Stagnation: The new normal

Stagnation: The new normal

In recent weeks startling headlines have charted falls on the world’s stock markets amid fears about the state of the world economy. Take a small sample from the financial pages of The Guardian: “Markets tumble in Europe and New York over fears US will reverse interest rate rise” (16 January); “Markets transfixed by fear of banking crisis” (9 February); “Fears of 2008-style crisis haunt global markets” (10 February); “Share prices slide amid investor panic” (12 February).

So is another crash in the offing? And what would be the implications for the future of capitalism?

Since the birth of industrial capitalism in the mid-18th century, that part of the world’s economy that is fully integrated into capitalism has hardly ever shrunk for more than a year or two (individual countries or regions may experience longer-lasting contractions). The path of capitalist economic output always demonstrates a tendency over time to rise. This is a reflection of capitalism’s drive to accumulate – to reinvest profits so as to generate ever bigger profits – combined with the unlocking of the potential of human ingenuity (expressed through science and technology) to make individual workers more productive year by year. On average the number of things (use-values in Marxist terms) produced by each worker increases and, since the accumulation of capital tends to increase the number of workers drawn into the capitalist system, the total output of things also increases.

Of course, the average rise in total output generated by capitalism does not take the graphical form of a perfectly straight line rising diagonally from left to right. Rather it zig-zags across the graph. For ever since its birth industrial capitalism has gone through one cycle of boom and bust after another. The key point for our present discussion is that the bust phase of that cycle does not last forever.

Now there are a wide variety of explanations of the cause of the short-term “business cycle”. It is even possible to argue that there is not even really a cycle at all (in the sense of a predictable recurrence of the same category of events) but simply, given the unplanned nature of capitalist growth, generalised instability in which random, contingent shocks can cause the economy to nose-dive from time to time. For what it is worth, I tend to agree with Marx that the duration of the business cycle is linked to the surge of investment that occurs when the recovery cycle of the phase begins. I have speculated that the falling price as a result of technological obsolescence (what Marx called “moral depreciation”) of this cohort of assets might cause an increase in economic instability (firms facing losses and retrenching or going out of business) within the typical seven to ten years of the cycle and initiate the downturn phase[i].

Extraordinary Measures

Neither did the downturn of 2008/09 – deep and prolonged as it was (easily the worst recession since 1929) – last forever. Give or take the odd double or triple-dip, most economies (with obvious exceptions such as Greece) were growing again by 2010. However, whether or not the recent sharp falls in stock markets are signalling a new economic crash (and a downturn in 2016 would fit the timescale of the normal business cycle), perhaps the most remarkable story is the failure of the global economy to properly recover in the subsequent seven years from the events of 2008/09.

The extraordinary monetary measures that were resorted to by central banks in order to pull the economy out its 2009 nosedive – ultra-low interest rates and the innovative experiment of quantitative easing (QE) – have, as the years have passed, been adopted on an ever wider scale.

UK interests have been stuck at 0.5% since 2009. In the United States they were at 0.25% from December 2008 until 16 December 2015. Low interest rates are designed to encourage businesses and individuals to borrow money to invest or spend in an attempt to get an economy moving again. Traditionally, interest rates are regarded as virtually the sole device available to the “monetary authorities”, ie, those responsible for printing the currency and setting its price (its interest rate).

The other arm of mainstream economic policy is the fiscal, ie, the manipulation of the difference between what a government raises through taxes and what it spends. The US and UK did apply fiscal stimuluses in the aftermath of the 2008 crash (although Keynesians would generally argue that they were not big enough and were brought to an end too soon). Nevertheless, governments ran large budget deficits, and government debt (also known as sovereign debt) rose dramatically as a percentage of GDP. The increase in debt was far from exclusively a deliberate act of policy. The crash itself by reducing economic activity cut the volume of taxes received by governments and meant governments were paying out more in unemployment benefit and other welfare payments. And measures by governments to bail out the banks that were at the centre of the 2008/09 crisis were very costly.

It was in the context of rock bottom interest rates and spiralling government debts, but economic growth that was recalcitrantly refusing to return to pre-crisis levels, that quantitative easing (QE) entered the lexicon as a way for central banks to pump money directly into the financial system. Effectively a proxy for “printing money” (a device that had previously been considered a short-cut to hyper-inflation), QE involves central banks buying assets (usually government bonds) with money it has created (usually electronically). It is supposed to encourage banks to lend and to push the interest rates they charge borrowers down towards the levels set by central banks, ie, closer to zero in the post-2008 world.

The US kicked off the initiative, the US Federal Reserve purchasing bonds worth more than $3.7tn between 2008 and 2015. The UK’s QE programme created £375bn between 2009 and 2012. Japan began a QE programme in April 2013 as one of the “three arrows” of Abenomics (the response to continuing economic stagnation by Japan’s incoming prime minister, Shinzo Abe).

And ever the late-comer, the eurozone began implementing €1.1tn of QE from January 2015, after Mario Draghi, president of the Central European Bank, won agreement for the latest attempt to fulfil his 2012 promise to “do whatever it takes to preserve the euro”.

The US can probably claim the greatest success in the “developed world” in restoring growth, but only from 2012. Even so, growth rates of under 2.5% are relatively modest by historical standards. In the UK, once chancellor, George Osborne, abandoned his original intention to close the gap between government income and spending by 2015, the economy did begin to expand. Average UK growth has been close to that of the US, but 2008 levels of total output were only regained last year.

Elsewhere in the world’s capitalist heartlands, efforts to break from the grip of 2008/09 have been more disappointing. The Eurozone economy shrunk in 2012 and 2013 and rose only 0.9% in 2014. Japan’s economy despite the best efforts of Abenomics grew only modestly in 2012 and 2013, actually shrunk in 2014 with growth restored in 2015.

The rolling implementation of QE is one indication that, even where growth rates appear to be pulling clear of recessionary fears, all is far from well with the global economy.

Interest rates that can barely be raised above zero are another. In December the US Federal Reserve raised rates 0.25% to 0.5%. The impact on economic confidence around the world was strongly negative. Federal Reserve chair, Janet Yellen, has forced to signal that her original intention to continue with small incremental interest rate rises through 2016 and 2017 until a normal level of 3.5% or so was reach has been abandoned. So much for her December boast that the US economy was “on a path of sustainable improvement”. Across the Atlantic, Bank of England governor, Mark Carney, has had to put on hold his ambition to start raising UK interest rates any time soon.

And now we have the unprecedented application of negative interest rates whereby commercial banks far from receiving any interest, however low, have to pay central banks for the privilege of depositing money with them. In June 2014 the European Central Bank slapped a fee on deposits. Then the Swiss National Bank followed suit as it vainly tried to stop the Swiss franc from appreciating against the euro. In early 2015 Denmark pushed an already marginally negative interest down to minus 0.75%. In February 2015, in the face of deflation, Sweden’s Riksbank introduced negative interest rates. On 29 January this year, the Bank of Japan, in the face of a rapidly slowing economy also resorted to negative interest rates – a measure which has yet to be dubbed Abenomics “fourth arrow”. Negative interest rates are therefore being applied in economies that together account for a quarter of global GDP.

Emerging markets

Over the last seven years, it is growth in the so-called “emerging markets” that has kept the capitalist show on the road. Whatever acronym you favour – BRICS (Brazil, Russia, India, China, Russia) or MINT (Mexico, Indonesia, Nigeria, Turkey) – as an indicator of where the best prospects for growth (and, to be blunt, profit making) lie, it is has been economies that were long on the periphery of world events which have been most dynamic in recent years. Although it has to be said that in the central emerging market economy, China, it was a massive state-led stimulus programme and a credit boom that kick-started the economy (and, as a consequence, loaded the state and corporations with debt). The restoration of high rates of growth in China after 2008/09 drew in raw materials and products sustaining high demand and prices around the world. Larry Summers, former US Treasury secretary claims China “poured more concrete between 2010 and 2013 than the US did in the entire 20th century”[ii].

It was the noisy grinding of gears and screech of brakes of this engine of world growth that did more than any other development in 2015 to expose the fragile props on which recovery had been built. Growth and trade have both fallen. Chinese industrial companies suffered an 8.8 per cent year-on-year decline in their profits in August 2015, the largest drop since records began in 2011. Longmay, a large Chinese coal company, in a “life and death struggle” for survival, announced in mid-2015 it was laying off 100,000 workers[iii]. Official Chinese statistics indicate a slowing in growth to under 7% (considerably lower than for most of the previous 30 years). Consumption statistics (of electricity and the like) reveal that in reality Chinese growth is unlikely to be more than 4% – far below what China needs to keep factories humming and workers in jobs.

Gross flows of capital from developed countries to developing countries which rose from $240bn in 2002 to $1.1tn in 2014 were predicted to reverse in 2015 with an outflow of $1tn. So, as far as most of the developing world is concerned, economies are already in recession or heading that way. For them, the post-2008/09 upturn is at an end.

Chinese stocks and shares underwent wild gyrations in 2015 as the Chinese state stepped in to try to halt falls that threatened to turn into a rout and failed. Stock market falls went global around the turn of the year. This was partly in response to the Federal Reserve’s paltry 0.25% rise in interest rates. For one thing, any dollar-denominated debts (and corporate debt in emerging markets have grown rapidly in recent years) will incur higher repayments as rates rise in what will probably be an appreciating dollar.

Dramatic falls in oil prices to be below 30%, far from giving a boost to consumer spending, served both to undermine oil producers, including the energy sector in the US (particularly shale gas production) and to add to deflationary pressures across the board. When prices actually fall, it makes sense to delay spending if at all possible in anticipation of lower prices in the future. 

What is more, exotic attempts to sustain economic growth – such as negative interest rates – may be counterproductive. Scott Mather, a Pimco chief investment officer, is quoted in the Financial Times as saying, “It seems that financial markets increasingly view these experimental moves as desperate and consequently damaging to financial and economic stability”[iv].

Negative rates have certainly had a far from positive impact on bank shares (since banks find it difficult to pass on negative rates to those who save with them): as of mid-February, Japanese and European banking shares had crashed more than 20% and US banking shares were down 15%. Nor is it clear that negative interest rates even in theory can have the effect monetary policy-makers desire: hoarding of bank notes (that preserve their value in a deflationary environment) could be encouraged, rather than spending.

Whether the recession that is already enveloping the likes of Brazil, Russia and South Africa (and impacting heavily on commodity exporters like Australia and Canada and much of Africa and Latin America) leads to a downturn in the developed economies depends on two considerations. First, is the impact of the developing Asia and other emerging markets on the rest of the world more significant than in 1997 when the Asia crisis failed to light the touch paper on a global downturn? Second, are internal factors in the US and other developed economies turning of their own accord towards recession?

On the first, in 1999 the developed world accounted for 23% of world GDP in dollar terms; now it is 35% – dollar measurements of GDP are far more significant for global impact than the purchasing power parity (PPP) statistics that are often bandied around, which show emerging markets currently with 52% of global GDP. So the significance of the newly-emerging capitalisms is rising: they have the capacity to deliver a nasty shock to the global economy.

On the second, the coming months will tell. Growth in the US and UK slowed sharply in the fourth quarter of 2015. In Japan, companies have revised down their annual net profit forecast for the fiscal year. Toshiba has posted a $6.2bn loss[v]. Japanese inflation at 0.8% remains stubbornly below the 2% target despite more than three years of Abenomics. In the eurozone neither QE nor negative interest have achieved any noticeable impact. It will not take much to turn the weak recoveries of the developed bloc of economies into renewed recession.

Secular stagnation

Whether or not 2016 witnesses another economic crash, there is no indication that anything like normal capitalist growth will be restored in the near future – allowing, for instance, the withdrawal of QE and close-to-zero or negative interest rates. Larry Summers, US Treasury secretary under Bill Clinton describes the situation as one of “secular stagnation” which he defines as “the inability of the industrial world to grow at healthy rates even with loose monetary policies”. He warns: “the risk is that the global economy will fall into a trap not unlike the one Japan has been in for 25 years where growth stagnates but little can be done to fix it “[vi].

Periods of sustained stagnation in capitalist economic history are relatively rare phenomena: the Great Depression of the 1930s and the long downturn of the 1870 and ’80s are two predecessors of the era we appear to have entered. I am not convinced that these depressive, stagnationary economic phases fit into a neat series of regular and recurrent “long-waves” (successive cycles lasting half-century each and subsuming several business cycles) – a theory developed variously by Nikolai Kondratiev, Joseph Schumpeter, and Ernest Mandel.

I think it is far better to focus on the underlying dynamics of capitalist economic development. Summers is a prominent Keynesian voice from the economic mainstream (he has after all been chief economist at the World Bank and president of Harvard University). He attributes secular stagnation to a lack of global demand. His prescription is a major programme of fiscal stimulus. Many Marxist economists share Summer’s basic analysis. It appeals to many trade union leaders and activists because it seems to justify higher wages and increases in government social spending for the good of the economy.

I do not think the explanation stands up to careful consideration. A slump (even a more modest downturn in the business cycle) spreads and gathers pace as firms cut back spending and investment plans, workers are sacked and spending throughout the economy falls. But that is a description of the phenomenon – not an explanation of why capitalist economies regularly crash. If, as part of its nature, capitalism were afflicted with a chronic (as opposed to a periodically acute) lack of demand, it would not be possible to explain those prolonged periods when capitalism actually does grow vigorously.

Generally, this kind of “underconsumptionism” is based on a gut belief that in the final analysis capitalist economies are driven by the consumption of individual consumers rather than all economic actors (including capitalist investors). This is not the model of capitalism that Marx describes in which accumulation happens “for accumulation’s sake” and the production of consumer goods does not have any priority over the production of producer goods as capital circulates.

For Marx, it is the drive of capitalists to increase the productivity of workers that introduces the most potentially crippling instability into the system. Productivity increases raise the output of things (use-value) but at the cost of the value of individual commodities which fall (value reflecting the amount of work by humans that has gone into producing commodities). The reduction in commodity values can in turn undermine capitalists’ rate of return on their initial investments. The average rate of profit in the economy as a whole can fall.

When this happens the growth of the economy in value terms is likely to fall also since, if the same proportion of profits is reinvested as previously, the rate of accumulation will be lower. However, it is quite likely that capitalists will actually reinvest fewer of their profits in productive activities as their rate of return worsens. As a consequence, the growth even of use-values will drop.

And indeed the accumulation of uninvested profits by corporations has grown over the last decade as rates of investment have fallen in many economies. Cash piles at European non -financial companies have swelled to $1.1tn – more than 40% higher than in 2008[vii]. Analyses by Marxist economists such as Andrew Kliman[viii] and Michael Roberts[ix] point to a generally lowered rate of profit. That indicates that Marx’s model provides a productive starting point for understanding the underlying cause of “secular stagnation”. It also, at least theoretically, provides a strong argument for going beyond capitalism in order to realise the scientific and technological potential that capitalism has unleashed for the benefit of humanity.

It is up to us to give substance to the theoretical case and build a socialist political alternative to capitalism.


[i] N Rogers, ‘”Revolutions in value” and capitalist crisis’, Weekly Worker, 19 November 2015 []

[ii] Lawrence Summers, ‘The case for expansion’, Financial Times, 8 October 2015

[iii] James Kynge and Jonathan Wheatley, ‘Ill wind’, Financial Times, 5 October 2015

[iv] Robin Wigglesworth, Leo Lewis and Dan McCrum, ‘Negative thinking’, Financial Times, 18 February 2016

[v] Kana Inagaki, ‘Japan Inc seeks lift as yen support fades’, Financial Times, 10 February 2016

[vi] Lawrence Summer, ibid

[vii] Chris Bryant and Claire Jones, ‘The printing press rolls…’, Financial Times, 8 September 2015

[viii] A Kliman, ‘The Failure of Capitalist Production: Underlying Causes of the Great Recession’, 2012

[ix] See Michael Roberts’ regular posts on his excellent blog:

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