By Manuel Raposo
Published May 14, 2023, in jornalmudardevida.net. Translation: John Catalinotto.
Since the beginning of March, when Silicon Valley Bank collapsed, government officials have repeatedly declared that the North American and European financial system is safe. The facts, however, show at a minimum that the threats of bankruptcy persist, and the remedies are failing to produce the desired improvements. Going further, warnings of an essential defect affecting the entire Western, and possibly worldwide, financial system say, without a shadow of a doubt, that the problem goes far beyond the collapses seen so far.
In addition to the cracks resulting from a hyperdeveloped financial system that is out of proportion with the real values of the economy, today we have to consider an issue of unprecedented proportions: the competition, taken to the extreme, between economic blocks that are breaking the ties that united them until recently and are opening, at an accelerating pace, a gap between two worlds.
The challenge is to know to what extent this factor, relating to the global political order, will alter the evolution of events, be it in the immediate term with regard to the announced financial meltdown, or with regard to the changes in the world economy in the coming years or within the scope of the general confrontation between great powers – a confrontation that will surely determine the shape of the world in the near future.
The source of the most recent problem is in the United States, just as it was in 2008. This time it started in medium-sized regional banks; some of them specialized in financing startups in cutting-edge technology sectors. In less than two months, three of these banks have gone bankrupt, and others are threatened with the same fate.
In spite of voices to the contrary and appeals for calm, in a few days a rapid spread to other banking sectors took place, which led to the intervention of the U.S. central bank for fear that the contagion would spread and reach the large banks. According to authoritative testimony, hundreds of U.S. banks are bankrupt (Nouriel Roubini, Russia Today, April 1), and as many as half of the 4,800 banks that make up the U.S. banking network may be at risk. (Amit Seru, Stanford University, RT, May 6)
The crisis extends beyond the United States, which is why U.S. and European officials immediately tried to agree on palliative measures. But developments in recent weeks have failed to reduce the threats: The gold rush is a sign of the insecurity felt by investors and speculators faced with the real prospect of a recession in the U.S. This has led strategists at JPMorgan, one of the world’s largest banks, to admit that this turn toward gold could be considered a defense against what they call “a catastrophic scenario.” (Bloomberg, May 5)
In Europe, it was Crédit Suisse that sank and was absorbed by its competitor UBS, in a race against the clock led by the Swiss state to avoid a resounding bankruptcy with unpredictable consequences. The immediate cause of the collapse of Crédit Suisse (foreseen even before the collapses triggered in the U.S.) is said to have been the refusal of Saudi investors (the Saudi National Bank) to reinforce the bank’s capital, which provoked strong distrust in financial circles.
Days before this incident, Swiss banking officials had expressed their displeasure with their government’s decision to go along with the sanctions on Russia, which were decreed right after the beginning of the war in Ukraine — sanctions, remember, under which the West froze and stole hundreds of millions of euros of Russian capital. (Financial Times, March 8)
This high-profile piracy is said to have led “hundreds” of Asian capitalists (Chinese and others) to be afraid to deposit their money in Switzerland, fearing that the same would happen to them as it did to the Russians.
This fact, denounced by the Swiss authorities themselves, shows how the confrontation unleashed by Washington against Russia and China, dragging the Europeans along with it, is playing a role in this banking crisis, adding to the intrinsic problems of the hyperfinancialization of Western capital.
Looking back 15 years
The financial crisis of 2008 was reduced by massive injections of money [from governments] to cover losses and prevent bankruptcies of banks, other financial institutions and commercial and industrial companies. Credit levels were thus sustained at the expense of a gigantic multiplication of banknotes in circulation. As a result of the problems resulting from the pandemic, which paralyzed much of the economic activity, the central banks’ procedure was repeated — injecting money.
Added to this, low or even negative interest rates were also set, designed to spread credit, with the idea of stimulating economic growth. Such growth has been stubbornly anemic and has remained anemic, despite all these efforts by government officials.
The amount of money in circulation (not only money itself, but also all the multiple forms of credit, which end up representing purchasing power, at least potential) far exceeds the real value of the goods actually created and made available by the productive sectors of the economy.
Credit, lever of consumption
Why has it been necessary to keep credit growing? In recent decades (practically since the 1970s), world capitalism has been suffering from an incurable disease. To put it simply: The enormous productive capacity it has reached has no relationship to the market’s capacity to buy; the overproduction of goods is matched by chronic underconsumption.
In the final analysis, this is due to the enormous technological progress, responsible both for the exponential increase in the volume of production and the corresponding reduction in the unit value of goods, on the one hand; and for the downward trend in the employed labor force and the fall in wage rates, on the other.
Feeding widespread credit has been essential in recent decades to keep businesses afloat. In fact, as contemporary capitalism is increasingly a low-wage capitalism (Fred Goldstein), the global fall of real wages results in a fall of global purchasing power, only attenuated by the extension of credit lines for the most diverse consumption purposes.
But by making consumption dependent on credit, an “artificial system of forced extension of the reproduction process” of capital is created. It happens that: “In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity.” (Karl Marx)
This is why “at first glance, the whole crisis appears as a simple credit and money crisis.” In reality, however, “at the basis of the whole crisis” is “a volume of buying and selling [represented by credit securities] that far exceeds society’s needs,” that is, “its purchasing capacity.” For this reason too, “no kind of bank legislation can eliminate a crisis.” (Marx)
The stagnation of economic growth, which mainly affects Western capitalism (as the most recent data from the IMF have confirmed), has resisted all measures aimed at combating it. What’s more, it contrasts with the enormous multiplication of fictitious capital — capital that, not finding conditions for productive application and appreciation, is dedicated to financial speculation in search of yield.
Within the enormous mass of financial assets, the obscure world of the so-called derivatives is of particular relevance. According to data from the Bank for International Settlements, the derivatives market amounts to more than $632 trillion (a million million), six times the value of the world annual GDP! (Réseau International, April 13)
The primary cause of the galloping inflation that has broken out over the last two years is thus to be found in the very remedies given to the 2008 financial crisis: the provision of virtually unlimited “liquidity” by governments to banks, financial institutions and large corporations.
To the soil thus fertilized by the public authorities was added the breakdown of supply chains resulting from the pandemic (causing shortages of goods, supply delays and rising transport prices) and the economic war against Russia and China unleashed by the U.S. and followed by the European Union (affecting energy, cereals, fertilizers and various raw materials).
High-risk side effects
Western authorities have increased interest rates in an attempt to combat inflation. The effects of uncontrolled inflation are well-known.
One example is the reduction in purchasing power, caused by the devaluation of money, reinforcing the tendency toward a drop in global demand with which capitalism is struggling. Another example is the devaluation of debts, a fact that is particularly worrisome for the creditors of the gigantic state debts. For example, what will German and French creditors say about the Portuguese government’s debt, if it is paid at the nominal value of the euro, devalued by 9% or 10% due to inflation?
Those who promote increases in interest rates, however, have brought about consequences for themselves that are undesirable but inevitable. The higher rate causes business to contract, worsening the economic slump. It reduces investment, compromising the prospect of future growth. It promotes bankruptcies in the financial system, devaluing the assets (stock portfolios, treasury bonds, etc.) that the financial institutions hold. It generates unemployment, reducing purchasing power, multiplying poverty and creating grounds for social unrest.
The irony of all this is that every measure taken to resolve one problem generates another problem that must be remedied by countermeasures. The most recent example comes from the bankruptcies of U.S. banks. In order to fight inflation, the Federal Reserve raised interest rates, aiming to reduce the volume of money in circulation; the rise in interest rates devalued the banks’ assets and drove them into bankruptcy. In order to prevent the bankruptcies from cascading, the state had to promise to insure all deposits of any amount, injecting money into the financial system.
A sword poised over our heads
The financial crisis that the world is again facing, whether fully unleashed or mitigated, remains like a sword hanging over the head of the entire capitalist economic system and obviously over the heads of the wage-earning populations.
A financial crisis, as we have seen, is not “just financial.” Economic crises always appear in the form of financial crises, because, in contemporary capitalism, it is through finance, particularly through credit, that the entire economic system is managed and its evolution determined.
The absence of growth, the threat of recession, etc., appear even bleaker if we understand that the tremors that shake finance anticipate the threat of an economic earthquake of unprecedented proportions. In other words, the recurrent financial crises are a sign of an economic crisis that is dragging on and on, accumulating an unprecedented explosive potential — not only on the strict economic plane, but also in the political sphere.
Hence the growing threats of war between the great powers fighting for world primacy indicate that economic disputes no longer fit within the limits of business competition, but rather overflow into the terrain of political and military confrontation.
In the present situation, therefore, in addition to the factors intrinsic to the mechanism of a failing capitalism, it is necessary to take into account factors of a political nature and of global competition that affect the course of events in an equally decisive way.
The current threats to the economic and financial system are unfolding in a new general framework, marked by a tendency toward the partition of the world into blocs — one formed by the imperialist powers (the “expanded West,” in their own expression), the other being formed in opposition to the first (the so-called “Global South”).
It is impossible to ignore the role that this great confrontation plays in the unfolding of the current crisis.
Where does this change originate?
After 30 years of unbridled globalization, in which imperialist capitalism gained access to two immense territories that had been closed to it, the Soviet Union (mainly Russia) and China, and was able to expand without external opposition to all corners of the globe. New phenomena with new actors have appeared: the reemergence of Russia as a national and military power, backed by the immense resources at its disposal; and the revelation of China as an economic power capable of challenging the hegemony of the U.S. and its associates.
The world that had been assembled, under U.S. direction, since the Second World War — and which had given the U.S. the position not only as a leading imperialist power but also as the hegemonic force of world imperialist capitalism — this world has, in a way, reached its limits. The web that the U.S. had woven for its own benefit became a straitjacket from the moment other powers were able to challenge its dominance.
This is what explains why the U.S. — until recently the champion of the free movement of almost everything (goods, capital, culture, information) — has adopted for itself a protectionism more typical of besieged nations and economies.
The push to combine into blocs, which goes back to before the war in Ukraine, and by which the U.S. is trying to surround itself with loyal allies (by subjugating them) in an attempt to isolate China and Russia, is a symptom of two things: the weakness that is affecting the U.S., which is progressively unable to compete with more powerful adversaries on a strictly economic level; and the increasing recourse to means other than economic ones in the attempt to stop these adversaries – that is, by using military force [an area where the U.S. is still dominant].
Customs tariffs on foreign products, sanctions on competitors (countries and companies), confiscation of astronomical sums of money from adversaries or simply victims (Russia, Iran, Venezuela, Iraq, Afghanistan), the (largely illusory) pretenses of reindustrialization — all these measures adopted by the enlarged West are evidence of the gigantic confrontation that is taking place between two worlds.
The situation is somewhat reminiscent of the late 19th century. Frederick Engels said, around 1886, in a note in Capital, that “these customs protections are nothing but the weapons destined for the general battle of industry, which will finally decide the domination over the world market.”
There is, however, a significant difference. At that time, England was the dominant power, and it was England that fought to eliminate barriers; and its competitors surrounded themselves with protective measures in order to survive. Today, it is China that, confident of its economic strength, is fighting for free trade, and the losing U.S. is hiding behind all sorts of barriers.
A new question
This division of the world poses a largely novel question regarding the financial-economic-social-institutional threat hanging over Western bourgeois civilization. To what extent will the financial collapse looming from the U.S. and Europe affect everyone? To what extent will the abyss that is deepening between two worlds keep China, Russia, India, Iran and the countries that line up on that side safe?
From the answer that reality gives to this question, we will be able to determine the pace at which the sinking of the “wider West” will proceed.
IMF Managing Director Kristalina Georgieva recently paid a visit to China that provides interesting data. Speaking in Beijing at the China Development Forum, she said that up to 90% of advanced economies will see a drop in GDP by 2023, but that “Asia will be a beacon of light” in the general gloom.
Georgieva said China and India together will account for half of world growth. China, past the constraints of the pandemic, will make “a strong leap” with 5.2% growth in 2023, contributing a third of world growth. By a spillover effect, every 1% growth in China will induce a 0.3% growth in the rest of the Asian economies.
She said the global economy will grow (despite the growth in Asia) less than 3% in 2023, and the same slump will continue for the next five years, the worst performance since 1990. The U.S. is striving for 0.7% growth in 2023, the EU for 0.8% and Japan for 1.3%, all pulling down the overall average.
Georgieva also warned of the “risks of geoeconomic fragmentation” that could lead to a “division of the world into rival economic blocs.” As a result, world GDP could fall by 7% ($7 trillion), equivalent to the combined output of Japan and Germany, or even by as much as 12%. For all this, forecasts for the world economy in the medium term “remain bearish.” (RT, March 26)
Moreover, as we have seen, the measures taken in the West to curb inflation, which in some countries exceeds 10%, are an additional factor in the fall of consumption, employment and the economy. Meanwhile, inflation in China remains below 1%; domestic consumption is growing; there is strong demand for credit in the real economy, and there is no need to raise interest rates. (Global Times, April 20)
If these trends continue — added to the dollar’s loss of prominence and the consolidation of alternative organizations with a global dimension, such as the BRICS [Brazil, Russia, India, China, South Africa] and the New Development Bank, the Shanghai Cooperation Organization, the new Silk Road — it seems inevitable that a gap will open between two rival blocs, as Georgieva had feared.
We are witnessing the increasingly extreme contradictions of a senile capitalism, incapable of responding to the demands of human progress. The world, specifically the Western world, is “in the dead end of a permanent and endemic depression,” and “every factor, which works against a repetition of the old crises, carries within itself the germ of a far more powerful future crisis.” Even at the distance of almost 140 years, these words of Engels seem especially dedicated to the moment we are living in.
Quotations from Karl Marx and Frederick Engels: Capital, book three, chapter XXX Money-capital and real capital
Fred Goldstein, Low-Wage Capitalism: Colossus With Feet of Clay (World View Forum, 2009)
Réseau International, L’économie mondiale dans l’expectative, Jean-Luc Baslé