A remarkable feature of the present state of the global economy – eight years on from the start of the Global Financial Crisis in 2008 – is the extreme disconnect currently exhibited by the main market indicators in the world’s major economies. These imbalances are particularly manifest, and increasingly acute, in respect of
Record levels of debt vs. record low interest rates
Based on estimates made by McKinsey Global Institute in early 2015 total global debt of all sectors (public and private) was approximately $200 trillion – 40 per cent above the level at the start of the Global Financial Crisis (GFC) in 2008 – and has inevitably continued to rise since then as hopes of recovery have been repeatedly dashed. By now there is scarcely any pretence among either official spokespersons or serious analysts that more than a tiny fraction of this debt will ever be repaid.
At the same time official interest rates set by the world’s central banks (such as the US Fed Funds Rate) have been held at or below 1 per cent ever since 2008. To put this in perspective, in the UK – where the Bank of England’s base rate has been held at 0.5 per cent or less since 2008 – the rate had never previously been set below 2.0 per cent since the foundation of the Bank in 1694 – not even in war time or in the Great Depression of the 1930s.
Given that these extreme phenomena have now co-existed for eight years in succession, it is at first sight astounding that hardly any mainstream analysts have pointed out that this obviously could not happen in anything resembling a free market. For it is a truism that in a climate of what amounts to generalised bankruptcy (in public and private sectors alike) the normal market reaction to increasing levels of unpayable debt is to mark down the value of such debt (non-performing loans) – thereby pushing effective interest rates up rather than down (the price of a debt-based security being inversely related to the rate of interest). The fact that not only has this not happened since 2008 but that interest rates have plunged to record low levels is an anomaly apparently not found worthy of comment by most “public” economists.
The uncomfortable truth which the global establishment refuses to face is that their collective decision – in the wake of the 2008 banking crisis – to “do whatever it takes” to save the financial system (and indeed the entire world economy) from imminent meltdown has only succeeded in postponing disaster for a few more years. In fact their resulting commitment to holding interest rates down by whatever means, even if this meant breaching the most fundamental principles of the market economy, was clearly a desperate gamble from the outset. The chosen mechanism has involved increasingly indiscriminate official buying of debt securities (i.e. bonds, public and private) – a practice officially referred to as Quantitative Easing (QE) – so as to avert the mass market panic which would otherwise have ensued from open recognition of systemic insolvency. But in order to prevent just such a panic – as well as a total loss of any remaining public confidence in the integrity of governments – it has been necessary to pretend that the actual purpose of QE is to stimulate investment and higher output. Predictably, however, any hope that this might indeed have been the result of this unorthodox policy has proved vain (see below).
Rock-bottom growth rates vs. sky-high stock markets
Alongside the paradox of record low interest rates against a universal background of unpayable debt economic actors and analysts have had to contend with another extreme anomaly. This is the fact that the key indicator of capitalist economic activity – the growth rate of real Gross Domestic Product (GDP) – has averaged only 1.2 per cent a year in the industrialised (OECD) countries in the period 2008-16, barely half the average rate recorded in the previous 25 years – while at the same time most stock market indices have risen to all-time high levels, whereas the normal market reaction to such conditions would be to mark equities down.
Yet just as this dismal growth performance – which would certainly have appeared even worse if the statistics had not been deliberately distorted – has not been allowed to be reflected in falling bond prices, the powers that be have been determined to prevent a corresponding slump in share prices (equities) of the kind that would normally be expected under such conditions. (Indeed an important benefit of keeping bond yields artificially low is that it has made them relatively unattractive assets for investors to hold, thereby enhancing the relative attractiveness of equities.) As a result global stock markets – as reflected in the MSCI all-country World Equity Index – have risen from their 2008 low to a peak of around double that level in 2014. Since then they have remained at or just below these record levels even as economic growth (GDP) has remained stagnant and corporate earnings weak, whereas normally such a high level of stock prices (with US price / earnings ratio at 24.7, the highest since the start of the GFC, even though earnings peaked in 2014) would go along with a boom in output and investment and correspondingly rising profits and interest rates.
The complete absence of such boom conditions is another obvious symptom of the generalised distortion of financial markets resulting from the official intervention which has been applied with growing intensity since 2008 in order to prevent or conceal their total collapse. Such is the desperation of the authorities to prop up the markets in order to avert this catastrophe that they are now starting to deploy officially “printed” money via QE to buy up corporate equities as well as debt. In Japan, which has been afflicted by chronic stagnation ever since 1989 and was the first country to deploy QE, this tendency has already led to a situation where over half of listed equities are now effectively in the hands of the state. At the same time, against a background of chronic low growth and low returns on capital investment, corporate management and investors (including pension funds) have been desperately seeking “yield” from high risk assets such as “junk” bonds, while purely speculative investing and market manipulation has been officially encouraged by enabling companies to buy back their own shares – which was illegal until about 1980.
What stands out from these contradictory manifestations is that they could only have occurred as a result of officially inspired intervention – i.e. de facto authorised market rigging. Equally, however, given the degree of distortion entailed, it is hard to believe that those driving the policy could have imagined that it would necessarily be sustainable in the long run. In short, it must be seen as a desperate gamble based on a flimsy hope that the laws of gravity could be defied, at least in the short term, in an improbable triumph of what President George Bush senior once called “voodoo economics”.
By now in fact it is becoming daily more obvious that the gamble has failed. For all the best efforts of official propaganda and despite the extraordinary capacity of the public to suspend disbelief it is clear that the laws of the market economy have not been repealed. Rather the damaging impact of QE and other tools of market manipulation and distortion are finally starting to become manifest and thus to call in question the validity of such “extraordinary measures”. These symptoms of dysfunction include:
Depressed levels of activity and investment. By imposing artificially low rates of return on the market, the authorities have been stifling the enterprise and investment they claim to be trying to promote, since in a fragile and uncertain economic climate investors and entrepreneurs are not inclined to take big risks for little reward. This in turn forces them to resort to even greater levels of asset price manipulation and speculation – rather than productive investment – in order to attain their profit targets (see below). The policy is thus imposing an extra handicap on enterprises already struggling to find profitable outlets for their shareholders’ funds in an era when, as suggested in an earlier posting, demand for investment capital is in long-term decline and competition is growing from start-up enterprises with a limited and dwindling need for funds from the capital markets.
Disappearing savings and pension funds. The compulsive need since 2008 to hold down interest rates – for the reasons given above – has imposed an increasingly heavy burden on those dependent on their savings for income. This includes hundreds of millions of members of pension funds in OECD countries, the viability of which has been put at risk by shrinking interest income. The threat to the survival of these schemes has in turn put pressure on the finances of many sponsoring companies, which in the UK face the prospect of having to call on their shareholders and / or the government to stump up hundreds of billions of pounds in total to make good the shortfall in their pension funds’ assets – while in the US state and municipal authorities are also facing consequent fiscal disaster. Meanwhile fund managers are forced to resort to unproductive and high-risk speculation – i.e. gambling – just to survive.
All these phenomena point to what could be defined as the greatest imbalance of all affecting global capitalism, though one that still dare not speak its name in mainstream policy circles: the mismatch between burgeoning corporate profits and the long-term decline in demand for investment capital. A recent UNCTAD report points out that between 1980 and 2015 the share of fixed investment in GDP in the leading developed economies fell from around 20 per cent to below 16 per cent while in the same period the share of profit rose from 14.6 per cent to 18 per cent. The UNCTAD authors attribute these trends to the “financialization of corporate strategies, linked to the rise of so-called ‘shareholder primacy’ and a focus on short-term decision-making, cost management and financial engineering”. What they evidently have not considered is the possibility that they may be confusing cause and effect, in that the process of financialisation has rather been the consequence of the inadequate returns on traditional fixed investment, and that this has led to the pressure for financial liberalisation (starting in the 1980s) with a view to facilitating speculative profit-making.
If this is indeed the case it is remarkable that mainstream analysts and commentators, including UNCTAD economists, have hitherto ignored the possibility that the decline in the share of fixed investment in GDP might actually reflect long-term, fundamental changes in the pattern of economic development, not least because of changing technology. Yet given that the inference of such a hypothesis – that the need for capital and hence its importance to the economy is in long-term decline – would spell disaster for the ruling vested interests who sponsor them, their refusal to consider its importance is perhaps understandable.
For the wider community the implications of these contrary trends in aggregate profits and investment are profound. In particular they point powerfully to the conclusion that the market economy as currently designed is generating seriously excessive profits in relation to the dwindling need for fixed investment. Thus if the share of profits in GDP, instead of rising since 1980, had fallen at the same rate as the share of investment it would have declined to under 12 per cent instead of rising to 18 per cent, implying the possible diversion of as much as 6 per cent of global value added ($3.6 trillion a year at current levels) to essentially wasteful economic purposes when they are desperately needed for more benign ones – see below.
The beginning of wisdom?
The present writer is perhaps entitled to claim to have been one of the first to identify – in a book written 20 years ago – this long-term tendency, starting in the 1970s, towards a decline in the need for capital in market economies – as well as the damaging consequences of the attempts on the part of the ruling vested interests to resist this trend by perverse distortions of markets or the legal framework. Among the many examples of these that could be cited (some of which, such as legalisation of company share buybacks, have already been mentioned) are:
The privatisation of public services and assets which – contrary to the official hype – has only benefited owners of capital in search of new investment outlets while mostly resulting in net losses rather than benefits to consumers and taxpayers;
Incentivisation (through tax breaks) of saving through funded pension schemes, which have ultimately only benefited asset managers while leaving more and more pensioners facing poverty and insecurity in retirement (see above);
Over-investment in publicly funded infrastructure, from useless airports to the London Olympic Park;
Encouragement of social dysfunction through liberalisation of dangerous activities such as gambling and pornography, to the sole benefit of investors in these industries.
While some critics of contemporary capitalism have deplored such abusive expressions of the profit motive, most of these have suggested that the remedy lies in somehow channelling the available funds to less harmful investments or ones more conducive to the public good. It seemingly has not yet occurred to them that in a profit-based, competitive system where corporate management is structurally incentivised (by company law) to maximise the returns to shareholders there is an in-built tendency to accumulate excessive profits (surplus value) – i.e. beyond what can be usefully absorbed by the market – and to reinvest them according to the same principle. It is part of this intrinsically capitalist mindset that GDP growth is viewed as a supreme public good – even though it should by now be apparent that the only logical purpose of such growth must be to reabsorb profits in new capital formation. A more sane analysis would surely conclude that if this can only be done through the promotion of wasteful or harmful activities such as those mentioned above the community would benefit from the abandonment of growth as a policy priority, particularly if high growth can only be attained by diverting resources from more socially advantageous uses. Equally it follows that it would be more rational to restrict the size of the excess in the first place, including by higher corporate taxation.
In fact there are signs of a dawning recognition that such a structural issue may indeed be what is now confronting the present market economy model, as reflected in statements from leading establishment figures indicating that since 2008 they have abandoned their earlier belief in a cyclical recovery of the global economy. Rather they are suggesting that the world may have entered a prolonged period of minimal growth – or what the head of the IMF, Christine Lagarde, has referred to as the “new mediocre” and Larry Summers, Harvard professor and former US Treasury Secretary, has termed “secular stagnation”.
Such hints coincide with far more widespread recognition that it will not be possible to absorb most of the world’s available capital – or indeed its labour force – in an economy transformed by the digital revolution. As noted previously, this constraint is most dramatically illustrated by the energy sector, where the capital-intensive model of supply and distribution which has been so dominant for over a century – based on large-scale extraction and burning of fossil fuels – is set to disappear in favour of one that is far more fragmented and employs far less capital. This arguably heralds the emergence across all sectors of an economy of super-abundance – or a “zero marginal cost society” – in which capital will be terminally devalued and the only supply-side constraints will be environmental. The corresponding devaluation of labour – involving the disappearance of vast swathes of paid human employment globally – is also now widely understood to be inevitable in the foreseeable future.
The implications of these tendencies are of course revolutionary – in relation to the existing order based on profit-maximising capitalist accumulation – and hence will continue to be fiercely resisted by the ruling élite. The path to a new equilibrium based on a more humane and rational order will accordingly be far from smooth and will probably involve even more violent conflict than the world is already witnessing. A more hopeful sign is that ideas such as the need for a Universal Basic Income, in response to the vanishing demand for paid labour, are starting to be taken seriously by many mainstream opinion formers. While predictably this remedy to the present maldistribution of income is dismissed by many as hopelessly unaffordable, even most of its supporters have yet to grasp that this objection might be easily overcome if the present diversion of excess value added into pointless private profits – as highlighted by the figures from the UNCTAD report referred to above – were redirected to more benign ends.
There is no painless way of achieving a transition to such an economic model. However, as it becomes ever more inescapable to ever more of the élite that the present model based on the principle of exploiting scarcity for private profit is being left behind by history, there is reason to hope that certain fundamental modifications to mainstream assumptions regarding the future course of economic development will likely come to be accepted:
Genuinely free markets are neither attainable nor desirable, given that they invariably lead very quickly to unacceptable levels of market instability and social injustice, as demonstrated once again by the “neo-liberal” order that has predominated since around 1980 and has ended in the present global chaos.
Maximising growth must be jettisoned as a primary policy objective (see above).
The right of private enterprises to limit their liability (as under existing company law) must be severely curtailed and made conditional on de facto public right of veto over key corporate decisions. This should severely limit the scope for management to pursue anti-social corporate objectives – other than at their own risk – with a view to maximising their profits, a goal which has already ceased to have any social purpose in view of the structural abundance of capital.
Given the equally serious structural oversupply of labour a form of Universal Basic Income (UBI) would need to be established at an adequate level. In that event official policies aimed at job creation would be pointless.
Given the vested interests at stake, resistance to the advance of such radical thinking will remain powerful, as exemplified by the well financed campaign of climate change denial, which is obviously designed to maintain the wealth and power of the fossil fuel industries in defiance of the overwhelming evidence of the harm they are causing. Significantly, however, corporations promoting new technologies leading to ever more robotisation of work are actually starting to lend support to the idea of UBI, even though it would clearly involve state action to redistribute income and curb labour exploitation. While such a stance may seem counter-intuitive from a traditional capitalist standpoint, it could also be viewed as an expression of enlightened self-interest on the part of businesses that see it as helping to reduce political resistance to mass redundancy, while it may also appear helpful to those needing the cooperation of official regulators to facilitate the introduction of revolutionary new products such as driverless cars.
Seen from this perspective it seems plausible to suppose that private enterprises across the economy could be drawn to the idea of trading their unfettered right to limited liability for a guarantee of government support on mutually advantageous terms. Indeed this has long been happening to the extent that corporations in most if not all sectors (e.g. energy, housing, health care, manufacturing, agriculture, transport and above all banking) have for decades enjoyed subsidies, tax breaks and other forms of support from government while still retaining full autonomy and all the privileges associated with limited liability. While conditions have sometimes been imposed on the favoured corporations requiring them to provide certain public benefits in return, in too many cases such conditions have been informal and lacking in transparency. Under a more publicly accountable régime such “crony capitalism” would need to be replaced with more formal contracts between private entities and the state in which the interests of private shareholders would be explicitly subordinated to those of the public through representative institutions. (It would of course remain open to private-sector companies to retain their autonomy to conduct business without the protection of limited liability).
If such a model of corporate governance could be implemented – based on a rational balancing of the interests of individual enterprises and the community in an economy where profit maximisation and economic growth were no longer viewed as public goods – it should be feasible to construct an economic model in which the public interest as a whole would be paramount without stifling the potential for the enterprise of individuals or communities. Identifying the appropriate way (or ways) forward into this new technological age will call for as high a degree of creativity and open-mindedness as the human race has ever been required to display. In this context the election of Donald Trump as US president may actually be a more hopeful sign than it appears at first sight. This is because his programme – typified by his climate change denial – is clearly centred on a hopeless yearning to turn the clock back to some supposed American golden age. Once this fantasy runs up against the harsh realities of the real world and national – indeed global – bankruptcy, the only conceivable escape from which is hyperinflation, we may hope that more rational visions of the future will find favour.
Indeed, the fall in capital requirements alongside demographic change and the new operagraphics of a modern economy beg for a new formula on which to base society, and that formula must be universal safety. However, having worked for a decade on how this can be done, the conclusion is Universal Basic Services which allow any citizen a basic standard of LIFE.
Because UBS activates social effort it can be universally provided in a low growth economy without financialisation. We are working with UCL to develop the framework for UBS and will publish next year.