It is hard to exaggerate the scale of the economic catastrophe facing the world. The World Bank is predicting a 7 percent contraction in gross domestic product (GDP) in advanced economies for 2020, and a 5.2 percent contraction overall. Most national economies will be in recession by the end of the year.

For workers, the job losses have been devastating. The International Labour Organization estimates that more than 300 million full-time equivalent jobs were lost in the second quarter of 2020, after 130 million were lost between January and March. An additional 1.6 billion informal workers, overwhelmingly in the poorest countries, are at risk of being plunged into poverty due to the lack of income support during lockdowns.

The COVID-19 crisis did not hit an otherwise healthy global economy, but one already heading for trouble. Surveys of business confidence in the OECD last year reported high levels of pessimism about the future. Sky-high corporate savings and widespread purchasing of financial assets despite negative returns were signs of economic stagnation. A recession in the manufacturing sector dragged global growth down to just 2.5 percent, the lowest rate since 2009.

Marxist economist Joel Geier describes the current scenario as “the second crisis of neoliberalism”. The policies typical of the neoliberal era—attacks on working conditions, the streamlining and privatisation of social services and the opening of world markets to powerful corporations—were introduced to revitalise the world economy after the stagflation crisis of the 1970s. The measures were largely successful in capitalist terms, boosting profit rates and transferring significant wealth from workers to the bosses. The 1980s and early 1990s were a triumph for the super-rich; confidence in the superiority of Western-style capitalism was at an all-time high. But by the late 1990s, the system was losing its gloss. A series of speculative bubbles brought the world economy to the precipice before the US subprime mortgage crisis sent it over the edge.

The underlying causes of the 2008 global financial crisis and the bubbles that preceded it are still widely misunderstood. The political right pretended that it never happened, doubling down on the same old free market dogmas as before. Centre-left economists felt that it vindicated their critique of neoliberalism, denouncing the predatory lending practices that precipitated the crisis. They criticised the poor regulation that allowed US investment banks to use shady instruments to circulate bad debt throughout the financial sector and called for stricter controls and public investment to meet the needs of poverty-stricken populations.

While these concerns were legitimate and the policy proposals supportable, they did not address the core issues. As many Marxists economists argued at the time, the most important factor behind the increasingly irrational bubbles of the late neoliberal era were the low profit rates in the productive sectors of the economy. Endemic overproduction and weak demand had led to lower investment. Corporations instead turned to the financial sector and the stock exchange. The vast sums of capital that could not be profitably invested in the real economy produced a growing market for high-risk, high-reward investments, creating an unprecedented bubble that finally burst in 2008.

Marx identified a possible solution to this kind of crisis: the widespread destruction of capital through companies going broke and being acquired on the cheap by their rivals. This concentration and centralisation of capital allow the surviving businesses to begin a new round of production with cheaper inputs, less competition and higher profit margins.

But the 2008 crisis didn’t lead to a cleaning out of unproductive capital. It led to a bailout of the rich funded by taxpayers. Newly elected US President Barack Obama shovelled $700 billion to Wall Street to stabilise the financial system. He also gave large subsidies to companies such as General Motors, on the proviso that they boost profitability by slashing workers’ wages.

The consequence was that a host of unprofitable companies survived a shock that would otherwise have sent them to the wall. A Deutsche Bank report in June this year found that almost one in five US corporations are “zombies”. That is, they do not make enough money to pay their workers and service their existing debts.  Lacking any capacity to make substantial new investments, these firms are a drag on economic growth.

They also need continually to take out new loans to service old ones, an unsustainable and unproductive debt spiral that risks dragging down other sections of the economy. A recent OECD report found that, between 2008 and 2019, corporate bond issuance—a form of borrowing—averaged $1.8 trillion per year, more than double the rate before the global financial crisis. Worse, more than 20 percent of these bonds were “non-investment grade”—so risky that they worry even the professional gamblers on Wall Street—and more than 50 percent were rated one level above “junk” status. For now, the US Federal Reserve is committed to buying $120 billion of these bonds per month, regardless of their rating, to prop things up. But it wouldn’t take much to trigger a new credit crunch.

In the meantime, the ready availability of cheap credit imperils the world economy in other ways. Share prices have risen to absurd levels this year, even as the real economy collapses. Geier describes this situation as a classic asset bubble—the stock valuations are not based on the real growth of production and profits, but on quirks of supply and demand. “For example, Apple had profits of US$58 billion last year, compared to $59 billion two years ago”, he says over the phone from his Chicago home. “Its stock market valuation two years ago was $720 billion, but in the last month it was valued at $2 trillion!” This is high stakes gambling that risks bringing down the house.

In 2009, China’s stimulus spending was celebrated for helping to lift the world out of recession. It clearly had a positive impact on countries such as Australia and Brazil, which registered strong growth on the back of a boom in primary exports. But the Chinese government exacerbated the crisis of overproduction in a range of key industries, expanding credit and directing investment into steel, concrete and other areas that had productive capacities well beyond global demand.

The combination of government bailouts, low interest rates and China’s extraordinary stimulus managed to stabilise the system after the 2008 crisis. But the recovery was anaemic and uneven. So while the decade after 2009 registered sustained growth, it was the weakest recovery from a recession ever recorded. Profits began to stagnate by 2014. According to research by Marxist economist Michael Roberts, US profitability fell by up to 9 percent in 2014-19. “From about 2014, we had secular stagnation: the US failed to grow by more than 2 percent a year, Europe down at 1.5 percent and Japan languishing at 1 percent”, Geier says. In short, the world economy was heading towards recession before COVID-19 hit.

As in the previous crisis, the capitalist class has fallen back on the state to prop up its failing system. In the first two quarters of 2020, governments have invested an astounding 4 to 5 percent of world GDP to keep their economies afloat, more than double the total stimulus during the entire global financial crisis. The US alone spent $3 trillion on fiscal stimulus, plus another $3 trillion in monetary stimulus via the Federal Reserve. And there are negotiations for another $2.4 trillion before the year is out.

In Australia, a right-wing Liberal government usually obsessed with budgetary discipline found $100 billion to give to workers and the unemployed affected by the crisis. This unprecedented expenditure totalled more than 9 percent of Australia’s GDP. The situation in the US is similar. “The Trump administration gave an additional $600 a month to everyone receiving unemployment benefits, in most cases more than doubling their incomes”, Geier says. “As well, any company accessing federal funding was banned from sacking workers until 30 September.”

For followers of British economist John Maynard Keynes and supporters of modern monetary theory, the spending spree shows what would be possible if governments abandoned their neoliberal dogmas. But while Geier agrees that the left should fight to maintain and extend welfare programs of all kinds, he also points to their limitations. “The theory is that you can print as much money as you like, that debt doesn’t really count. This is essentially liberal voodoo economics”, he says. Most states can’t act in this way—their reliance on international markets to fund deficit spending means that they can borrow only as much as capitalist financiers believe will be repaid. And at some point, the IOUs will be called in. “This explosion of state debt will lead to sovereign debt crises like we saw in 2012 [in Greece, Italy, Spain etc.] and huge austerity. But it will be at a much higher level”, Geier predicts.

Even the US, which can sustain higher levels of debt, has its limits. “In the long term, that kind of policy puts the dollar as the international reserve currency under a question mark, because it relies on depreciating the US dollar”, Geier says. If all those countries holding US dollar reserves see the value of their reserves shrinking, they will look elsewhere to store their emergency savings.

US government debt is already enormous, and growing rapidly. At the end of 2019, the US was about $17 trillion in debt—equivalent to about 80 percent of its GDP. The Congressional Budget Office expected it to reach 100 percent of GDP by about 2030, but instead it reached that milestone in June.  

As a new wave of the virus sweeps through western Europe, and as the first wave continues making its way through much of the underdeveloped world, the social, health and economic costs will continue to grow. It is possible that the coronavirus can be brought under control through the development of an effective vaccine or treatment. Such a breakthrough would likely ease the intensity of the crisis, at least for a time. Yet the underlying issues of low profitability and low productive investment will not be resolved so simply.

Only a massive destruction and restructuring of capital can pave the way for a sustained round of accumulation and growth. But politicians are reluctant to take this step out of legitimate fear of a domino effect—that it won’t be only one or two companies going bankrupt, but entire industries. As well, growing imperial rivalries are making governments think harder about preserving and expanding strategic industries even if they are unprofitable.