Crisis Beyond the Bubble

Will stagnation be a permanent condition? An outlook for the world economy after the end of the globalized financial bubble economy.


Tomasz Konicz, translation by OlIver Blackwell

The speculative air is slowly leaking out of the global valorization machine – but hardly anyone seems to have noticed. At the beginning of 2024, the World Bank warned of a “lost decade,” as the first half of this decade was about to see the worst economic performance in more than 30 years.[1] Without a “major course correction,” the 2020s will go down in history as a “decade of missed opportunities,” concluded the World Bank’s chief economist, Indermit Gill, as he presented the bank’s forecasts for the current year.


And according to the financial institution, the economic outlook is not exactly rosy. Global economic output is expected to grow by 2.4% this year, compared to 2.6% in 2023. If this economic forecast proves to be correct, 2024 would be the third year in a row that economic growth was weaker than in the previous year. There is therefore a clear global trend toward economic stagnation: Average GDP growth in industrialized countries is expected to fall from 1.5% last year to 1.2% in 2024. By contrast, the eurozone can hope for a slight economic recovery at a very low level, as they are expected to go from 0.4% growth in 2023 to 0.7% in the current year.

Global trade growth is also expected to be only half of what it was before the outbreak of the pandemic, which, together with high key interest rates, has contributed to annual economic growth in developing countries averaging just 3.9% this decade. This is a full percentage point lower than in the first decade of the 21st century. Developing countries need to achieve a much higher rate of growth in order to improve – or even maintain – the social situation of their wage earners. The medium-term economic outlook is no better. As early as mid-2023, the International Monetary Fund (IMF) warned that global growth would be below average for the next five years.[2]
The End of the Bubble Economy

The crisis-induced stagnation of the late capitalist world system only becomes fully apparent from a historical perspective. As mentioned at the beginning, only the half-decade from 1990 to 1994 was characterized by worse economic development (averaging just over two percent per year) than the first half of the current decade, and it was only slightly worse then. But the early 1990s were marked by the collapse of the Soviet Union and Soviet state capitalism in Eastern Europe, which was accompanied by massive economic slumps that led to miserable global averages. In other words, the episodes of crisis that began in 2020 (such as the pandemic, war, and supply shortages) left similarly strong traces of economic slowdown as the implosion of the Eastern Bloc.

Almost all other five-year periods between the late 1990s and 2019 – the eve of the pandemic and the war in Ukraine – saw much higher average global economic growth of just over three percent. The only exception is the period between 2005 and 2009, when the bursting of the real estate bubbles in the U.S. and Europe (2007/08) led to a brief but severe global economic crisis (2009), which was overcome from 2010 onwards thanks to extensive economic stimulus measures and the central banks’ expansionary monetary policy.

The slump in 2009, triggered by the bursting of the real estate bubbles, points to the veritable bubble economy that the globalized world system had developed in the neoliberal era: From the dot-com bubble in the second half of the 1990s, when the internet boom led to a bull market in high-tech stocks, to the real estate bubbles that burst in Europe and the U.S. in 2008,[3] to the major liquidity bubble that has been deflating since 2020, all of which were sustained by the expansive monetary policy and money printing of the central banks.[4]

And it was precisely these growing speculative bubbles that acted as the main economic drivers in the era of financial market driven globalization. The tendency toward stagnation in the 2020s, which the World Bank laments, is due precisely to the collapse of this global bubble economy based on an ever-growing mountain of debt. Inflation, which central banks are trying to combat with restrictive monetary policy, made it impossible for another bubble to form after the crisis surge of 2020.
The Chinese Economic Brake

The connection between the economy and speculative dynamics, which characterizes a late capitalism that is choking on its own productivity,[5] can currently be seen very clearly in Chinese state capitalism, where one of the country’s largest construction investors, the bankrupt Evergrande Group, is facing liquidation – 300 billion dollars and millions of condominiums are on fire.[6] The gigantic real estate bubble that China created in the wake of the massive government stimulus packages after 2008 brought the “workshop of the world” double-digit growth rates for years.[7]

But now, despite Beijing’s best efforts to postpone it, the inevitable deflation of this real estate bubble is on the horizon[8] – and it is already leaving its mark on the economy. According to the World Bank, China’s economy is only expected to grow by 4.4% this year.[9] This forecast is based on a best-case scenario in which an uncontrollable crash of the real estate market can be prevented.

But even a controlled devaluation and liquidation of the overheated Chinese real estate sector will have serious economic consequences. This applies not only to export-dependent Germany, but also to many developing and emerging countries that are heavily dependent on the People’s Republic.[10] China’s debt-financed speculative boom was an important factor in the economic recovery after the major transatlantic real estate crash of 2008, but a similar constellation is no longer possible in the current phase of crisis. On the contrary, China will contribute to the general tendency towards stagnation in the future.
Is the Next Crisis Surge Already “Priced In”?

The spread of stagnation is the result of the partially successful fight against inflation undertaken by the central banks, which have turned off the money tap that was wide open during the era of the giant liquidity bubble, but are maneuvering themselves into a monetary policy impasse in which the goals of fighting inflation, stabilizing the financial markets, and stimulating the economy are increasingly coming into conflict.[11] This is particularly evident in the U.S., which was able to defy the general stagnation in the core of the world system with economic growth of 2.5% in 2023. However, the World Bank is forecasting growth of just 1.6% for the United States this year, which is due to “the restrictive monetary policy” of the U.S. Federal Reserve, according to Reuters.[12]

Fighting inflation usually comes at the cost of an economic slowdown (with the exception of the U.S. in 2023), as the World Bank’s Global Economic Prospects shows. Then there are the destabilizing effects of high interest rate policies on the financial sector. The key interest rate hikes and the end of the central banks’ purchasing programs are making the financial sector more susceptible to crises, as bonds, stock markets and the real estate sector can no longer be supplied with sufficient liquidity and/or credit to continue the boom – there is a risk of crashes, slumps and financial market quakes, as was last seen in March 2023, when the slump in the bond markets led to a banking crisis in the U.S.[13]

The policy of high interest rates is therefore like a balancing act on a knife-edge, with the bloated financial sector and the global debt mountain as the biggest risk factors.[14] Continuing to fight stubborn inflation inevitably increases the risk of further crises in the unstable financial sector. To minimize the risk of crisis surges, the Fed last signaled to the unstable markets in December 2023 that the first interest rate cuts would come in 2024 if inflation rates continued to fall.[15] In doing so, the central bankers triggered a short-term price explosion on the stock markets that simply anticipated the potential end of the high interest rate policy in this bull market. The end of the restrictive monetary policy has therefore already been “priced in,” as the jargon goes, to the stock markets, where the future is always traded.

But what happens if inflation does not move as quickly as expected towards the two percent mark that the Fed has set as the target for its restrictive monetary policy? Then monetary policymakers, whose comments were intended to reassure the markets, suddenly find themselves in a quandary. At the end of January, U.S. central bankers indicated that there would probably be no interest rate cut in March,[16] after the U.S. inflation rate of 3.4% in December was slightly higher than in the previous month (3.1%).[17] This retreat in monetary policy brought the fleeting boom on the markets to an abrupt end with heavy price losses.

In addition, cracks appeared once again in the U.S. banking sector after the share price of the regional bank New York Community Bancorp plunged by around 50 percent in two trading days.[18] Like other regional banks, New York Community Bancorp is suffering from high interest rates and the related crisis in the commercial real estate sector in the U.S. The financial institution, which was actually considered a winner of the crisis in March 2023, has now had to book around $552 million in loan loss provisions and record a loss of $185 million.[19] A repeat of the March 2023 banking crisis triggered by high interest rates seems possible. The slump in Bancorp’s share price is also due to the fact that regional banks in particular were expected to benefit from the Fed’s “priced-in” interest rate cuts.

The U.S. central bankers have thus become hostage to their own policies: December’s chill pill is turning into a monetary policy bomb. The next bout of crisis is effectively “priced in” if the Fed does not soon return to an expansionary – and thus inflationary – monetary policy. This is most likely a fundamental contradiction that will characterize capitalist crisis policy after the end of the neoliberal bubble economy: it is a balancing act that is ultimately doomed to failure, an attempt to square the circle in the systemic crisis in order to combine the fight against inflation with economic and financial stability.

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Originally published on on 02/05/2024

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