Is Capitalism Out of Order?

Is Capitalism Out Of Order?
by Tomasz Konicz

[This article published on March 17, 2020 is translated from the German on the Internet,

Will the current pandemic trigger the next global crisis? An overview of the structural vulnerability of the late capitalist world system

What is the top priority in view of the rapidly spreading pandemic panic, the plummeting financial markets and the looming recessions in many regions of the world, which threaten to plunge millions of people into misery threatening their existence?

An orderly, swiftly implemented bank rescue, of course! That much should have been left over from the last crash of 2008/09.

At Springer, the esteemed readership, which is otherwise trained to be outraged by every refugee smartphone, was already prepared for these costly actions for "our" banks on March 11. The financial institutions were - literally - the "innocent victims" of the crisis this time, since the problems did not originate with them, the Springer newspaper Die Welt explained with reference to analysts.

The reaction of politicians to the current crisis should now be different from that during the financial crisis around 12 years ago, it continued, "state aid would then be easier to provide", including "easier regulation", the needy socialists in the banking industry told the world.

During the last crisis spurt, after the bankruptcy of Lehman Brothers and the subsequent financial crisis in 2008/09, politicians spent hundreds of billions in the context of economic stimulus measures to prevent a collapse of the global financial system. At the same time, a historically unique, expansive monetary policy was pursued, with interest rates being cut massively and scrap paper and government debt, which is now slumbering on the balance sheets of central banks, being bought up in what has been termed "quantitative easing".

A sequence of speculative bubbles

The crisis spurt of 2008/09, when the real estate bubbles in the USA and the EU burst, was thus not overcome, but rather transformed into a renewed bubble, a liquidity bubble initiated by expansive monetary policy, as a result of the crisis measures taken at the time.

In the final analysis, the economic history of the neoliberal era over the past three decades can be understood as a succession of successive speculative bubbles that gained in scope and momentum. The local crises at the end of the 20th century - the Asian crisis in 1997 and the financial crash in Russia in 1998 - were followed by the large speculative bubble with high-tech shares in the USA and Europe, the so-called dotcom bubble, which burst in March 2000.

The low interest rate policy of the US Federal Reserve, which was used to cushion the negative economic consequences of this collapsing speculative dynamic on the stock markets, created the best conditions for the next, even bigger bubble to appear: The real estate bubble that burst in 2007/2008 and devastated large parts of Europe and the USA economically.

Here's to a new one!

Each time, a de facto bubble transfer took place, with the measures taken to combat the economic consequences of the burst real estate bubbles (zero interest rates and money printing) preparing the ground for the next, even bigger bubble formation. The central banks' expansive monetary policy after 2008 thus enabled the formation of a gigantic liquidity bubble, which formed the basis of the apparently stable economic development of the last decade.

The late capitalist world system is thus still caught up in a financial bubble formation; in fact, since the advent of neoliberalism and the accompanying "fictionalization" of capitalism, it has found itself in a constantly growing bubble economy, generating the mountains of debt that keep a hyper-productive production of goods running at all by means of credit-financed demand. (See also: A brief explanation of the crisis).

This systemic crisis of capital - conceived as an intermittent historical process of increasing internal contradictions - has thus never been overcome (an overview of the historical crisis process can be found here, here and here).

Ultimately, this fragile debt tower on the world financial markets is now threatening to collapse - triggered by the external shock of the pandemic - which would trigger a renewed, even stronger surge of crisis. The fragile system that has built up a gigantic mountain of debt in the past neoliberal decades can hardly tolerate external shocks any longer, it is becoming increasingly unstable.

From the perspective of mere internal capitalist crisis management, the dramatic political measures are therefore consistent and appropriate to the dynamics of the threatening socio-economic upheavals - although it is by no means clear whether even the most stringent emergency measures can still absorb the crisis dynamics.

In fact, the banks, for example, have to be "saved" with billions. This is the lesson of the disaster surrounding the bankruptcy of Lehman Brothers, when the administration of George W. Bush's administration decided to make an example of a major bank that had gambled away on mortgage securitizations while merrily speculating on mortgage securitizations, and deliberately let it go bankrupt - resulting in a freeze on the world's financial markets and the dramatic economic collapse of 2009, which were cushioned by the central banks' zero-interest policy and money printing, which laid the foundation for the aforementioned liquidity bubble that is now threatening to burst.

The sky is the limit

This time the counting unit with which the state's rescue measures can be meaningfully quantified no longer seems to be the billion but the trillion (one trillion is 1000 billion) - with a tendency to infinity. The German government literally announced aid of "unlimited amounts" to prevent the threat of economic collapse.

Specifically, loans to companies and corporations are to be granted by the state "without limitation", as the Frankfurter Allgemeine Zeitung (FAZ) put it. A "billion-euro shield for businesses and companies" is planned, as well as "fiscal liquidity aid" and an expansion of short-time work compensation.

How dramatic the situation is can be seen not only in the willingness to take out boundless state loans, which ironically is also intended to act as a kind of sedative pill, but also in the pragmatic ease with which precisely those ideological taboos are being removed which were erected in the wake of the euro crisis by the then finance minister and passionate austerity activist Wolfgang Schäuble under the cheers of a published opinion that drifted to the right.

In the event of an economic collapse, the notorious fiscal rules, including the debt brakes in the Eurozone, are now to be suspended in order to give the member states more financial maneuvering room in the fight against the crisis. All the talk about debt brakes and black zeros, which was used to justify the Berlin austerity dictate towards Europe's crisis countries - it's already a waste of time.

Proposals that a few weeks ago would have meant the end of a political career are now being brought into the discussion as a lifeline. The German Minister of Economics, Comrade Peter Altmaier, announced that, if necessary, strategically important companies would be nationalized in order to protect highly sensitive sectors of the economy. On the Tagesschau website, "helicopter money" is once again being discussed as a means of counteracting the collapse in demand by means of direct money printing and the giving away of cash - around 1,000 euros per German citizen.

The (European Central Bank) ECB has again announced additional bond purchases to pump liquidity into the financial markets, which are expected to amount to 120 billion euros by mid-year. In addition, banks can hope for "extremely favorable financing conditions," according to Manager Magazin. The interest rate policy is controversial because Schäuble and Steinbrück are demanding interest rate increases in the middle of the unfolding crisis.

Until Monday noon it was unclear how the European central bank intends to prevent the impending collapse of Italy's financial sector, which is suffering from a gigantic mountain of debt, bad loans and a national debt ratio of around 130 percent of GDP. A new crisis spurt in the eurozone is likely to come from Italy.

Small financial bubble customer

In the USA, on the other hand, the floodgates of the central banks have already been torn wide open. The measures with which the US Federal Reserve is attempting to revise the crash of the US stock markets, which recorded the worst slump since 1987, add up to 1.5 trillion dollars. The key interest rate was lowered to almost zero percent.
Late capitalism is thus not growing out of its debts, it is growing further and further into them - which is the most reliable indicator of the systemic crisis outlined above.

In 2000 it was high-tech stocks, in 2008 real estate - where is the steadily growing global debt tower threatening to collapse this time?

The most likely medium-term focus of the debt crisis that is now unfolding is corporate bonds. This is primarily because the pandemic-related production shutdowns, the collapse in demand and the partial freezing of many global supply chains are hitting the concrete, goods producing economy immediately - the global capital liquidation process is being directly capped.

The longer the closure or restriction of production capacities takes, the more dramatic the situation becomes. The interest of capital in maintaining its exploitation process collides with the requirements of pandemic control, which is aimed at slowing down the rate of infection through appropriate measures.

Without significant reserves, the affected groups are dependent on loans. Or, worse still, they are no longer able to meet their existing liabilities to banks and the financial sector. This is precisely the case.

Threatening credit crunch

According to the FT, a large part of the debt growth since the financial crisis of 2007/08 has been in the non-bank corporate sector, i.e. in corporate bonds. These groups and companies would no longer be able to service their debts due to "disrupted supply chains and reduced global growth". A "credit crunch in a world of ultra-low and negative interest rates" is looming.

It's the usual story that comes with every bubble: this time it's not mortgages that have been converted into securities, but corporate bonds. Given the low interest rates and the expansionary policies of the central banks to combat the consequences of the bursting of the bubble in 2008, companies would have started to increase their bond issuance or borrowing to pursue aggressive expansion strategies (such as Bayer) or to buy up their own shares. Global corporate debt beyond the financial sector now totals US$75 trillion, compared with US$48 trillion in 2009.

In the meantime, the great, hectic calculating process has begun to assess the systemic risk to the global debt mountain. Initial model calculations took into account the corporate debt of eight countries - China, the US, Japan, the UK, France, Spain, Italy and Germany.

In the event of an economic shock that was only half as severe as the global financial crisis of 2008, liabilities amounting to USD 19 trillion (or 19,000 billion, as explained above) would no longer be serviceable. This would be the 40 percent of total corporate debt in these countries.

Yet recessions in most economic areas seem almost inevitable - the only question is how severe they will be. Thus, the most likely scenario of the coming debt crisis is clearly emerging, in which the current pandemic acts as an external trigger that bursts the liquidity bubble that has been inflated by the central banks: Production shutdowns and slumps in demand are turning a large part of corporate debt into financial market junk, similar to the mortgage securitisations from 2008, which in turn threaten to trigger a credit crunch on the financial markets.

A wave of defaults or bond downgrades would "shake up the financial system," analysts say. This credit squeeze would interact with the real economy and, in a positive feedback loop, reinforce the economic downward pull.

In such a case, an irreversible "point of no return" would be reached, after which crisis policy measures could hardly contribute to influencing a completely uncontrollable crisis dynamic.

Existential crisis of an ailing system

The blatant measures mentioned at the beginning, which are implemented by the political functional elites - from the trillion-dollar flood of central banks to unlimited credits and nationalizations - are an expression of the fact that politics is aware of the existential crisis in which the capitalist world system now finds itself.

The only legitimate question is whether it will still be possible to stabilize the situation. The longer the necessary fight against the pandemic lasts, the greater the risk of a meltdown of the world financial system, as a result of which the growing global debt mountain of late capitalism buries under itself and devalues value in all its aggregate states.

Conclusion: It is obvious that the unstable, fundamentally ailing late capitalism is now incapable of absorbing major external shocks. Weeks of production downtime have plunged the system, which is calibrated for boundless growth, into a crisis that threatens its very existence. A fundamental transformation of the system seems to be indispensable - also against the background of the escalating climate crisis.

At the beginning of the full-blown climate crisis, which will bring with it a multitude of different external shocks, the transfer of capital into history, the construction of a post-capitalist society that will be able to cope with the coming external shocks, takes on the character of a survival necessity for human civilization.

It is already clear that this pandemic will fundamentally change the late capitalist society in which we are forced to live. The only question is whether these changes will be progressive, emancipatory, or reactionary and authoritarian.

Here, in the struggle to shape this objectively pending transformation, new fields of struggle are opening up for progressive and emancipatory forces, which must counter the drive of the system in agony towards authoritarian crisis management and fascism.

Despite these absurd injections of liquidity, the situation hardly seems to be calming down - the most important indices also crashed on Monday. The panic on the stock markets was triggered by the Trump administration's announcement that it would stop travel between the USA and the EU.

The "cash injections", with which additional liquidity is being pumped into the panic markets, will drive the Fed's "bond portfolio" "up by a third from the current 4.2 trillion dollars", the FAZ commented dryly on this emergency measure.

A quantification of the now bursting liquidity bubble seems to make sense at this point: The US Federal Reserve already holds in its balance sheets a lot of "securities" that it has bought up over the past 12 years to stabilize the global financial system and enable the economic expansion of the global economy.
Before the collapse of the transatlantic real estate bubbles from 2008 onward, the Fed hardly held any paper on its balance sheets. It was only in the wake of the money-printing buyout programs for all the scrap paper issued in the wake of the real estate bubbles (mostly mortgage securitizations) that the Fed's balance sheet jumped from around EUR 800 billion to around EUR 2.4 trillion.

According to this, the purchase of "securities" on the financial markets by central banks, in the case of the Fed for example US government bonds, became the new normality, in which de facto debt was added to the central bank balance sheets and fresh liquidity was injected into the financial system - which in fact amounts to the aforementioned money printing, which did not trigger an inflationary spurt simply because it was injected into the financial sphere in order to promote rising prices, i.e. securities price inflation.

The Fed's balance sheet soared from $2.4 trillion in 2010 to around $4.2 trillion in 2015. Now another gigantic leap to just under 6 trillion is on the cards, and by Monday evening the Fed had failed to calm down the great markets.

All ideas and business games to reduce the scrap paper in the central bank balance sheets are - similar to the Schäublerian Black Zero, the neo-liberal talk of the personal responsibility of the entrepreneurs or the fiscal rules of the Euro zone - thus already waste paper.

In the EU, where monetary policy was part of the national debates on crisis policy, in which the expansionary course of the ECB Draghis formed the monetary counterbalance to the naive austerity dictates, things do not look any better: Here the balance sheet total rose from one trillion in 2005, over two trillion in 2008, to 4.5 trillion in "securities". The situation is similar at the Bank of Japan, which - similar to the Fed - mainly bought up government debt.

This liquidity bubble, which is in acute danger of bursting, shows a rough historical dichotomy in its ascent history, which goes hand in hand with the Fed's interest rate turnaround. Until 2015, the Fed's zero-interest rate policy meant that capital seeking investment flowed into emerging markets such as Turkey, Brazil, South Africa, etc. in order to promote the formation of short-term bubbles.

From 2016, when the Fed started to raise interest rates again, these credit-financed booms in the emerging markets, once traded as the locomotives of the global economy, collapsed, allowing, for example, extreme right-wing figures such as a Jair Bolsonaro to rise politically in Brazil.

At the same time, speculative dynamics shifted back to the centers of the world system, with the Dow Jones, for example, almost doubling its value to almost 30,000 points between 2015 and 2020 - until recently.

Focus on corporate debt

Whether it is a dotcom, real estate or liquidity bubble: the bubble formation on the financial markets always acts as a systemic transmission belt for generating further mountains of debt, since capitalism, due to the enormous progress in productivity in recent decades, can only maintain its exploitation cycle in the production of goods by means of credit-financed demand.

The capitalist world system ultimately fails on a global level because of its own standard of "profitability", since it has become too productive for itself. Consequently, the system can only run on credit, because without this debt dynamic - i.e. the anticipation of future capital realization - deflationary downward spirals set in, regardless of whether the state, private households or the economy creates credit-financed demand.

Bourgeois politics is thus in a crisis trap, since as the follower of the escalating internal contradictions of capital it can only try to maintain this absurd debt tower construction as long as possible in order to prevent the total crash.

In fact, the global debt mountain has continued to grow cheerfully even after the bursting of the transatlantic real estate bubbles in 2007/08 in the USA and Europe. In a lengthy background report, the Financial Times put the total global debt at the trivial figure of around $253 trillion which represents a historic high. When the debt crisis broke out in 2008, the debt of the capitalist One World totaled around $170 trillion.

Growing debt is actually not a big problem in a growing economy as long as it does not grow faster than the gross domestic product (GDP). But this has been the case since the 1980s of the 20th century. The debt mountain of the capitalist world system is growing much faster than the world economic output - for the reasons mentioned above.

At present, total debt accounts for around 322 percent of world economic output; when the financial crisis broke out in 2008, it was less than 300 percent; at the beginning of the 21st century, this figure was around 260 percent.