by Michael Roberts
Last March, I posted that the global economy seemed to be in a fantasy world
where stock markets hit new highs but output of goods and services,
investment and trade was stagnating in the major economies. This week,
the US stock recorded yet again new highs. As the Financial Times
described it: “The US economy appears to be enjoying the fabled Goldilocks scenario. Its porridge is neither too hot nor too cold”.
This financial market rally is founded on the decision of many
central banks to hold their policy interest rates at very low levels.
The US Federal Reserve has basically announced that it will not hike its
rate this year. The European Central Bank has done the same and has
decided to have another bout of ‘quantitative easing’ (buying government
bonds and other assets from commercial banks). And today the Bank of
Japan promised not to raise interest rates before spring 2020 as it
continued its massive programme of monetary stimulus.
Central bank policy, along with the prospect of the US-China trade
deal (still not realised), has given new encouragement to financial
institutions to invest in stock markets. But the biggest driver of the
US stock market has been the major companies using this cheap finance to
buy back their own shares to drive up the price and increase the
‘market value’ of the company. In
2018, buybacks reached $1.18trn, twice as much as was invested (after
covering for worn out equipment) in productive capacity (plant, offices,
equipment, software etc).
Thus the financial markets boom, but the ‘real’ economy struggles.
The recovery since the Great Recession ended in mid-2009 is about to
reach its tenth year this summer, making it the longest recovery from a
slump in 75 years. But it is also the weakest recovery since 1945. And
trend real GDP growth and business investment remains well down from
the rate before 2007. That is why I designate the last ten years as a Long Depression, similar to the periods of 1873-97 or 1929-42.
Behind the fantasy of financial markets, global growth has been
slowing. And worse, there are now several economies that appear to
heading into outright recession. Today, the Asian powerhouse, Korea,
suffered its worst quarterly contraction since the global financial
crisis (Korean real GDP growth has fallen to just 1.8% – graph), as this
export-driven economy felt the pinch from weakening growth in China,
global trade tension and a downturn in the technology sector.
Exports, which account for about half of the country’s GDP, are
heading for a fifth consecutive monthly decline, falling 2.6 per cent
quarter on quarter. And business investment plunged 10.8 per cent, the
worst reading since the 1998 Asian financial crisis, as big
manufacturers, such as Samsung Electronics and SK Hynix, refrained from
increasing capacity amid a global economic slowdown and weaker demand
for semiconductors.
Even worse, several large so-called emerging economies are
experiencing severe contractions. After President Erdogan suffered
significant defeats in local elections in Istanbul and Ankara, the
Turkish central bank has been forced to prop up the country’s fast
dwindling dollar reserves using ‘dollar swaps’, taking high risk
short-term loans. It had to do this because dollars have been fleeing the country as the economy plunged
and Erdogan refused to take an IMF loan to bolster finances because it
would mean severe austerity measures being imposed. The net foreign
assets figure, a proxy for the country’s financial defences, slumped by
$9.4bn between March 6 and March 22 to $19.5bn, the lowest level on a US
dollar basis since 2007. Excluding swaps, net foreign assets have stood
at less than $11.5bn during the entire month of April, down from
$28.7bn at the start of March on the same basis.
Argentina went deep into recession in 2018 under the governance of
the right-wing administration of President Macri. When he was elected
in December 2015, he said that his ‘neo-liberal’ economic policies would
attract foreign direct investment and lead to sustained increases in
productivity. The currency crisis that erupted in April 2018 underscored
the failure of that policy approach.
Unlike Turkey, Macri turned to the IMF for a $57 billion stand-by loan –
the largest in the IMF’s history – a clear case of bias by the IMF to
help a government that it and US favoured over the previous
social-democratic Peronist administration. The money is being used to
make debt repayments as they come up. Elections are now just six months
away, and the IMF conditions for the loan are biting into government
spending and increasing tax burdens.
Investment is stagnating, inflation has rocketed and the high
interest rates imposed by the central bank have attracted short-term
speculative portfolio capital, or ‘hot money’. Capital like that is
just as likely to reverse with any new crisis. Next year, the amount
of external debt that must be repaid will be at its highest and the IMF
must also be repaid. The new government would then face two unpleasant
options: a straitjacket of higher debt payments, more austerity, and
more recession, or a painful debt restructuring with an uncertain
outcome.
And there is Pakistan. This is another so-called emerging economy
where capital to fund economic growth and investment has dried up. Up
to now the new administration under Imran Khan,
the former Pakistan cricket captain, elected on a no corruption
platform, has refused to take an IMF loan, for the same reasons as
Turkey. Its finance minister, Asad Umar instead to tried to raise new
loans from China and the Middle East, much to the chagrin of the US. But
it has not been enough to stave off a new potential collapse in the
currency. Pakistan’s inflation is at a five-year high of more than 9
per cent, while the rupee’s value has plummeted 33 per cent since 2017.
Umar was forced to resign last week. The new finance minister has
reached an agreement in principle to take an IMF loan – Pakistan
business will thus gain some stability while the Pakistan people will
pay with more taxes and cuts in services, labour conditions and
infrastructure projects. “The solutions are not going to be easy. The
choices will be politically difficult for any government,” said Abid
Suleri, an economic adviser to Khan.
Stock markets may be booming in North America but economic prosperity
in many parts of the world is disappearing like water in a desert. And
in some parts, a sand storm is fast approaching.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
Thursday, April 25, 2019
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