The End of an Era

Why do the International Monetary Fund (IMF), the World Trade Organization (WTO) and the World Bank-- three of the most highly regarded international economic organizations-- project a bleak road ahead for the global economy? 

Ominously, the World Bank warns of the possibility of a coming “lost decade” for economic growth. 

In January of this year, the World Bank dropped its global growth projection for 2023 to 1.7% from its June of 2022 projection of 3%. To put some perspective on the number, during the era of high globalization before the 2007-9 crash, global growth averaged 3.5%. Since the crisis, growth has averaged 2.8%. And just three months after the January projection, the World Bank warns of an entire decade of lowered growth expectations. As quoted in The Wall Street Journal: “it will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one.”

Likewise, the WTO projects the volume of world merchandise trade to expand at only 1.7% this year from the 2.8% average growth experienced since 2008.

On the heels of the April World Bank alarm, the IMF has announced its worst medium-term growth forecast since 1990. 

Accordingly, all three major international organizations have offered challenging, if not dire predictions for the global economy.

Clearly, the capitalist ship that has been buffeted by a global pandemic, raging inflation, a European war, and bank failures is taking on water. While there is no reason to expect the ship to sink, serious alarm bells are going off.

The pundits, policy-makers, and economics professors assured us that the orgy of price increases battering household budgets was only temporary, due to disruptions in global supply chains caused first by the pandemic, then by the war in Ukraine. Those promises were made over two years ago. 

Since then, explanations have given way to prayer. The policy tools-- a bitter potion of Central Bank interest rate hikes-- have proven less effective against inflation than promised. The previous long decade of unusually low interest rates encourages consumers to freely use credit when income is under stress, as it is with rampant inflation. As interest rates soar, those same consumers are slow to recognize their exploding debt load from high interest payments, adding to an already deteriorating standard of living. Reliance on credit thwarts the dampening effects of interest-rate increases upon consumer demand. 

Media Pollyannas rejoiced over the March Consumer Price Index numbers, with growth down to 5% over the level of the year earlier (the Fed target is 2%). While the drop is significant, the media neglected to mention that they had been persistently reminding us that the Federal Reserve relies on the core rate over the overall rate in its policy decisions. That rate-- the core CPI-- actually rose in March (its components-- core services and core goods-- were both up from February). So much for the power of faith. 

Thus, the Federal Reserve will likely raise interest rates again in May, further increasing the cost of newly incurred debt.

And why would inflation ease when consumers are still rushing towards Armageddon by continuing to tolerate price increases? Proctor and Gamble, one of global economy’s biggest consumer-product monopolies (Tide, Charmin, Gillette, Crest, etc.) has raised prices by 10% with little loss in sales volume and with growing dollar revenue. P&G has no incentive to stop or slow price increases as long as revenue (and profits) continue to grow. In fact, why would they? They are in business to make money.

Simple as it may seem, that’s the answer behind the “puzzle” of inflation: “‘The only way to explain this in relation to what we’ve seen in some of the commodity price indices for food is that margins are being expanded,’ said Claus Vistesen, an economist at Pantheon Macroeconomics” as quoted in The Wall Street Journal. Yes, that’s price gouging.

It’s not a “wage-price spiral” as corporate flacks like to opine. Instead, as Fabio Panetta, European Central Bank board member, confesses, it’s “opportunistic behavior” capped by “a profit-price spiral.” 

Liberal and social democratic economists decry the Federal Reserve’s strategy of putting a wet blanket on consumption to discourage price rises, but they have no alternatives to offer. They are content to leave the management of the capitalist economy to the capitalists, while denouncing their remedies.

Similarly, the once loud advocates of Modern Monetary Theory (MMT) are strangely quiet. During the pandemic, the idea of running large, stimulative deficits without fear of igniting inflation became popular. Left-wing pundits thought that they had found a pain-free method of funding social reforms without tapping the accumulated wealth of the obscenely rich-- a magical political elixir. The arrival of spiraling inflation has stifled that talk.

If three major capitalist institutions are foretelling economic uncertainty and instability, it is because we are exiting a distinctive era of capitalist restructuring. Associated with the popular term of “globalization,” the accelerating mobility of capital, the opening up of new areas of capital penetration; a revolution in financial instruments; the release of huge new low-wage, skilled-labor reservoirs; modern, efficient shipping techniques; the removal of trade barriers and the streamlining of regulation; new formerly public areas opened to private development; and the adoption of trade agreements embodying these changes are among the more important and novel features of the era that we are leaving. 

That era gave capitalism a new lease on life, with growing profits, hyper-accumulation, and vastly expanded speculative investments. Little of that enrichment was shared with the masses, resulting in unprecedented inequalities of income and wealth. 

The great economic collapse of 2007-2009 exhausted the vitality of the epoch of globalism-- capitalist internationalism-- that lasted over two decades. Vast sums of hyper-accumulated capital channeled into riskier and riskier speculation, a process that eventually collapsed from its own arrogance.

Rather than surrender to the inevitability of the “creative destruction” that always naturally follows a crash-- the natural process of sweeping away the toxic “assets” left in the wake of a crash-- the great financial wizards in the financial centers of New York, London, Paris, Zurich, etc. sought to isolate, protect, and sustain the garbage of the disaster and “inflate” a deflated economy through “creative restoration.”

Popularized by economist Joseph Schumpeter, the term “creative destruction” refers to the wreckage left after an economic crash-- the deflated and fictitious “values” associated with bank and enterprise failures, overpriced, unrealized goods and services, lost jobs, bad investments, ruined securities, etc. For Schumpeter and his followers, this destruction was essential for a reset of the economy, a new, fresh beginning, sweeping away the waste products of the crash.

Historically, the pain of a crisis is borne excessively by poor and working people, but the rich and powerful and the corporations are set back as well. The more severe the downturn, the less able the elites are to push all of the consequences onto those less powerful and more vulnerable. And the worse the downturn, the greater the political resistance to business-as-usual.

But after 2007-2009, working people’s institutions were extraordinarily weak, the mainstream party systems offered little advocacy for the victims of the crash, and the policy makers were determined and confident that they could avoid or buffer the period of creative destruction. They believed that they possessed the financial tools that would stabilize and resuscitate the global economy without a period of retrenchment and the accompanying economic setbacks. Central banks spent trillions to buy the worthless "assets" and place them in a lockbox until values could be restored and sold back into markets. And they embarked on an unprecedented decade of free money (ultra-low interest rates) to allow sickly, unprofitable, and marginal enterprises to live on life support and to compete another day. The discipline of the market-- of winners and losers-- gave way to state intervention to keep everyone in the game.

They only succeeded in postponing the inevitable. Today, the effort to forego creative destruction is failing and global institutions know and recognize that failure with their dire projections.

What will follow the collapse of globalism remains a matter of conjecture. 

However, we can see that we are entering a period of growing uncertainty and conflict. The rise of rightwing populism has spawned a strong dissatisfaction with conventional answers and a rise in nationalism and protectionism. Governments in Europe (Hungary, Poland, Italy, the Baltics, etc.) in Asia (India, Turkey, Taiwan, Japan, etc.) have taken a decidedly rightward turn, embracing militarization, sectarianism, anti-liberalism, and nationalism. The US and its allies are no longer the champions of free markets, employing tariffs, sanctions, and other aggressive, winner-take-all measures. 

The alliances and the rules of the game that were established in the 1990s and the first decade of the twenty-first century are now crumbling. Global leadership is now contested, with the war dangers that ensue. The win-win illusions of globalization are mutating into the voracity of grab-whatever-you-can. 

We have not seen in memory a period where the US and its allies simply steal the financial assets of a country like Venezuela or Russia with impunity. All signs point to not a world order, but a world disorder, with alliances coming and going between old allies and old enemies. Turkey can attack Russian planes over Syria and sell drones to Russia to use against Ukraine. Saudi Arabia can assist fundamentalists in killing Russians in Syria and then broker a global oil deal with Russia. Russia can sell weapons to both Peoples’ China and India, as tensions rise between the two. The US can destroy pipelines that offer cheap Russian energy to Germany with impunity, while the UAE sells sanctioned Russian oil back to Germany. And so it goes. Increasingly, the only principle behind international relations is absence of principle. 

Understandably, the highly-educated-- normally Pollyannaish-- minds diligently working for The World Bank, the IMF, and WTO foresee a rough road ahead for global capitalism. The rest of us should take notice. 

Greg Godels

zzsblogml@gmail.com

New Developments in Political Economy: The Demise of “Globalization”

Notes from the Brink: The Economy in the Winter of 2013

Workers’ Woes

Workers at a non-union Toyota plant in Kentucky have been offered incentives to retire early in order for management to replace them with new hires at a lower starting wage. The labor cost advantages formerly enjoyed by Toyota—the non-union premium—is no longer available to non-union plants in the auto industry. It seems the wages and benefits long ago won by a more aggressive UAW have retreated to the extent that non-union plants must now secure lower compensation in order to compete!

Since the UAW has conceded starting pay in the unionized industry down to about $14-16 per hour, Toyota seeks to replace older workers making around $26 per hour in their Kentucky plant with new hires at $16 per hour. Thus, the union shops are paradoxically pressuring downward the wages and benefits of non-union employees .

As reported in The Wall Street Journal, industry experts claim that the non-union manufacturers enjoyed a $29 an hour competitive advantage in wages and benefits as recently as 2008. By the end of 2011, they report that non-union labor costs were about equal with General Motors and actually higher than Chrysler!

It is hard to imagine a more demoralizing consequence for the union movement in the US: if only the market, and not a fighting union, is to competitively determine wages and benefits, how does one entice workers to join the union? For the bankrupt UAW leadership, union growth comes only from striking a deal with the employers-- a deal that would promise collaboration and stability at the expense of workers’ pay and benefits.

The decimation of the living standards of US unionized auto workers came with the bailout and subsequent temporary stewardship of the auto industry by a Democratic Party administration. That same administration demanded plant closings and layoffs as a condition of the bailout.

With friends like these, workers are sadly in dire straits.

Clearly, radical changes are in order, changes that cry out for class struggle unionism and independent political action. Without a new direction, US workers will continue the descent towards Depression-era living standards.

Currency Wars 

The 1917 text of Lenin’s Imperialism projected intense struggles between rival capitalist powers. Written during an unprecedented total war between the most economically advanced countries, a war that when settled cost the lives of millions of  people, Lenin’s tract explained the First World War as a contest between empires seeking global advantage for the spoils of capitalist exploitation.

Less than twenty years later, the same empire-building forces were again unleashed to carve the world in a desperate attempt to secure markets and sources of strategic resources. World War Two further confirmed Lenin’s thesis that competing capitalist powers were unable to collaborate and cooperate for some greater, universal good. Instead, competition always begets aggression, national chauvinism, and war.

Many were dismissive of Lenin’s prophecies when witnessing the Cold War expediencies of inter-imperial cooperation against the emerging post-war socialist community. With well over a third of the world’s population in the socialist camp, the imperial rivals found a temporary basis of unity around fears and resistance to the success of socialist revolution. The survival of capitalism tamed the inherent rivalries for that moment.

The demise of that threat with the collapse of Eastern European socialism and the accommodation with capitalism by Asian Communists has unleashed the beast of imperial competition. The global economic crisis only serves to fuel the tensions and expose the rivalries.

I wrote in November of 2008 of the “global crackup”, noting that the US was no longer in a position to impose its will on the rest of the world, unable to slough its problems easily upon others. I drew attention to the logic of capitalist competition that, in the long run, denies any hope of cooperation and common solutions.

Today, that tendency— aggressive imperialist rivalry—has found its expression in a new war, a war waged around the relative value of national currencies.

Rulers understand that in a climate of stagnant or declining world trade, nation-states will draw an advantage from devaluing national currencies; by cheapening money—the medium of exchange— domestic enterprises will be able to offer their products at a more favorable price in international markets.

The US tepid “recovery” from the depths of the crisis has largely been won by hyper-exploitation of a docile work force and the dramatic expansion of exports through the Federal Reserve’s massive devaluation of the dollar via the printing press. The Qualitative Easing programs aim to suppress interest rates and remove the corporate garbage generated by the financial promiscuity of the period before the collapse of 2008. But they also have the not-so-unintended consequence of bolstering the competitiveness of US export manufacturing.

At the same time, US policy makers pointed an accusatory finger at the Peoples’ Republic of China, charging its leaders with currency manipulation. While the charge got little traction from those who closely studied these relationships, it served as a useful diversion from US policies and bolstered rounds of anti-China bashing by do-nothing politicians and labor mis-leaders.

European Union leaders, occupied with the desperate effort to save the Euro, offered little resistance to US currency manipulation.

But with the election of Shinzo Abe in Japan, the currency war was joined. Abe, a right-wing nationalist, exploited the Japanese public’s frustration with years of ineffective governance and economic stagnation to scorn cooperation and offer an aggressive economic program geared towards restoring Japanese competitiveness. Assuming the office of Prime Minister, he launched an aggressive campaign to devalue the Yen. His pressure on the Bank of Japan has already (in less than two months!) produced a drop of 10% in the Yen’s value against the dollar and 15% against the Euro. This means that Japanese products are enjoying a growing competitive advantage in international markets.

International bankers see these moves clearly as the opening salvos in a major escalation of the currency/trade wars. Politicians in countries throughout the world have quietly made similar moves to spur competitiveness, but never with the open audacity shown by Abe.

Perhaps even more disturbing is the unabashed belligerence and arrogant nationalism accompanying these economic moves. The Japanese government has provoked disputes with nearly every Asian Pacific government over barren islands claimed as part of Greater Japan. Imperial aggression is as great a danger today as it was nearly a hundred years ago when Lenin established it as a structural feature of mature capitalism.

A Hushed Mea Culpa       

Capital’s policeman, the International Monetary Fund, has offered a quiet confession of an arcane theoretical mistake of enormous consequence. As the leading cheerleader for decades of the “fiscal responsibility” approach to public programs, the IMF can take dubious credit for the policy of austerity as a general panacea for economic duress. A cursory look at the IMF legacy shows a constant, unrelenting enforcement of balanced budgets and meager public spending. Developing countries seeking IMF loans have felt the lash of austerity as a condition of relief.

A cornerstone of IMF thinking was a little discussed macro-economic assumption of the compounding effects of debt reduction. Where “unschooled” common sense might suggest that removing a dollar of public spending from economic activity would remove at least a dollar from a nation’s gross domestic product, the IMF postulated that it would reduce economic activity by only half of a dollar. That is, the “multiplier” for a reduction of public spending was only .5. The assumption, of course, is the neo-liberal axiom that the dollar spent elsewhere in the private sector MUST always be far more productive, must always be greater than unity and, therefore, must always outweigh the loss of “inefficient” public sector spending.

Unfortunately, the axiom is wrong. IMF empirical studies show that, in fact, the multiplier of public spending reductions ranges between .9 and 1.7. In other words, the negative impact of public spending cuts was underestimated by two to three times! The IMF confessed as much in its October report. Unstated, however, is the negative impact of this “error” on hundreds of thousands, perhaps millions, of people who have lost public benefits to the discipline of IMF imposed “fiscal responsibility”. Even more have suffered from the constraint on economic growth produced by the regimen of austerity.

And yet debt reduction through choking government spending remains a priority of political parties from the far right to the social democratic left.

The Sky is Falling, but not on Everyone yet!  

You would never know it from the Wall Street pundits loudly proclaiming the best January stock market in two years, but the US GDP shrank in the final quarter of 2012 (as it did in the UK, the EU, and even the seemingly bullet-proof German economy).

Generally, negative GDP panics investors and disrupts markets, but we live in special times. To the extent that labor remains quiescent and social movements fail to translate into anti-capitalist uprisings, investors and the capitalist class have made their peace with historically unacceptable unemployment and stagnating, but stable economic growth. It’s the earnings that catch the eye of the investors and the wealthy. And they have been holding up rather well so far.

In fact, they are creating the conditions for another round of risk-taking. Money market funds are flush with cash and seeking greater returns, securitization of debt is on the rise again (securities built on auto loans are greater than at any time since 2005), and banks are again growing their real-estate loan portfolios. Capitalism and the lust for ever greater accumulation never sleep!

Of course it is the very mechanism of accumulation, the search for yield on swelling capital (and the accompanying pressures on profitability), that announces the next round in the crisis.

Zoltan Zigedy

zoltanzigedy@gmail.com