11.06.2022, Tomasz Konicz
A brief background on the aporias of bourgeois crisis politics in the transition of the world economy from pandemic to war-related crisis.
From pandemic to war – the world economy is obviously not coming to rest. On its website, the Tagesschau sees the world economy threatened by “multiple crises.” But when it comes to the economic fallout of the rapidly advancing erosion of the capitalist world system, the question now arises whether it makes any sense at all to speak of a pandemic or war-related economic crisis, or whether it would not be more consistent to finally understand the successive economic shocks as stages of one and the same systemic crisis process.
In its latest assessment of the global economy, the World Bank had to revise its earlier growth forecast downwards significantly. As of now, the global economy is expected to grow by only 2.9 percent this year, while the World Bank was still forecasting 4.1 percent growth in January. This would almost halve global economic momentum, which reached a whopping 5.7 percent in 2021 due to the gigantic, debt-financed stimulus measures implemented by many countries. For many developing and emerging countries, which can only achieve social stability with high growth rates, this economic slowdown is dangerous – especially against the backdrop of skyrocketing food prices. Moreover, the World Bank has warned of the growing risk of a prolonged period of stagflation, similar to the crisis phase in the 1970s, when economic stagnation was accompanied by double-digit inflation (see also: “Back to Stagflation?”).
The OECD made similar corrections, according to which global economic output is expected to grow by only three percent this year. At the end of 2021, the forecast was still 4.5 percent. For 2023, the association of 38 industrialized countries forecasts economic growth of 2.8 percent instead of the previously assumed 3.2 percent – if there is no new crisis push, of course. According to the OECD, the economic slowdown in the coming year will also be accompanied by an easing of the wave of inflation, which is expected to fall from 8.5 percent this year to 6.0 percent in 2023.
The massive revisions that had to be made by the OECD and the World Bank within half a year not only illustrate the futility of economic forecasts in the manifest systemic crisis into which late capitalism is entering, they also reveal an increasingly clear connection between inflation and economic growth. At the latest since the outbreak of the pandemic, to which politicians reacted with massive money printing, to finance government stimulus measures in the USA and the EU, the dynamic of increasing inflationary has taken root. This is not only due to the war – it is not pure “Putin-flation” – and the disrupted global supply chains, but also to the expansionary monetary policy of central banks.
A Flood of Money and Inflation
This connection between the great pandemic-related flood of money and global inflation was most recently discussed, for example, before the US Senate Finance Committee, which the Biden administration’s Treasury Secretary Janet Yellen had to face in early June. The accusations of the Republican opposition, according to which the White House triggered inflation and the “overheating” of the economy through its 1.9 trillion dollar stimulus program, are dishonest in several respects: on the one hand, Donald Trump introduced similarly costly support measures, which, however, mainly included tax breaks for the rich and corporations, while with Biden – despite all the cuts – it was possible to push through some relief for the middle class and low-income groups. And it is precisely this circumstance that the White House has now been reproached for, for example by the identification of social subsidies for children as “inflation drivers.”
A look at the past year helps to put things in perspective: Accelerating inflation, which now exceeds eight percentage points, was accompanied by GDP growth of 5.4 percent – the highest level since the 1980s. This expansion, in which the Federal Reserve effectively used freshly printed money to buy up the debt incurred by the US government to stimulate the economy, was in response to the tremendous economic collapse that followed the outbreak of the pandemic, which caused US GDP to contract by 3.4 per cent in 2020. Conversely, one might ask what the US economy would look like now if Washington had foregone these stimulus programs.
US economic policy has effectively averted a depression, albeit only at a price that wage earners must now pay at the supermarket checkout: the price of inflation. Central banks have bought up bonds and debt instruments in previous crises, for example after the bursting of the real estate bubble in 2007/08, but on the one hand the dimensions of this “quantitative easing” are many times greater now than they were back then, and on the other hand, the financialization of capital seems to have reached its limits, as the previous phases of expansionary monetary policy led to an inflation of prices on the already bloated financial markets – and thus contributed to the rise of new speculative bubbles.
Central bank money printing thus represents – along with collapsing globalization and the full-blown climate crisis – one of the three most important factors contributing to the current wave of inflation (see also “Triple-Threat Inflation”). In the meantime, the Fed has raised key interest rates to between 0.75 and one percent in order to get this inflation under control – despite a 1.5 percent contraction of the US GDP in the first quarter of this year.
In the US, the right-wing opposition blames the Biden administration and its already stunted approach to social policy for inflation. In Europe, the ECB is at the center of criticism, mainly from Germany. In the EU, the disputes over the course of monetary policy are overshadowed by the divergent interests of the southern periphery and the German center. In Berlin, resentment of the ECB’s ultra-loose monetary policy is growing, while the south of the eurozone, which has suffered from Germany’s trade surpluses since the introduction of the euro, relies on zero interest rates and ECB bond purchases to finance stimulus measures and keep its high debt burden sustainable. In Italy, government debt now exceeds 130 percent of GDP. There is a good indicator of the potential for crisis in the eurozone: it is the so-called “spread,” the interest rate difference between German and Italian government bonds, which rises with every impending crisis in the EU, as capital flees to “safe havens” such as the FRG or the US. This spread has just climbed to its highest level since the outbreak of the pandemic.
That is why the European central bank is much more hesitant than the Fed in raising key interest rates – a new euro crisis, in which rising interest rates could cause the mountains of debt in the south of the currency union to collapse, must be avoided at all costs. In “German Europe,” two decades after its founding and a decade after the first euro crisis, the monetary impasse that threatens to blow up the currency area is once again emerging: the ECB should actually raise interest rates quickly and significantly in order to curb inflation, which now stands at more than eight percent. But at the same time the “guardians of the currency” would have to keep interest rates low to prevent a new debt crisis in the south. Italy, whose public debt ratio is 134 percent of GDP, is the third-largest economy in the eurozone.
The Crisis Trap of Monetary Policy
Again, the European Central Bank could, on the one hand, fight inflation by raising interest rates rapidly and significantly, but in doing so it would risk a debt crisis in southern Europe and, in effect, the disintegration of its currency area. On the other hand, the ECB could continue to give priority to economic policy and keep interest rates low in order to prevent a new euro crisis. But this would give inflation a further boost, so that there would be a danger of the Eurozone following Turkey’s example, where “interest rate critic” Erdogan has repeatedly lowered key interest rates despite the rapid rise in prices in the country – which has now driven inflation in Turkey to an impressive 73 percent.
The political class can either choose the option of further indebtedness up to hyperinflation or take the path of harsh austerity programs that lead to recession with the onset of a deflationary spiral, as exemplified by Schäuble’s austerity sadism during the euro crisis in Greece. In the permanent capitalist crisis, bourgeois monetary policy would in fact have to lower and raise interest rates at the same time, which is only an expression of the aporia of capitalist crisis policy, an impasse in which the capitalist “administration” of the systemic crisis finds itself at the end of the neoliberal age.
This crisis trap does not only apply to the euro area, it is effective in all capitalist core countries, which have so far been able to postpone its snapping shut by the expansion of the financial sphere, by permanently rising mountains of debt and ever new financial market bubbles. A look at the long-term development of key interest rates shows this self-contradiction of monetary policy, which has unfolded further and further with each push of the historical crisis process. Both the ECB as well as the Fed have historically tended to continuously lower their policy rates since the 1980s, with the major financial crisis episodes of the 21st century acting as the triggering moments of each low or zero interest rate phase. Key interest rates in the euro area, sometimes in negative territory, were more than three percent when the euro was introduced. After the bursting of the dot-com bubble (2000), the housing bubble (2007) and the outbreak of the euro crisis, they have gotten lower and lower. Since 2014, the eurozone has had a de facto zero interest rate policy, accompanied by ever more money printing.
The situation is similar with the Fed, which pursued a very expansive monetary policy after the outbreak of the real estate crisis in 2007 and thereby contributed significantly to the formation of the gigantic liquidity bubble, which had to be laboriously stabilized with further injections of trillions of dollars throughout the course of the pandemic. The distortions on the inflated financial markets, which began even before the outbreak of war, indicate that this financialization of capitalism can hardly be maintained. The increasingly massive global financial house of cards is threatening to collapse. At its core, this was a debt dynamic that raised the debt burden of the world system currently choking on its own productivity to 351 percent of global economic output.
Should the capitalist crisis management no longer succeed in initiating a new bubble formation on the world financial markets in reaction to the “multiple crises” – a phrase used by leading German media to describe the capitalist systemic crisis – currently being faced, then a gigantic devaluation push is inevitable. Not only would many “financial market goods,” which circulate in the financial sphere in the most diverse forms – as shares or derivatives – be devalued, but also the financial market junk, which has been accumulated in the balance sheets of the central banks (mostly government securities and mortgage or loan securitizations).
The collapse of the financial markets, for example in the form of a European debt crisis, would spill over into the “real” economy, which is highly dependent on lending and the credit-financed demand generated in the financial sphere. This would lead to the devaluation of production capacities in the form of company bankruptcies, of resources that can no longer be sold, and of the commodity of labor, which would suddenly become superfluous. And only here is there still “room for maneuver” for bourgeois crisis policy: as described above, it can determine the form that this devaluation process will take. Either monetary policy can follow Erdogan’s example and march in the direction of hyperinflation, or it can follow Schäuble’s example and take the path of deflation through austerity.
For a progressive, emancipatory left, however, there is only one perspective left if it still wants to act in the crisis according to its concept: the perspective of categorical critique. Instead of concentrating opportunistically on immanent pseudo-alternatives or bourgeois trivialities it would rather be a matter of denouncing as such the monstrous end in itself of capital. This remains the fundamental prerequisite for making an alternative to capitalism and thus a system transformation conceivable at all.
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Originally published on konicz.info on 06/11/2022