One of the running jokes on Marxists is that they tend to predict 10 out of the last 4 recessions. Basically, we expect another crisis of capitalism to unfold itself at any moment. Certainly, the number of book orders that talk about the economic crisis and the number of Das Kapital orders on Amazon tend to increase after every recession. People tend to have a rather short memory such that we read too much into the current business headlines, while academics since Karl Marx do not have much to say about dynamic and unfolding events, which are hard to grasp. As John Kenneth Galbraith wrote of the great financial crash.
The financial markets are characterized by…
“…extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again. Sometimes in a few years they are hailed by a new, often youthful, and always extremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance.”
(Quoted from Cross Hairs Trader)
The relevant question for us as social commentators is whether we have any indication to believe that we are imminently facing another big crash, or whether that is still too early to tell. There are a number of factors, which should lead us to believe that we might be facing another big crash, though these news stories tend to get buried.
Arguably, the locus of economic power has shifted from the western industrialized country to East Asia, which means principally China. Any economic investigation should, therefore, begin in China, and then we can make more credible links with what is happening elsewhere. I found the headline that China’s steel and coal plants were laying off 1.8 million workers (Quartz 2016). Since summer of 2014, one-fifth of China’s foreign reserves were wiped out, because of capital flight and the government propping up the value of the currency (NYT 2016). What are investors recognizing? What they are reacting to is the deceleration in the Chinese rate of economic growth.
The entire motivation for the investor class to place their funds in China was that economic growth would be very high, so that the rate of investment would be correspondingly high. But the steel and iron industry are now cutting back on production and employment, because the capacity utilization rate is a paltry 67%, and there is a steel surplus of 400 million tons (Reuters 2016). The government scales back growth expectations from a ‘normal’ of 7.5% to 6.5-7% (BBC 2016). What this means is that Chinese companies and the government have long known that their growth has been derived from overbuilding and overproduction. It is only now that the private sector debt has doubled to 200% between 2008 and 2016 (Economist 2016) that the leaders recognize that they can no longer rely on debt-financed and overproducing growth.
The Chinese government’s decision to repeal the one-child policy reveals that the leaders are aware that the economic effects of demographic aging are largely negative. However, to think that motivating Chinese women to raise their fertility rate is illusory for several reasons: (1) more female education and employment opportunities implies more choices for women, and tends to lower the rate of fertility, which is below 1 in some provinces (Beijing, Shanghai, Zhejiang etc.- see birth rate map in Target Map) already; (2) the one-child policy has reoriented the norms of people such that a three person household with only one child is considered optimal. This also gives women more time to succeed in their careers rather than devote all their lives to nurturing, making it even less likely for them to desire more children. (3) Government policies for family and maternity leave are nowhere near generous enough to stimulate indiscriminate procreation. (4) Even if the government were successful in raising the fertility rate, they would have to do so in no time and at such a large scale to counteract their declining labor force.
A real economic slowdown in China will have and is already having severe implications for other parts of the world economy. In October 2015, the German statisticians already had to shave off 0.3 percentage points from their annual growth for 2015, because exports to China had declined (WSJ 2015). Germany is hailed as the biggest and most powerful economy in Europe, but because they base more than 50% of their annual economic output on exports, they react very sensibly to swings in global demand. With the German growth engine confronting obstacles, the Europeans can bury any realistic hopes of generating significant growth, especially considering the fact that the austerity regime has created a huge Eurozone trade surplus (primarily by reducing imports in the indebted peripheral Eurozone countries), which indicates greater reliance on world markets for consumer outlets.
Brazil had also been hailed as an emerging economy. As the largest South American economy, they play an important role in the entire Latin America region. Their growth model had been heavily reliant on the export of commodities (iron ore, sugar, soybeans etc.; see Atlas MIT). But since 2011, the value of exports to China has roughly stagnated and now declined between 2013 and 2014 (WSJ 2015). They are also suffering from a corruption scandal in the state-owned oil company, Petrobras. The decline in Chinese and overall world demand implies a falling price for these export commodities, which results in economic problems.
The US economy is not so much exposed to swings in the global economy, because of a much larger domestic market. (Though they are linked to China because of the dollar reserves the Chinese hold.) The jobs situation had been broadly improving, and there are indications that the retail sector is raising wages (Atlantic 2016). This is the lowest paid sector in the economy, and it means a lot if these workers are getting paid more than before. But there is no illusion here: the massive jobs growth is not visible, because labor force participation rates are expected to decline. There are many young workers who are putting off employment options, because they are not lucrative enough or do not exist. The Global Minotaur is still doing fine on the surface. But any economic growth should reflect the fact that the workers have not seen their fair shake, that millenial wages are stagnant compared to their age peers in the 1980s, while the overall economic productivity has risen by 70% (Atlantic 2016).
Is there only an ethical argument to be made about productivity growth needing to be shared more broadly in the economy? Well, there is an economic argument as well, which is that broadly shared growth is a necessary condition for growth itself. So far the contradiction between private appropriation in the hands of the few and consumption growth in the overall economy can only be resolved by increasing the level of indebtedness in the economy. Student debt, mortgage debt, credit card debt reflect what is happening with debt in the private household sector. Governments having to service the needs of the capitalist class have also gotten themselves into a big debt, and now say that there is not much budgetary room for social expenditures.
Chinese debt in the private corporate sector also reflects where the short-term growth opportunities are financed from. The key lesson in the history of financial crises is that a large debt buildup in a particular sector in a particular country can have substantial ripple effects on the global economy. China’s 3.2 trillion dollar in foreign exchange reserves provide an ample cushion against the market instability they are facing. But only slight changes in growth forecast might swing the investor sentiment toward further outflow. Some people argue that we need to calm down, and accept that the second largest world economy, which is exhausting its labor pool (which is getting more expensive and less competitive by the day), will not be able to produce the same compound growth rate forever. Even at dramatically rising rate of productivity, there are limitations to fast growth. But in a private capitalist economy, where the so-called “electronic herd” (Friedman 1999), is in charge, it is that same capitalist class which decides based on its collective sentiment whether, where and how much to invest.
People concerned about global stability would very much prefer the inevitable deceleration of Chinese growth to be manageable rather than chaotic. But I expect that deleveraging debt in the private sector could have a somewhat chaotic effect, and will have a massively negative impact on global growth expectations. February 2016 growth outlook (2.5%) is 0.3 percentage points lower than November last year (Conference Board 2016). Quo vadis, capitalism? We don’t know, but I take the safe bet that the big economic crash is not far off. We are biding our time, and hoping that we can finally overcome the instability which is inherent to our transient economic system of the present. If we are only waiting, then it is for Godot to come. If we want to change it, we need a counter-hegemony to capitalism.