It wasn’t long ago that victory was declared. “The crisis in the eurozone is over”, said French president François Hollande last year. The European commissioner for economic and monetary affairs, Olli Rehn, followed some months later: “We have green shoots now in the European economy”, he announced at a “citizens dialogue” in Estonia. “[W]e expect that the European economy will continue to stabilise and return to recovery. And, next year, the European economy will stand on firmer economic footing and we will have better economic growth.” Promoters of austerity economics began to crow over what was pretty desultory growth. “The recovery in most of the EU Member States is now becoming more self-sustained”, claimed the European Commission’s Spring Economic forecast.
It didn’t last long. The three largest economies, Germany, France and Italy, contracted or stagnated in the second quarter of this year. Industrial production is again declining. “The high-income economies … are in a truly extraordinary state”, wrote Financial Times columnist Martin Wolf in early October. “The best way to describe it is as a managed depression … This is particularly true of the eurozone, where real domestic demand in the second quarter of this year was 5 percent lower than in the first quarter of 2008. In the US, by contrast, real demand was 6 percent higher. The latter is an extraordinarily feeble recovery, but the eurozone’s performance is little short of appalling.”
Deflation has appeared in more than a dozen countries, threatening to increase already overwhelming debt burdens in the Southern economies in particular. Deflation also makes recovery from recession particularly difficult.
Global growth forecasts everywhere have been downgraded as concerns mount. One of the worries, noted by Wolf, is that monetary policy may have reached its limits. Prevailing wisdom says that when central banks push down interest rates, companies will borrow to invest. Then economic growth should be stimulated as investment triggers production, greater labour utilisation and consumption. Yet the monetarist orthodoxy has not been able to turn the situation around.
Instead, we have the contradiction of a stagnant bubble economy. With one hand the capitalists are hoarding. Because of the uncertainty about whether the value created during the production process will be realised through the sale of the commodities produced, there is always a possibility that money will stay in a capitalist’s pocket rather than flow back into the economy. Possibility becomes probability when there are perceived high risks associated with investment. That has been the case for more than five years now. Data released by Thomson Reuters in January showed a mountain of nearly US$7 trillion in cash being held by global non-financial corporations – twice the level of a decade ago.
With the other hand they are speculating. As New York Times senior economic correspondent Neil Irwin described it in July: “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.”
These phenomena are the twin results of a perceived lack of secure productive investment opportunities and a flood of cheap money making attractive both traditionally “safe” low-yield financial instruments such as bonds, and the paper gains accruing from rising prices across a range of asset classes. The European Commission’s Winter Economic forecast was optimistic that “investment growth, in particular investment in equipment, is projected to significantly strengthen, as the main impediments to firms’ demand and profits … are slowly receding.” Yet despite historically high levels of cash reserves and low interest rates, global capital expenditure declined by 1 percent in 2013 and, according to first-half figures from rating agency Standard and Poor’s, will decline again this year. It is projected to further decline in 2015 and 2016.
G20 saviours?
This is the backdrop to the G20 summit taking place in Brisbane on 15-16 November. On the table for discussion is a package of 900 “reforms” that the IMF estimates will add nearly 2 percent to world economic growth. Central to the agenda is a proposal for an “infrastructure initiative”, which would add $2 trillion to the global economy in five years. “Governments have run out of money to fund [infrastructure] and therefore we need you and we need your money”, pleaded Australian treasurer Joe Hockey as he promoted the initiative at a July business forum in Sydney.
The reasoning is that in order to overcome stagnation, investment needs to be increased – and if central banks can’t boost aggregate demand, someone should expand supply through road, port, telecommunications and power station development. “This will create jobs and boost economic growth”, says the G20. It boils down to saying, “capitalists aren’t investing, let’s get them to invest” – like imploring a drowning person to float. There are obvious problems with this.
Infrastructure development doesn’t do away with the realisation problem, which is that, for production to expand, there have to be buyers for the commodities produced. For example, building a new port may lift the quantity of products that potentially can be exported. But that doesn’t guarantee that exports will rise. The latter requires export industry capital investment to expand production. Without that, more infrastructure will result only in underutilisation – and an unprofitable investment. Perhaps that is why capitalists are hesitant to rush headlong into such projects at the moment (without substantial government backing). They probably understand better than our treasurer that it is not for a lack of ports that global trade remains subdued.
We’re told that the sheer number of people joining the ranks of the so-called “global middle class” pretty much guarantees that, once governments have their finances in order and some of the larger imbalances are evened out, world trade and production will naturally get going again. If the economy were just a collection of buyers and sellers of goods, this might make sense. But capitalist pursuit of profit creates fundamental problems for any idea that there are automatic mechanisms of recovery.
Longer term issues
The global financial crisis and economic recession have left the G7 economies (Canada, France, Germany, Italy, Japan, Britain and United States) an estimated 8 percent smaller than they would otherwise have been. This spectacular collapse has to be viewed in the context of a persistent slowdown, since the 1960s, in advanced economy growth rates. World output has more recently been supported by East Asia, in particular China – but its breakneck pace of growth is now moderating.
Economists often point to a long-term decline in productivity growth (among other things) for declining output growth. Productivity – the amount produced per worker in a given time – is mostly a function of investment (in technologies that intensify the labour process). In the US, which is experiencing the weakest recovery on record, the figures are particularly striking. Business investment as a share of GDP, as Marxist economist Michael Roberts has pointed out, “has peaked lower in each successive recovery since the 1980s”. This is important because the key feature of a downturn is a collapse in investment.
That isn’t simply about a lack of buyers for products. Production is always carried out under conditions of uncertainty on that front. The key consideration relates not to the volume of products sold, but the margin between the cost of production and the revenue from the sale of the commodities – the rate of profit. The relatively depressed state of the latter underpinned the casino economy of bulging debts and financial speculation that existed well before the North Atlantic financial collapse of 2008. In that sense, the current malaise should not be seen as a radical departure from the past, but rather, one of its logical conclusions.
The debts accrued over years in turn now weigh on investment. Roberts, writing last year, noted that the European Commission “found a ‘strong negative correlation between changes in investment since the onset of the crisis and pre-crisis debt accumulation, suggesting that the build-up of deleveraging [debt repayment] pressures has been an important factor behind investment weakness’. The Commission reckoned that eurozone corporations must deleverage further by an amount equivalent to 12 percent of GDP and that such an adjustment spread over five years would reduce corporate investment by a cumulative 1.6 percent of GDP. Given that gross non-residential investment to GDP is at a low of 12 percent right now, that’s a sizeable hit to investment growth.”
Two of the world’s most powerful bankers, JP Morgan Chase CEO Jamie Dimon and Morgan Stanley’s James Gorman, are claiming, according to the Financial Review, that “Australia’s G20 leadership should be a turning point for the world economy.” That is pretty fanciful stuff – stagnation and high unemployment are increasingly recognised as “the new normal”. While the major banks are no longer threatened with immediate collapse, the longer term trajectory of the advanced economies continues to promise ongoing hardship for working people.
