The overhang of debt

The Great Recession may be over in the sense that national output in the major capitalist economies has stopped falling and is even rising in some.  But that does not mean real economic growth and employment is going to resume at previous levels.

Before the bursting of the global credit bubble in 2007 and the ensuing drop in global production and world trade in 2008-9, the major economies were growing at about 3% in real terms and unemployment rates were pretty low by the standards of the last 20 years.  But in this economic recovery, the advanced capitalist economies are not going to see those levels again over the next five years.

The biggest reason is that capitalism is still carrying the weight of a huge overhang of capacity in real production and an excessive level of what Marx called ‘fictitious capital’, or credit.  Until the value of this dead capital is removed from the accounting books of capitalism, profitability will only recover minimally over the next year or so and will probably drop to new lows by 2014.  That will keep new investment and economic growth low.

Take the fictitious or money capital first.  Desperate to avoid a Great Depression, during the economic slump, politicians resorted to massive injections of credit and public spending.  Central banks like the Federal Reserve in the US, the Bank of England, the Bank of Japan and the European Central Bank expanded the supply of money with new forms of fictitious capital.  They bought up the ‘toxic’ assets of the commercial banks (all those sub-prime mortgages and mortgage bonds that caused all the trouble when the housing boom went bust) and launched programmes to buy government bonds called ‘quantitative easing’.   They paid for all this just by printing money.  The banks in turn used this ‘free money’ to speculate in the stock market, pay themselves renewed bonuses and to buy government debt too.

The result has been that, far from the Great Recession causing a destruction in the value of accumulated money capital, there has been an increase.  Indeed, global debt is now over 150% of world annual output, up from 2007 before the crisis.

The capitalist sector has reduced its debt burden slightly and households have paid down some of their excessive mortgage debt or defaulted.  But that’s only because the capitalists have let public sector debt soar – up 50-150% in just two years.  Now most OECD countries have public debt close to 90% of annual output.

That is placing a tremendous drag on the ability of capitalist economies to grow at the old rates from hereon.  The cost of borrowing to invest or spend is going to rise as governments compete for funds with businesses.  And taxes will have to rise and public spending be cut to ‘service’ this extra debt (namely paying interest to the bondholders who are the bailed out banks, the pension funds and the speculating hedge funds).

Recent research by two leading capitalist economists, Carmen Reinhart and Kenneth Rogoff (see , has shown that when in any country, the public debt ratio reaches 90% of GDP, that will reduce its economic growth rate by 1.0-1.5% pts a year.  So an economy that used to grow on average at 3% a year will now grow at only 1.5%.  If that is borne out, it will really hit the ability of capitalism to provide jobs, services and wage rises.

At the same time, there remains a huge overcapacity in the ‘real’ economy.  According to the OECD, the output gap (the difference between the current expansion of output and the available capacity to produce) has never been larger.  A huge amount of obsolescent and unused industrial equipment and plant needs to be ‘cleared’ or written off,  if capitalist profitability is to be restored and investment in new technology revived.

The Marxist argument is that capitalism will not expand without sufficient profitability.  That won’t be achieved at the same rate as before the Great Recession without a new recession that can destroy the capital value newly generated by the public sector debt explosion.  That means the destruction of public sector services and jobs.

I deal with these arguments in more detail in chapters 45 and 48 of my book, The Great Recession ((available from


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