Notes on the Next Global Crisis – an Overview

Barely a decade since 2008, there are warning signs of another of crisis on the horizon, only this time, it’s not the banks alone: from deflation to global slowdown and rising corporate debts, there’s a lot to at stake for Western economies, while the tools that saved 2008 – American bailouts and European austerity – won’t be of much help this time. For, what we’re up against is a crisis of production, and it starts with China.

What you probably shouldn’t know

What changed after 2008 is much more than the clock-work mechanism behind world finance; until the financial crisis, most world economies were backstopped by the US. Yet, as The Financial Times observed, the global economy now revolves around a “second sun”, one that’s both big enough and linked enough to pull in other’s around the globe: The People’s Republic of China and the scale of its spending clashed with both European austerity or American finance. Unlike the EU and the US, China’s answer to the crisis was the largest program of fiscal stimulus in history – more than $1 trillion. namely, it was neither the American bailouts nor austerity-obsessed Europe, but China’s unrecognized social programs that brought the world economy back to life by creating global demand. Yet, that doesn’t mean that America’s „progress machine“ is broken, as The Guardian recently put it: its systemic changes keep it well-protected from the financial repetition of 2008. Yet, this is the problem. Namely, how the deep changes after 2008 were handled by the powers that be, is what now pull the capitalist dynamic downwards, and it is in their interaction that the present crisis starts.

Make China Great Again

In April 2009, China embarked on one of the largest social programs in history that would mark its predominantly fiscal response to the crisis: it implemented the largest healthcare program in history, raising health insurance coverage from 30% to 90% of the population (sic!), while in November, China’s State Council agreed upon a spending program of 4 trillion yuan ($586 billion) spending program, with local governments funding massive infrastructural projects in the wake of the earthquakes of 2008. Investment surged into housing and education, featured building two thousand county hospitals and five thousand town-clinical centers and initiating the “One belt one road“ policy in 2013, on a daunting scale. Yet, this was just a part of China’s program:, Beijing approved another fiscal stimulus of 300 infrastructure projects worth a total of 7 trillion RMB ($1.1 trillion) when China’s growth slowed down in 2016, which was itself part of an even larger plan that featured a fiscal stimulus 10 trillion RMB ($1.6 trillion). Chinese premier Wen allowed state banks to lend on an almost unrestricted basis, with the State Council ordered financial institutions to lend to local government projects even when borrowers could not repay.

To put this into perspective, the American recovery was also featured a fiscal stimulus: the largest ever undertaken after a crisis in any Western economy and by far the largest in American history: the American Recovery and Reinvestment Act of 2009 was the act by which the crisis was kept from escalating even further. It featured spending $831 billion from 2009 until 2019, but this was almost half of what the Chinese would soon invest. Between the space of only three years, from 2011–2013, China used 50% more cement in three years, than the US had consumed during the entire twentieth century. Coming from an economy one third the size of the US, the figures are even daunting. According to The Washington Post, „It’s a statistic so mind-blowing that it stunned Bill Gates and even inspired haiku“.

What Happens When You Mess With Other People’s Fiscal Stimulus: on Deflation

Yet, this sort of gargantuan spending „clashed“ with austerity-driven economies. More precisely, with the 37% fall of global commodity prices that followed European austerity programs in 2015; when international demand fell (for crucial products like oil, iron, copper, and steel), so too did the production. This created a crisis of oversupply, which made factory prices fall and the economy enters into deflation (graph 1, below). What China experienced was a „clash“ with austerity, and it came in the form of lower demand from those economies that revolved around the „sun“ of austerity in Europe. This coincided with the end of quantitative easing (QE) and the rising interest rates in the US, further aggravating the situation, creating a perfect storm of deflation.

This was nicely summed up by the British economist Ann Petifore: according to Petifore, China „rescued the global economy in 2009 by launching a massive $600 billion stimulus, which helped keep western economies afloat. [But] Western leaders responded by reverting to orthodox, contractionary policies, thus shrinking demand for China’s goods and services. This has left China with an overhang of bank debt, and with gluts of goods like tires, steel, aluminum, and diesel. These gluts drove Chinese producer price inflation below zero for four years before 2016.“ This was the biggest fear any contemporary economy had to face: what if there was to be no pickup of new investment? What if, despite all the borrowing, overall economic activity would slow down?

Yet, deflation isn’t „Chinese“. It’s also home-grown American, and the same questions were also faced at the other side of the Pacific. As the Canadian Marxist economist David McNally opined in a recent interview regarding the US: „The irony today is that the very financial policies that averted a depression also meant that capitalism’s “creative destruction” was blunted. Record low-interest rates enabled inefficient firms to stay in business. But this has blocked the “cleansing” that would otherwise open up new markets for the most profitable companies. That explains why rates of new investment have been remarkably low throughout the so-called “recovery” phase of the past nine or ten years.“ In the US, this is offset by Trumps tax-cuts, which created an artificial „sugar rush“ of investment, that is slowly reaching its end.

…And more deflation

Furthermore, neither the Chinese nor the American deflations were isolated but reacted with one another. Just as China’s overcapacity was built up by falling demand from Western economies, so too the deflationary pressures didn’t remain in China alone. Namely, when global demand fell, the sudden pressures of oversupply in China did bring the prices of its products down (graph 1, below), but they also spread into other economies through Chinese exports (graph 2, with an explanation, below). According to Petifore, China’s overcapacity, „was channeled into global markets, so deflationary pressures hit western economies.“, in short.

Thus, with fiscal stimulus and borrowing on the one hand, and financial bailouts on the other, the threat of deflation and slowing economic activity not only bugged both economies but also interacted at both ends of the Pacific. In wake of such disaster scenarios, it shouldn’t be surprising that there has been something akin to a central bank “gold rush”: namely, central banks across the world, China included, have been buying gold, a proven safe asset, at levels not seen since 1971.

Graph 1: China’s producer prices index (factory-gate prices, white line), showing a downward fall in prices until 2,7% November 30th. Source: Bloomberg. Fresh data also confirmed this downward trend since, as of January 9th, China’s producer price index fell to 0,9% (sic!).

Graph 2: China’s producer price index (factory-gate prices, white line) and export price index (export prices, blue line). The graph shows a strict correlation between factory gate prices and export prices meaning that, when China’s prices fell, they also spread into those economies which traded with China, as was the case from 2012–2016, when both price levels were below 0 (shown on graph). Source: Bloomberg.

So, what next?

This deflationary pressures manifested themselves in several ways that determine the factors for the next global crisis. 1) #Eurodoom. A slowdown in Europe is already occurring. This means that the global austerity-induced fall in demand „unexpectedly“ bounced back in the face of European economies. Namely, while China’s growth is still high compared to European standards (it reached 6,4% as of December 2018), this is the weakest growth rate China has seen since the 1990s: and, as China tightened, its imports from the European Union sharply fell. This affected mostly Germany, which narrowly avoided a recession, unlike Italy, while France’s economy is engulfed in the riots of the gilet jaunes. Yet, of the three, Italy is the winner, which entered the year with a second consecutive contraction: this forced the Italian government to re-scale its budget in order to make good on its election campaign commitments. This is the pattern that might repeat itself in other states in an impending recession, as the European Commission’s growth projection for the EU had also been cut to 1.3 percent for this year. Moreover, the EU, Switzerland, Sweden, and Japan have already been swimming in the previously uncharted monetary territory of negative interest rates for years – meaning their banks have to pay interest to their central banks for the privilege of „parking“ their money there, rather than the reverse. If faced with a synchronized deflation across the board, the costs and value of debt could soar while existing policy tools would be rendered inoperative with the negative interest rates currently in place.

Yet, it is incidentally 2) corporate debt that is dangerously on the rise at the very same time. Namely, the slashing of public assets across North-American and European economies in the wake of 2008 makes it no surprise that global debt has reached its historical apex across the private sector around the world: China’s off-sheet local government debt is soaring in the wake of spending programs, while Michael Roberts, quoting an IMF report, recently drew attention to the rising corporate debts. Namely, according to the IMF, The level of these loans globally now stands at $1.3trn and annual issuance is now matching the pre-crash year of 2007, and the same warnings were later echoed in the report of the ECB, according to which debt owed by businesses relative to gross domestic product is historically high, while a report of the American Fed stated there are signs of deteriorating credit standards, prompting even JP Morgan to publish a doomsday analysis in the face of a possible crisis. This might prompt a wave of corporate bankruptcies like the farm belt bankruptcies that are now soaring in the US, as Trump’s corporate tax cuts are about to end last year’s sugar-rush of the economy.

Third, 3) the Sino-American trade wars: the tandem of slowing growth and rising debt is exacerbated even further by the recent trade wars that Trumps’ administration has initiated: adding to the plummeting growth, they further decrease the demand for Chinese goods from the American side, and this is hitting where it hurts. Namely, Trump’s trade war could only aggravate the situation by closing the trade outlet for China’s overcapacity while pushing the Fed to increase its interest rates, which would further hurt the yuan. This is where Trump’s favorite problem comes to the fore: China’s efforts to boost its exports by making them cheaper through buying US government debts. This is what Larry Summers called the „balance of financial terror“. The problem is that a poorer country like China is indirectly crediting the American consumer to buy export products from China’s factories using the earnings from its previous exports to buy more US government debt (or, more precisely, the US Treasury bonds), which further brings down the value of the yuan and makes Chinese exports even more competitive. While there are already “holes” in Trump’s tariff walls (exceptions such as certain aluminum products whose production is not available at home) It’s a spiral that is now propelled in China by the same overcapacity that propelled deflation, and Trump’s trade war is making it spin faster.

A crisis of production

The above symptoms were somewhat noticed by the media. Yet, buying US debt is neither a cause of the crisis nor did it happen on its own. Japan, for example, also holds large swaps of US debt ($1.07 trillion as of January 2018, which is an often-overlooked fact), yet as the US’ ally, it hasn’t received the political/media-bashing like the case of China. So, what’s the problem with China’s $1.17 trillion, then? The question leads us back to the US. Namely, there is one last thing, that connects all of the symptoms of a foreseeable crisis mentioned above, and which, at the same time, reveals what made 21st century America „Great“ in the first place: 4) the outsourcing of production and its crisis: the very lifeline of neoliberalism, which fed upon it, in stealth. Without this, one really can’t imagine the American economy: if there was ever a secret to ensuring that there was always a high demand for both the dollar and America’s domestic products, it was not the tariff walls, but the outsourcing of production – and, where else? – to Asia. Likewise, the „rise“ of Asia can’t be understood without the US, which was as much a consequence of its governments as it was of US companies outsourcing to China and using it as an export-processing zone, transforming China along the way into an export-led economy: as The Economist put it, „Made in China used to mean assembling foreign widgets in China; now it really does mean making things there“. And it is this crucial sphere of production that’s now being threatened. Namely, China alone produces about 80% of the world’s air-conditioners, 70% of the world’s mobile phones and 60% of its shoes. In the wake of the trade wars, its companies also began to outsource their production lines further into Vietnam, Bangladesh, and South-Asia, while American firms turned to stockpile material imported from China to stave off the future crisis. Thus it is of no surprise that the global supply-chains of “Factory Asia” now produce almost half the world’s goods. Firms like Apple; Nike; Walmart; IBM; Hewlett Packard; Boeing; Kingston; Ford & General Motors all outsource to Asia and began doing so from as early as the late 1980s to as late as mid-2000s. Today, as we are slowly approaching 2020, it is the semiconductor industry behind the tech-monopolies such as Apple, Google, Facebook and Amazon that is at stake: along with their Chinese counterparts (Huawei and the state-led “National Integrated Circuit Industry Investment Fund”, for example), the technological quadrumvirate of the US already invested research into optical computing, approximate computing and quantum computing-related projects, which are now threatened by the trade wars that led The Economist to dub them as “chip wars”, to highlight the stakes in stopping the outsourced chip production that enables Silicon Valley to run, day by day. Ultimately, with such outsourcing of production came an outsourcing of pollution, accelerating that other global problem by the name of 5) the global climate crisis. The speed at which outsourcing grew is daunting: in 2013, 80% of the world’s trade was linked to international production networks of transnational corporations, according to one UNCTAD report.

And what they were drawn into was not America’s „sun“, but the alure of the low-waged workforce in China. Namely, what kept what Ben Bernanke previously called the „Great moderation“ or the stable output and inflation that characterized the US economy after the 1980s was, low by falling prices of intermediate inputs and consumer goods whose production was shifting to low-wage countries along with the expansion of credit[1]. In 2008, that collapse made itself felt in financial terms. But, according to a very important insight by the British economist John Smith, „The series of financial heart attacks that began on August 9, 2007, were provoked by the side effects of the two principal measures that allowed the imperialist economies to escape, for a while, the crises of the 1970s – the enormous expansion of debt and the epochal global shift of production to low-wage countries. The first propped up demand, alleviating overproduction (the production of more goods than can be sold for a profit); the second helped restore sagging profits by substituting relatively expensive domestic labor with cheap labor in low-wage countries. Together, these two therapies helped put global capitalism back on the rails for another thirty years.“ With those thirty years over, this fact has daunting implications for how we imagine the world after 2008., which takes us back to the clash of the American and Chinese responses to the crisis.

This means that there was an additional step back before the crisis of 2008: if the expansion of credit was the „place“ where the crisis of 2008 developed, then the outsourcing of production is what sustained much of the profits of the transnational corporations. Instead of investing in production, the above-mentioned companies turned to speculative investments and the outsourcing of production that occurred before 2008. This is an often forgotten fact, and one which wasn’t named a „global crisis“ because it affected the working conditions of the world’s poorer nations and made the profits that created the crisis possible. John Smith’s argument goes against the widespread myth that it was finance that caused the crisis: it was the other way around, and it’s what we are experiencing today is the surfacing of this sphere of production. It is this that Trump’s walls threaten to shake if they resume after March 2019. While not historically the highest tariffs ever (the US isolationism is a historic precursor), Trump’s tariffs do threaten to undo the global supply chains mentioned above, which are historically new: if Trump’s tariff walls succeed[2], they could further disrupt global output, coupling global fall in demand with a fall in supply, which could be brought about by the trade war’s disruption in Asian global supply chains.

To recap: after China’s fiscal programs clashed with Western (mostly European) austerity, a global fall in demand ensued, creating a whirlwind of deflation that began to plague China and the US, before ricocheting back to Europe. This coincided with a rise in global corporate debts and Trump’s trade wars, which further threaten to disrupt the global supply chains that are based on the outsourcing of production. Thus, the roots of the symptoms of the next crisis could be traced back to how 2008 was handled by the three global powers that be – Europe, US and the newcomer of China.

The Fault Lines Across the Globe

Whether all of these factors can turn a recession into a crisis of global proportions is an open question: yet, if the recession worsens and the whirlwind of deflation continues, it could be translated into a crisis of production itself, and that is something that neither American monetary prevention (the Dodd-Frank „stress tests“ or the Fed’s international credit lines, for instance[3]) nor the Chinese fiscal stimulus could solve on their own. Despite all the hype around business forums, there are no magic bullets that could reverse a global slowdown, if it occurs: not in Sun Valley, Aspen, Bellagio or the poorly named „Summit at Sea“ where one finds a shocking lack of response[4]; for, even these most serious forums have done very little to avoid disaster, and it is questionable to what extent they can. To paraphrase the Thomas Mann’s Magic Mountain,: „From Hamburg to Davos is a long journey – too long, indeed, for so brief a stay,“: and from the isolated heights at Davos to the G20 in Hamburg and Buenos Aires, most of what is discussed remains at the level of the symptoms (such as the “concerns” for social inequality), rather than the responses to what is becoming a crisis of production.

And this should be the first, rather than the last reason why the next crisis could be a different one – for it would reveal the one before it, that of 2008, to be less of a financial meltdown, and more of a meltdown of production and accumulation across the globe, that is slowly catching up with us, more than 10 years later. This reason alone is why the left could also expect the next global crisis to trigger a political explosion – for what it may prove beyond doubt is that bailouts and austerity hadn’t solved anything, and, while the few and the rich have profited, the rest were striving for nothing – because the crisis of 2008 was neither financial, nor ever resolved, but that it laid the causes for the one to come.

[1] It is no coincidence that trading had stopped getting cheaper after sharp declines in the 1970s and 1980s, while transport followed the same pattern – after sharply plummeting thanks to containerizing freight, transport costs ceased to fall about a decade ago.

[2] While not historically the highest tariffs, as US isolationism is nothing new historically, Trump’s tariffs threaten to undo the global supply chains mentioned above, which are historically new.

[3] Trump’s administration is structurally prepared a financial crisis, rather than a crisis of production. Namely, In 2008, the US didn’t just save its banks, but embarked on a fundamental and large-scale pre-emptive monetary response: it featured 1) the infamous bail-outs, and 2) a mutation of the Fed which made an unprecedented decision of acting across the boarder by extending its credit lines to ECB and other central banks. This meant the Fed became the ultimate provider of global liquidity to economies across the Atlantic, while 3) the Dodd-Frank act established regular „stress tests“ of banks and systematically important institutions that last to this day. This means that America’s „progress machine“ is neither broken nor falling apart, as the Guardian recently claimed. These were systemic changes that keep it well-protected from the financial repetition of 2008. The American recovery was also featured a fiscal stimulus: the largest ever undertaken after a crisis in any Western economy and by far the largest in American history: the American Recovery and Reinvestment Act of 2009 was the act by which the crisis was kept from escalating even further. It featured spending $831 billion from 2009 until 2019 but was considerably smaller in comparison with China. The US is protected from a financial meltdown, and not a fiscal crisis.

[4] To quote The Economist, where an interview with one participant was mentioned, „‘The [Summit at Sea] boat’s not about getting drunk and getting naked,’ a motivational speaker intones. ‘Well, it’s sort of about that. But it’s also about social justice.’” – the statement speaks for itself.