Everything is in place for a new international financial crisis to occur. We don’t know exactly when it will break out. But it will, and its impact will be felt all over the planet.
The major factors contributing to the crisis situation are:
– first, the very large increase in corporate private debt, and then the growing speculative bubble involving financial instruments – securities in stock exchanges, debt securities, securities market, and – in certain countries including the USA and China – the real-estate sector again. The two factors are closely interconnected.
Even companies who have enormous amounts of cash at their disposal, like Apple, take on massive debt because they can take advantage of the low interest rates to lend the money they borrow to others. Apple and many other companies borrow to lend, rather than to invest in production. Apple also borrows in order to buy its own stock on the market. I explained this in an article entitled “The mountain of corporate debt will be the seed of the next financial crisis”
The speculative bubbles mentioned above are the result of the policies of the big central banks (the Federal Reserve in the United States, the ECB, the Bank of England for the last ten years, and the Bank of Japan since the bursting of the real-estate bubble in the 1990s), which have injected thousands of billions of dollars, euros, pounds sterling and yen into the private banks to keep them afloat. These policies have been referred to as “Quantitative Easing.” The financial resources the central banks have distributed so profusely have not been used for productive investments by the banks and major capitalist corporations in other sectors. Instead they have served to acquire financial assets – stocks, corporate bonds, sovereign public securities, structured financial products and derivatives, etc. That has created a speculative bubble on the stock market, the bond market and, in certain places, in the real-estate sector. All the major corporations are overindebted.
This policy on the part of the central banks demonstrates the fact that the decisions their directors make are determined totally by the short-term interests of the major private banks and large capitalist corporations in other sectors – namely, preventing cascading failures and the resulting considerable losses for their large shareholders.
This policy also stems from a characteristic of contemporary financialized capitalism: a smaller and smaller part of the new value that is created is reinvested in production (see François Chesnais, “De nouveau sur l’impasse économique historique du capitalisme mondial”. An increasing part of that new value is spent in the form of dividends for shareholders, re-purchases of shares, and speculative investments, in particular in “structured products” and derivatives. François Chesnais mentions “an ever-more-massive influx of non-reinvested profits of financial groups with a strong industrial component.”
Let’s return to the policy adopted by the central bankers to face the crisis that broke out in 2007-2008. Their intervention did not result in cleaning up the system; on the contrary, the weakest elements were maintained or increased: the ratio between equity (the company’s capital) and the debt taken on by the company is much too low. That ratio is not sufficient to deal with the loss of value that would be caused by a fall in the price of stocks, bonds or other financial assets held by the company, be it a bank or a company like Apple or General Electric, to use only two examples. All companies are heavily indebted because borrowing costs them very little since interest rates are very low (0% in the Eurozone, -0.1% in Japan, 0.75% in the UK and 2.5% in the USA), and huge masses of capital are seeking maximum financial yield, even if it means buying junk debt securities issued by companies in financial trouble. Thus companies like Apple, which have good reputations in terms of financial health, borrow funds and use them to purchase junk securities with high yields. The failing companies who issue these high-yield junk securities conduct an ongoing policy of indebtedness – they borrow in order to repay earlier loans.
In late December 2018, a major stock market crash nearly happened in the USA and the contagious effect was immediate. It was yet another signal of an impending major crash.
There is a tendency for institutions that missed the warning signs before the last financial crisis to over-cook their doomsayer’s warnings as they consider the potential for another one.
The International Monetary Fund leads a group of gloomy forecasters that worry about the stability of the global economy amid rising debt levels and slowing GDP growth. How long, they ask, can the expansion seen since the last crash go on before another recession hits?
And if a global recession is pushed further into the future by even larger dollops of borrowed money from the financial system, will the next recession quickly become a crash of similar or even larger proportions than the one seen in 2008?
Some analysts argue that such gloomy warnings ignore the precedent seen in recent years that major economies tend to start the year slowly before getting into gear later on. That was especially true in 2016, when most of the developed world saw only a small lift in GDP in the first quarter before growth took off.
However, the three years from 2014 were characterised by falling oil and commodity prices, which moderated inflation. This gave the global economy a boost it desperately needed, albeit at the expense of oil- and commodity-exporting nations – and the environment. The boost faded in 2017 and left 2018 as a particularly unspectacular year – except in the US, where Donald Trump’s tax cuts more than made up for lacklustre global trade and fed a consumption boom.
As 2019 gets under way, things look very different. Consumer debt has risen back to pre-crisis levels in many countries. Corporate borrowing has soared and governments, while they have reduced annual deficits, continue to sit on mountains of debt that dwarf the borrowing seen before the crisis.
Another similarity with the pre-2008 period is the determination of central banks to increase borrowing costs. The speeches of central bank officials are littered with references to the need for higher rates, both to bring discipline back to borrowing and, in case another credit squeeze grips the banking sector, to have the tools to prevent a full-blown economic collapse. Bank of England governor Mark Carney has said as much, though his remarks are tempered by threats of a no-deal Brexit. He has been echoed by Jerome Powell, his counterpart at the US Federal Reserve.
Global Recession Risks Are Up
Whether the world’s central banks are prepared to combat another slump is becoming less of a hypothetical question as the global economy shows signs of strain. The chances that the United States will enter a recession by next year have grown as manufacturing weakens and trade uncertainty drags on. In Germany, the unemployment rate has ticked higher, and industrial production is slowing. In Japan, weak factory production and waning exports heighten vulnerability.
A recession is far from inevitable — particularly one as deep and painful as the last. But the capacity for the type of decisive response that prevented an even worse outcome in 2008 has been hindered. Back then, central banks cut rates, bought up bonds, extended government backing to financial products, lent money to banks and in some cases coordinated with government authorities to make sure their rescue packages didn’t work at cross-purposes. It was an unprecedented period of experimentation, one that saved economies careening toward collapse.
But today, interest rates remain below zero in Japan and Europe. They are low by historical standards in the United States, leaving less room to cut in a downturn. Most central banks still hold huge amounts of the bonds and other securities they bought to prop up their economies the last time, which could make another buying binge more difficult and dampen its effects.
Mr. Trump suggested last week that central banks were in something of an arms race, saying on Twitter that China and Europe were manipulating their currencies to gain an edge over the United States and that the Fed should start doing the same.
“We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games — as they have for many years!” he wrote.
SOURCE : cadtm.org