World Perspectives 2018: III. The State of the World Economy: Delaying the Eruption of Accumulated Contradictions

 

 

Note of the Editorial Board: The following Chapter contains several figures. They can only be viewed in the pdf version of the book here for technical reasons.

 

 

32.          As we noted already in our last World Perspective document, the bourgeoisie has succeeded in delaying for now the collapse of the world economy by a new Great Recession. The latest IMF reports present a relatively optimistic picture. In its January 2018 Update the IMF states: “The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010.” [1] The World GDP is supposed to grow (calculated by Market Exchange Rates) by 2.5% (2016), 3.2% (2017), 3.3% (2018) and 3.2% (2019). [2] The IMF October 2017 Report gave the following figures for the development of global GDP, industrial production, investment and trade. They reflect a certain, albeit not particularly impressive, upswing. (See Figure 1 and Figure 2)

 

Figure 1. World Trade, Industrial Production, and Manufacturing PMI, 2011-2017 [3]

 

Figure 2. Global Fixed Investment and Trade [4]

 

 

33.          However, the latest panic at the global stock markets in early February demonstrates the fragile state of the capitalist world economy and confirms the RCIT’s analysis which we have elaborated in the past years. [5] The smarter bourgeois economists are also fully aware that there is not much behind the official optimistic fanfares. The World Economic Forum, the organizer of the summit of the world’s elite in Davos in January, warns in its report: “However, this relatively upbeat picture masks numerous concerns. This has been the weakest post-recession recovery on record. Productivity growth remains puzzlingly weak. Investment growth has been subdued, and in developing economies it has slowed sharply since 2010. And in many countries the social and political fabric has been badly frayed by many years of stagnating real incomes.[6] Likewise, the OECD notes in its latest report: “Whilst the near-term cyclical improvement is welcome, it remains modest compared with the standards of past recoveries. Moreover, the prospects for continuing the global growth up-tick through 2019 and securing the foundations for higher potential output and more resilient and inclusive growth do not yet appear to be in place.” [7] In fact, there has not been a single year in this cycle since 2008 in which global production has reached the average of the years 1990-2007! (See Figure 3 and Figure 4) The development of investment and profits continues to be weak or is even in decline. In Figure 5 we see the latest World Bank statistic showing how weak investment and profit growth is, particularly if we compare it with the last cycle in the 2000s. We get an even worse picture when we look to the dynamic of investment in the other major economy – China. (See Figure 6)

 

 

 

Figure 3. Global GDP Growth 2012-2019 compared to Average Growth 1990-2007 [8]


Figure 4. Global industrial production growth [9]

 

Figure 5. US: Investment and Profit Growth 2000-2017 [10]

 

Figure 6. China: Investment Growth 2015-2017 [11]

 

 

 

34.          Furthermore, as we have pointed out in past World Perspectives documents, we continue to see a stagnation of world trade in relation to production. [12] This reflects the stagnation tendencies of the world economy in general and the rise of protectionism in particular since the beginning of the new historic period in 2008. (See Figure 7) As we have said, the era of globalization is about to come to an end. According to the World Trade Organization 791 new non-tariff barriers appeared annually on average in the years 2010-15 – that is, more than ever in history. [13] Another reflection of this development is the decline of cross-border capital flows as a percentage of global GDP since the Great Recession in 2008/09. From a peak level of 20.7% in 2007 it fell to a record-low of 2.6% in 2015. (See Figure 8) This trend of de-globalization is also reflected in the decline of merger & acquisitions and greenfield investment by the multi-national corporations in 2017. According to a UNCTAD report investment in merger & acquisitions decreased from $869 billion (2016) to $666 (2017) and greenfield investment projects from $834 billion (2016) to $571 (2017). [14] Given the aggressive protectionism advocated by the Trump Administration there is a realistic possibility that a trade war could start in 2018 between the U.S. and China which would trigger another recession. [15]

 

 

Figure 7. Ratio between Global Goods Trade and Global Industrial Production 2000-2018 [16]

 

 

Figure 8. Cross-Border Capital Flows as a Percentage of Global GDP [17]

 

35.          These stagnation tendencies of the business cycle reflect the failure of the monopoly bourgeoisie to overcome the fundamental inner contradictions of the capitalist world economy – its over-accumulation of capital and the fall of the rate of profit. Even the latest issue of the U.S. “Economic Report of the President”, annually produced by the White House and not known for a pessimistic outlook, is forced to draw attention to the decreasing rate of capital accumulation. It reproduces a figure showing the development of net investment as a share of the U.S. capital stock between 1945 and 2015. (See Figure 9) This figure reflects the declining dynamic of the expanded reproduction of capital: In 2009, net investment as a share of the capital stock fell to its lowest level in the post-World War II era and the nominal capital stock even declined. Although net investment has rebounded somewhat in the recovery, its level as a share of the capital stock remains well below the historical average and it declined slightly in 2015.[18] Hence, business investment in the US has ground to a halt and the age of the existing means of production has risen as aging equipment and technology is not replaced. As a result, as the economist David Rosenberg observed in a report to the U.S. Senate: “The last time the private sector capital stock was this old and obsolete was back in 1958.” (See Figure 10) We see a similar tendency in the downward trend of the global rate of profit as the Marxist economist Michael Roberts, among others, has demonstrated in his works. (See Figure 11)

 

Figure 9. Net Investment as a Share of the Capital Stock, USA, 1945-2015 [19]

 

Figure 10. USA: Average Age of Private Fixed Assets, 1975-2014 [20]

 

 

Figure 11. Global Corporate Profits [21]

 

 

 

Delaying the Beginning of the Next Recession

 

 

 

36.          While the capitalist class has been unable to overcome these fundamental contradictions of its mode of production, it has been able, until now, to delay the beginning of the next recession. What have been the reasons for this? There are several reasons but the most important seem to be a massive increase in debt reaching a level higher than before the last recession in 2007. Related to this there is a huge bubble in the financial sector which will sooner or later explode. All this has been made possible by the reckless policy of the imperialist central banks of printing money and keeping down the interest rates at nearly zero.

 

37.          Let us look to these developments more in detail. In Table 1 we see the latest calculations of the Institute of International Finance on global debt. It shows that debt as a share of global output rose massively in the past 15 years. Significantly, while debt as a share of global GDP was 276% before the last recession, this has grown to 327% in 2017 – despite all the official promises to reduce debt as it was understood to be a major reason for the severity of the last recession!

 

 

 

Table 1. Global Debt (All Sectors), 2002-2017 [22]

 

                                In Trillion US-Dollar                          Global Debt as a Share of Global GDP

 

2002                       86                                                           246%

 

2007                       149                                                         276%

 

2012                       205                                                         305%

 

2017                       217                                                         327%

 

 

 

38.          In Table 2 we see the breakdown of this debt into the different sectors: Non-Financial Corporations, Government, Financial Sector, Household. It is of particular interest to see that – compared with the situation before the last recession – the two sectors where debt increased most rapidly have been the non-financial corporations and the government. While it is only logical that the capitalists are prepared to increase their debt in order to keep their business operations going in this period of declining profit rate, it is telling that government debt is increasing massively but not that of the financial sector. This is all the more interesting since it was the financial sector which was massively in debt before the recession in 2007 and which triggered it. The explanation lies in the fundamental character of the capitalist government – as Marx and Engels already stated in the Communist Manifesto: “The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie[23] Concretely, the capitalist state has taken over the debts of the banks and, by this, helped the financial speculators to start their risky business again. Meanwhile, the working class has to pay for the increased public debt with higher taxes and cuts in social service!

 

 

 

Table 2. Global Sectoral Indebtedness (All Sectors), as a Share of Global GDP, 1997-2017 [24]

 

                                Non-Financial Corporations              Government          Financial Sector                    Household

 

1997                       64%                                                        58%                        53%                                        42%

 

2007                       77%                                                        58%                        86%                                        57%

 

2017                       92%                                                        87%                        80%                                        59%

 

 

 

39.          The growth of indebtedness is taking place in all imperialist economies. In Figure 12 we see how massively the gap between corporate debt and productive capital stock has been growing between 1995 and 2016 both in the United States as well as in the Euro Area. However, while the level of indebtedness was already high in the Western imperialist economies before the recession in 2008/09 but not so much in the so-called “emerging markets” (including China), this has changed now. In fact, debt has even increased faster in China than in the old imperialist economies! According to the latest OECD report, aggregate debt in China rose from less than 100% of GDP at the end of 2008 to 170% by early 2016. [25] According to another report, China’s total debt is believed to be around 280% of GDP, with corporate debt rising quickly to 160% of GDP, the highest level among the major world economies. [26] Finally, in Table 2 we can see that debts in government and non-financial corporations sector increased in nearly all G20 countries. Marx observed in Volume III of Capital that the credit system helps the capitalists to accelerate production. However, he also warned that indebtedness is a double-edged sword. The more it accelerates production, the more it will later result in violent eruptions: ”Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection. At the same time credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production.[27]

 

 

 

Figure 12. Corporate Debt and Productive Capital Stock in the US and Euro Area, 1995-2016 [28]

 

 

Table 3. Sovereign and Nonfinancial Private Sector Debt-to-GDP Ratios (Percent) [29]

 

2006                                       2016

 

Japan                                     343                                         388

 

Canada                                 221                                         295

 

USA                                       225                                         259

 

Britain                                   210                                         250

 

Italy                                       205                                         246

 

Australia                              187                                         243

 

South Korea                        183                                         232

 

France                                   164                                         226

 

Germany                              180                                         168

 

China                                    142                                         254

 

Brazil                                    118                                         145

 

India                                      125                                         125

 

South Africa                        104                                         124

 

Turkey                                  81                                           113

 

Mexico                                  64                                           103

 

Russia                                   49                                           84

 

Saudi Arabia                      66                                           78

 

Argentina                            93                                           73

 

Indonesia                             61                                           68

 

 

 

40.          There are many indications that the global economy is experiencing a similar bubble as it did in the last two decades. Global stock markets are hitting all-time high after all-time high. But in fact this is a bubble which should soon implode. The WEF alarmingly observes: “US stocks have only twice in history been higher than they are at the moment: just prior to the crashes of 1929 and 2000.[30] Another example for the bizarre bubble is the hype around the cryptocurrency Bitcoin, which increased in value by around 1200% in 2017! Likewise, the Global House Price Index has increased massively and has reached now the same level when the bubble was at its height in 2007! (See Figure 13) In short, assets are unsustainably overpriced and this bubble must implode rather sooner than later. Such an implosion most likely would trigger another Great Recession.

 

 

 

Figure 13. Global House Price Index Q1-2000 – Q2-2017 [31]

 

 

 

 

 

 

Why the Next Recession will be Worse

 

 

 

41.          In fact, the next recession will most likely be worse than the last. This is the case for a number of reasons related to the deep stagnation of the capitalist world economy. But at this place we want to point out only three important factors. First, during the last recession in 2008/09, the dramatic effects on the world economy could be softened by the fact that the recession had its focus in the old imperialist countries. Hence, China which experienced still some significant growth, as well as other “emerging economies”, could soften the consequences of the slump. This is no longer the case. As we have demonstrated, indebtedness in China and other “emerging economies” has significantly increased and, hence, their ability for counter-cyclical interventions is much more limited now.

 

42.          Secondly, the dramatic effects on the world economy in 2008/09 could be softened by the massive state-capitalist intervention. The capitalist governments were prepared to bail out the banks, take over their debts and pump money into the economy since then (the so-called “Quantitative Easing”, as we have explained in past documents on the world economy). However, again, this instrument is no longer available. The governments are now much higher indebted than they were last time and therefore their room for maneuver is much more limited.

 

43.          Thirdly, the central banks were able in past recessions to lower the interest rates. This monetary instrument made it easier for banks and corporations to take new loans and to soften the effects of the recession. However, this instrument too is no longer available since the central banks already lowered the interest rates to nearly 0% in the past years! Former U.S. Treasury Secretary Larry Summers noted in a recent speech that the Fed typically has lowered interest rates by 5 percentage points over time to stimulate the economy in recessions. As we can see in Figure 14 the U.S. Fed lowered interest rates in every recession since the mid-1970s between 5 and 10%. This is no longer possible as the Fed had lowered the federal funds rate close to zero and just recently raised it to 1.25-1.5%. Other Central Banks – like the European Central Bank, the Bank of Japan and the Bank of England – are in an even worse position since their interest rates are currently even lower than the Fed’s.

 

 

 

Figure 14. U.S. Fed lowering of Interest Rates in Recession, 1957-2007 [32]

 

 

 

 

44.          There can be no doubt that the capitalist world economy is heading towards a new Great Recession which will be most likely more devastating than the last one. An increasing number of economists already get nervous. Jean-Claude Trichet, the former President of the European Central Bank from 2003 to 2011, recently warned in an interview about the “a very serious risk of a new crisis.[33] We can not say if the next Great Recession will happen in 2018 or later. In fact, the massive state-capitalist interventions and the huge global indebtedness, which reminds one to a Ponzi scheme, make a precise prognosis difficult. Furthermore, as the IMF pointed out in a recent report, geopolitical crises like wars or political crisis can also provoke recession: “Rising geopolitical tensions and domestic political discord can hurt global market sentiment and confidence, burdening economic activity.[34]

 

45.          The Marxist economist Evgenij Preobrazhensky pointed out in his last book, before he was silenced by the Stalin regime, that “the monopolistic structure of capitalism so curtails—or perhaps it would be better to say, so distorts—the action of the law of value, that today this law can no longer regulate the process of reproduction as it once did in the epoch of free competition.[35] Such a distortion of the law of value as a regulator results in “changing the character of the economic cycle under monopolism”. [36] Therefore, Preobrazhensky concludes, the business cycles in the epoch of monopoly capitalism takes “inevitably longer and assumes a more agonizing character”. [37] It seems to us that these observations of this great Marxist economist are particularly relevant for understanding the stagnant and protracted nature of the cycle since the new historic period opened up in 2008/09. In any way, we are convinced that whenever the next Great Recession will explode, it will tremendously shatter the bourgeois order and open a new phase of major attacks by the capitalists as well as of class struggles.

 



[1] IMF: World Economic Outlook, Update, Brighter Prospects, Optimistic Markets, Challenges Ahead, 22 January 2018, p. 2

[2] The IMF and other bourgeois institutes usually pronounce more the growth figures calculated in the so-called “Purchasing Power Parity” instead those calculated on the basis of “Market Exchange Rates”. Calculations based on “Purchasing Power Parity” are said to better reflect the growth of poorer countries while the “Market Exchange Rates” reflect growth rates expressed in the money terms of the leading world currencies (usually the US-Dollar). Leaving aside that this claim is in itself doubtful, it is clear that global growth rates must be calculated by a single measure, i.e. a single currency and not by different measures. The IMF and other economists do so only because they want to make the official growth rates look better, i.e. suggesting a higher growth rate.

[3] IMF: World Economic Outlook October 2017. Seeking Sustainable Growth, p. 2

[4] IMF: World Economic Outlook October 2017. Seeking Sustainable Growth, p. 3

[5] On the stock market turbulences in early February 2018 see Michael Pröbsting: The Latest Stock Market Panic. A Harbinger of the Future Crash of the Capitalist World Economy, 8 February 2018, https://www.thecommunists.net/theory/the-stock-market-panic-february-2018/

[6] WEF: Global Risks Report 2018, p.19

[7] OECD: Economic Outlook, Volume 2017 Issue 2, p. 12

[8] OECD Economic Outlook. The policy challenge: Catalyse the private sector for stronger and more inclusive growth, Presentation, Paris, 28 November 2017, p. 3

[9] OECD: Economic Outlook, Volume 2017 Issue 2, p. 14

[10] World Bank: Global Economic Prospects, January 2018, p. 13

[11] World Bank: Global Economic Prospects, January 2018, p. 15

[12] For the RCIT’s analysis of the capitalist world economy since the Great Recession in 2008/09 see e.g. RCIT: World Perspectives 2017: The Struggle against the Reactionary Offensive in the Era of Trumpism, Chapter I, in: Revolutionary Communism No. 59, https://www.thecommunists.net/theory/world-perspectives-2017/; RCIT: Advancing Counterrevolution and Acceleration of Class Contradictions Mark the Opening of a New Political Phase. Theses on the World Situation, the Perspectives for Class Struggle and the Tasks of Revolutionaries (January 2016), Chapter II and III, in: Revolutionary Communism No. 46, http://www.thecommunists.net/theory/world-perspectives-2016/; RCIT: Perspectives for the Class Struggle in Light of the Deepening Crisis in the Imperialist World Economy and Politics. Theses on Recent Major Developments in the World Situation and Perspectives Ahead (January 2015), in: Revolutionary Communism No. 32, http://www.thecommunists.net/theory/world-situation-january-2015/; Michael Pröbsting: World economy – heading to a new upswing? in: Fifth International, Volume 3, No. 3, Autumn 2009, https://www.thecommunists.net/theory/world-economy-crisis-2009/; Michael Pröbsting: Imperialism, Globalization and the Decline of Capitalism (2008), in: Richard Brenner, Michael Pröbsting, Keith Spencer: The Credit Crunch - A Marxist Analysis, London 2008, https://www.thecommunists.net/theory/imperialism-and-globalization/

[13] Rawi Abdelal and Igor Makarov: The Fragmentation of the Global Economy and U.S.- Russia Relations, Working Group on the Future of U.S.-Russia Relations, Working Group Paper 8, April 2017, p. 8

[14] UNCTAD: Investment Trends Monitor, issue 28, January 2018, pp. 5-6

[15] For example the Bloomberg economist Jared Dillian warned recently: “I can’t be the first to notice that 2018 could be the year that we get an honest-to-goodness trade war.” (Jared Dillian: Trade and Central Banks Will Make Life Painful for Investors, Bloomberg View, 8. Januar 2018, https://www.bloomberg.com/view/articles/2018-01-08/trade-and-central-banks-will-make-life-painful-for-investors); see also Richard Javad Heydarian: What a US-China trade war would look like, 2018-02-04, http://www.aljazeera.com/indepth/opinion/china-trade-war-180201121746516.html

[16] World Bank: Global Economic Prospects, January 2018, p. 18

[17] Sebastian Mallaby: Globalization Resets, in: IMF Finance & Development, Vol. 53, No.  4 (December 2016), p. 7

[18] Economic Report of the President, January 2017, Washington, p. 104

[19] Economic Report of the President, January 2017, Washington, p. 105

[20] David A. Rosenberg: The 2014 Outlook: Moving from Constant Crises to Broad-Based Growth, Statement by David A. Rosenberg before the Committee on the Budget, U.S. Senate, p. 5

[21] Michael Roberts: Forecast for 2018: the trend and the cycles, December 29, 2017, https://thenextrecession.wordpress.com/2017/12/29/forecast-for-2018-the-trend-and-the-cycles/

[22] Tyler Durden: Global Debt Hits Record $233 Trillion, Up $16Tn In 9 Months, 01/07/2018, https://www.zerohedge.com/news/2018-01-07/global-debt-hits-record-233-trillion-16-trillion-9-months

[23] Karl Marx and Frederick Engels: Manifesto of the Communist Party (1848), in: MECW Vol. 6, p. 486

[24] Tyler Durden: Global Debt Hits Record $233 Trillion, Up $16Tn In 9 Months, 01/07/2018, https://www.zerohedge.com/news/2018-01-07/global-debt-hits-record-233-trillion-16-trillion-9-months

[25] OECD Economic Outlook, Volume 2017 Issue 2, p. 58

[26] PricewaterhouseCoopers: The Long View. How will the global economic order change by 2050? February 2017, p. 22

[27] Karl Marx: Capital Band III, MECW Vol. 37, p. 439

[28] OECD Economic Outlook, Volume 2017 Issue 2, p. 77

[29] IMF: Global Financial Stability Report. Is Growth at Risk? October 2017, p. 34

[30] WEF: Global Risks Report 2018, p.19

[31] IMF: Global House Price Index, http://www.imf.org/external/research/housing/index.htm; see also IMF: Global Housing Watch, Q2-2017, p. 1

[32] Steve Liesman: The Fed, worrying about the next recession, considers changes, 10 Jan 2018, https://www.cnbc.com/2018/01/10/the-fed-worrying-about-the-next-recession-considers-changes.html

[33] Interview mit Jean-Claude Trichet: „Es gibt ein sehr ernstes Risiko einer neuen Krise“, Wiener Zeitung, 27. January 2018, p. 15

[34] IMF: World Economic Outlook October 2017. Seeking Sustainable Growth, p. 24

[35] Evgenij Preobrazhensky: The Decline of Capitalism (1931); Translated by Richard Day (1983), p. 23

[36] ibid, p. 41

[37] ibid, p. 75