond yields dropped into negative
territory. This means that banks and other corporate investors would
prefer to pay the Bank of Japan and the government for holding bonds for
the next decade rather than spend cash or invest! And that behaviour
is happening increasingly globally. The volume of government bonds
trading below zero interest has now reached $6trn, or one-third of the
entire global sovereign bond market!
So what is to be done? Martin Wolf, the Keynesian economic journalist for the UK’s FT, asked the question in a recent article. His answer seemed to be more of the same ‘unconventional’ monetary policy. “It is crucial to recognise that something more unconventional might have to be done”. Another recession was bound to come along and doing nothing about it was not an option.
Wolf went through the various options that I have discussed above and
eventually concluded that the only one left with the possibility of
success was “helicopter money” — dropping money directly into people’s bank accounts in so that they spent more. This is similar to the People’s QE advocated by some of the current leftist Labour opposition in the UK and has been mooted before by heterodox economists. I have discussed this option in a previous post when it was proposed by maverick Bank of England economist, Andy Haldane.
In my view, it won’t work because it assumes that what is wrong with
the capitalist economy and the reason for the continued Long Depression
and the prospect of another slump is the Keynesian explanation of a
‘lack of demand’. For Keynesians, you can create extra spending through
money creation. This leads to increased employment and then to
increased income and growth and thus to more profits. But the reality
of the capitalist system is the other way round. Only if profitability
is sufficient, will investment increase and lead to more jobs and then
incomes and consumption. The demand for money will rise accordingly.
Artificial money creation by fiat from the government does not get round
this – as the experience of ‘quantitative easing’ has already shown.
Instead, we must look at what is happening with profits and profitability. And as I have shown in several previous posts,
the profitability of business capital in the major economies is near
historic post-1945 lows and the limited recovery in profitability since
2009 has come to an end. Indeed, global corporate profit growth has
ground to a halt and is now falling in China, the UK and most important
in the US.
Last week, the investment bank, JP Morgan, noted that US corporate
profit margins (the share of profit in each unit of national output)
have started to fall back from its record highs. After the slowdown in
US productivity growth to near zero, as reported last week, JPM’s
economists now expect US corporate profits to fall by 10% this year.
And here is the rub. As I and (a few) other Marxist economists have
argued, JPM points out that every time there is such a large fall, an
economic recession is not far behind, because such a fall is seldom not
followed by an economic recession. I quote: “this
week’s larger-than-expected productivity drop in 4Q15 points to a 10%
drop in corporate profits from year-ago levels. A double-digit decline
in profits is a rare event outside recessions, having been recorded only
twice in the last half century”.
JPM has raised the probability of a US economic recession from 10% to
25% in 2016. And that probability is greater than 50% before 2017 is
I have commented on the possibility of a new global recession in
previous posts. My view is that it is due and will take place in the
next one to three years at most. Some mainstream economists are now
forecasting a more than 50% chance for 2016. Citibank economists reckon that there is a 65% chance in 2016.
This doom-mongering is dismissed by others. Bill McBride from Calculated Risk trashed those recession mongers who think it is on the cards for next year. Says McBride: “For
the last 6+ years, there have been an endless parade of incorrect
recession calls. The manufacturing sector has been weak, and contracted
in the US in November due to a combination of weakness in the oil
sector, the strong dollar and some global weakness. But this doesn’t
mean the US will enter a recession. The last time the index contracted
was in 2012 (no recession), and has shown contraction a number of times
outside of a recession. Looking at the economic data, the odds of a
recession in 2016 are very low (extremely unlikely in my view).”
Maybe it won’t be in 2016. But the factors for a new recession are
increasingly in place: falling profitability and profits in the major
economies and a rising debt burden for corporations in both mature and
emerging economies. And the Fed set to hike the cost of borrowing in
dollars. As I said before, it’s a poisonous concoction.
Can we avoid this slump? Stiglitz’s answer to avoid this is to
‘direct’ banks to lend for investment or household spending and to
introduce “large increases in public investment in infrastructure, education, and technology”
to be financed by higher taxes on ‘monopolies’. No doubt, increased
public investment would help to compensate for the failure of capitalist
investment. But the world is capitalist: governments are not going to
boost public investment if it means higher taxes for corporations,
reducing their profitability even more. So even this moderate
policy for more public investment is a challenge to capitalism in an
environment of low profitability, rising debt and depressed growth –
something that Keynesian/Marxist Michel Kalecki at the end of the Great Depression of the 1930s pointed out.
Wolf’s ‘helicopter money’ and Stiglitz’s tax-funded public investment
are poor options. It is not the banking system that has to be by-passed or directed but the capitalist system of production for profit that has to replaced by planned investment under common ownership.
- AFSCME Local 444 negotiations assesment 1997
- Preparing for Revolution: A discussion document
- The Internal lives of Revolutionary Organizations
- Socialist Alternative members: Questions and Answers
- Sanders: Our Alternative
- The Nature of the New European Left
- Catastrophic Climate Change: Caused by Capitalism
- University of California workers and Unions
- An Invitation to Our Readers
- Facts For Working People Weekly Phone Conferences ...