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 this 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.
Michael Roberts Blog 
As Brenda from Bristol might say, “What another one?”
The fact is that despite repeated predictions of another recession, and continued long depression, the world has not fallen off a cliff. The IMF have downgraded projections for world growth, but only to 3%, which is hardly a catastrophe. All that is despite the fact that Trump’s global trade war has knocked 0.3% off Chinese GDP last year, and also hit the US economy, via higher costs, and a collapse in some US exports to China, as retaliation sets in. His trade war has also hit EU economies which saw large tariffs put on steel and aluminium, as well as the threat of tariffs on cars etc. The slowdown in the Chinese economy, also impacted EU exports to China.
Yet, the US continues to grow at a clip. US employment figures continue to rise, as do US hourly wages, which together with the rise in total wages due to higher employment levels means a continued increase in the demand for wage goods. The Chinese economy appears to be growing faster again. Trump’s trade war, and its impact, which is only distorting trade rather than causing a global recession, which it might have been expected to do, if the fundamentals of the global economy were really weak, will not last forever. Brexit which has had a debilitating effect both on the UK economy and EU economy, and thereby on global growth, is also going to be resolved one way or another, hopefully and probably with it being scrapped.
The latest EU data suggests that the German economy heavily dependent on manufacturing exports, which were hit by the Chinese slow down, is showing signs of a pick up. In short, political factors – and insofar as Trump’s trade war is concerned it is purely political, and about shoring up his voter base, rather than in any way beneficial to the US economy, as is the case with Brexit, too which is about internal Tory Party management, and quite disastrous for the British economy – will inevitably be only temporary, and the effect they have had in holding back investment, raising costs, and redirecting trade and investment flows in other channels, which inevitably causes a disruption, will be reversed.
As Marx points out, and as a simple look at the facts over the last century shows, not only are asset prices, and so stock markets not determined by the state of the real economy, they tend to move in opposite directions, because the main determinant of asset prices – as capitalised revenues – is the rate of interest. The rate of interest reaches its lowest point during periods of stagnation. That is why asset prices soared in the 1990’s. Its to prevent the collapse of those asset prices, following the period of stagnation, as global growth rose, and interest rates began to rise along with it, that central banks have been trying to inflate asset prices via QE, and states have tried to limit growth via austerity measures to prevent interest rates rising on the back of it.
The level of stock markets and other asset prices is a fantasy, but it is a fantasy based upon the continued QE of central banks – the US stock market having lost 20% last year, when the US was growing at a rapid pace, and the Fed was raising its official interest rates, only turned round at Xmas, when the Fed announced it was slowing down its increases in rates. Yet, despite all the attempts to divert money-capital into financial and property speculation, despite the austerity measures introduced by conservative governments, despite Trump’s trade war restricting and redirecting trade flows and investment, despite Brexit the global economy continues to grow, employment continues to grow even more rapidly, and even real wages are starting to rise, as money wages exceed inflation.
These are not the conditions of a new next recession, or of long depression, but of potential growth being held back for political reasons to protect the paper wealth of the top 0.01%. A financial crash is inevitable, but it is inevitable because the continued rise in employment, and on the back of it aggregate demand will force its way through those constraints, causing interest rates to rise.
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I’d like to remind every one that Boffy believes we are in the summer or a Long Capitalist Wave. He believes that since 1999 capitalism has experienced an upswing comparable to that of the Post World War 2 Boom. How anyone can take him seriously with that in mind is beyond me.
Michael Roberts, I´m a big fan of your works. I´ve been sharing your content with links to your site, from my twitter account. However, most people in Brazil is unable to read English. Would you allow me to translate your texts to Portuguese? I´m considering to create a blog to share the texts of Marxist English speaking authors, like you and Paul Cockshott.
Alexandre Thank you for your support. Yes, it would be very good if you can translate the texts into Portuguese as i know there are several followers of my blog who are Portuguese or Brazilian. I am honoured to be included with Paul Cockshott. Please send me notifications when you publish so I can pass it onto my facebook site. best MR
Yes, you are right, capitalism today is in a phase of Long Depression. The cause?. I do not think it is because the rate of profit has fallen since the 60s (I do not have reliable data, but, in any case, in Capitalism the profit rate ONLY goes down for non-monopolistic companies (small and medium enterprises), but DO NOT DESCEND for monopolistic companies There is a lot of empirical evidence on this question. I believe that the cause of the Long Depression has its origins a) political. See Rosa Luxemburg and her definitions of revolutionary impulse (1.917, 1959) – progressive phase of reforms (until about 1980) – reactionary phase of counter-reforms (1980-¿) and b) Private monopolies attack and privatize all public-state companies. Therefore, the praise and its growth becomes private, becomes smaller, less powerful than the state economy. Evidence in the nineteenth century with all the praise in capitalist mode, the global average growth does not exceed 1, 5% per year (A. Madison)
Yes, you are right, capitalism is today in a phase of Long Depression. The cause?. I do not think it’s because the rate of profit has fallen since the 60s. I do not have reliable data, but in any case, in Capitalism the profit rate ONLY goes down for non-monopolistic companies (small and medium enterprises), but DO NOT DESCEND for monopolistic companies. There is a lot of empirical evidence on this issue. Joseph Stigliz y many others confirm it. If I believe that the cause of the Long Depression has its origins in: a) Political causes. See Rosa Luxemburg and her definitions of revolutionary impulse. The last revolutionary impulse (revolution of class struggle) has: 1.- beginning date and expansion in 1917-Russia and 1949- China-2.-progressive phase of reforms (until about 1980) -3.-reactionary phase of counter-reforms (1980-¿? And b) Private monopolies and their effects. They attack and privatize all public companies. For this reason, the economy and its growth becomes private, becomes smaller, of less power than the state economy. Evidence. In the nineteenth century with all the praise in capitalist mode, the average global growth does not exceed 1, 5% per annum (A. Madison). In the 20th century, the Trente Glorieuses (1945-1975) with an annual GDP of 5.5% in OECD countries and socialist countries is NOT a phase of Golden Capitalism, but rather an injection of a socialist economy, an injection of public companies, in the veins and bodies of capitalist Western economies.