A capitalist supernova?
Excerpt: “Are we heading towards a capitalist supernova?”.
Global debt – of households, private companies and governments – reached a staggering $305bn (£254bn) in 2021, up from $83bn in 2000.
In addition, global debt now equals 355% of global GDP, down from 120% in 1980 and 230% in 2000.
The events we are witnessing reflect the dynamic that launched our current phase of capitalism in the first place.
In 2021, debtors of all types paid $10.2 billion – 12% of global GDP – in interest payments to their creditors. In comparison, the annual income of the poorest 50% of humanity is only 8.5% of GDP.
Global debt has grown twice as fast as global GDP since 1980 and is accelerating, while global GDP growth is slowing and threatening to reverse.
As global debt has exploded, global interest rates have fallen almost continuously since 1980. Interest rates have fallen so much since the 2008 global financial crisis that by 2021, $17 billion worth of bonds were trading at negative interest rates, even before inflation. is taken into account. That’s $7 billion more than the figure that stunned Bill Gross in 2016, mentioned at the start of this article.
As a result, interest on debt as a percentage of GDP is well below its peak at the start of the neoliberal era. The Economist calculates, for example, that 27% of US GDP was gobbled up by interest payments in 1989, but “only” 12% in 2021, despite massive growth in US debt.
But the world of ever-low interest rates is now over. The US Federal Reserve’s decision on June 15 to raise interest rates by 0.75% – the largest increase in nearly three decades, with the promise of more to come – sent shockwaves through the around the world and erased billions of dollars of value from stock and bond markets.
Any rise in interest rates means a huge transfer of purchasing power from indebted households, businesses and governments to their creditors. The Economist calculates that a 2% increase in US interest rates in 2021 would double, by 2026, the share of global GDP absorbed by interest payments.
Decades of ever-lower interest rates inflated what Nouriel Roubini, one of the few economists to predict the financial crash of 2007-2008, famously called “the mother of all asset bubbles, driving ultimately collapse, another massive financial crisis and a rapid slide into recession.
However, a bubble is insubstantial and delicate, and bursts with barely a sound. A much more appropriate and useful metaphor is that of a star, which is immense and dies in a stupendous explosion. As Bill Gross, the “King of Bonds,” tweeted in 2016, “Global yields are at their lowest in 500 years of recorded history. $10 trillion in negative rate bonds. It’s a supernova that will explode one day.”
What forced the Fed to aggressively raise its interest rate was the dramatic reappearance of one of the most feared monsters: inflation. The events we are witnessing reflect the dynamic that launched our current phase of capitalism in the first place.
The neoliberal era was ushered in in October 1979 with a huge hike in US interest rates aimed at stifling rampant and endemic inflation. The “Volcker shock”, as it became known (after Paul Volcker, then head of the US Federal Reserve), was compared by journalist Naomi Klein to “a giant Taser gun fired from Washington, sending the developing world in convulsions…over foreign debts…could only be satisfied by taking on more loans. The spiral of debt was born.
This rise in interest rates succeeded in killing the inflationary monster, but at the cost of a sharp recession in the imperialist countries and a devastating debt crisis throughout Africa, Asia and Latin America. . The debt crisis has impoverished millions and forced these nominally independent countries to submit to the dictates of the “Washington Consensus”: mass privatization, austerity, and the removal of barriers to cross-border flows of capital and goods (but not people !).
Now the inflation monster has risen, prompting the Fed and other central banks to attempt to kill it again before it has had a chance to gain strength. Thus, the Bank for International Settlements, which provides banking services to the world’s central banks, called on them to “not hesitate to inflict short-term pain and even recessions to prevent any movement towards a world of persistently high inflation”. .
As a result, the debate has shifted from whether there will be a global recession to its severity – and whether central banks really have the guts to follow through on their threats and risk a global economic crash. In the next 18 months, we will find out.
Why did Bill Gross compare global bond markets to a star about to explode? What are the chances of his prediction coming true? What would such a cataclysmic event really mean in practice?
A star is a production process, in which heavier elements are fused from lighter elements, releasing huge amounts of energy. When the energy released by the fusion of lighter elements is insufficient to counter the gravity exerted by the increasing mass of heavier elements, the star dies.
It ends its life as burnt ash or, if large enough, in a supernova, an extremely violent implosion that incinerates anything nearby and scatters the debris into space.
Will the coming crash take the form of a brief recession, or a long and deep depression (like in the 1930s) or something much worse?
Capitalism is also a process of production, and the energy that fuels it is living labor, carried out by workers and farmers who produce more wealth than they consume. Surplus is converted into capital, that is, self-expanding wealth, wealth that must either make a profit or shrivel up and die. Capital, whether in the form of stocks and shares, bonds, real estate or fine wines, is, in the words of Karl Marx, “dead labor which, like a vampire, does not live that by sucking living labor, and living all the more labor it sucks”.
As with a star, when the mass of accumulated capital exceeds the capacity of living labor to breathe life into it, the moment of crisis has arrived and entire sections of capital are destroyed in a financial crash.
With interest rate hikes, our moment of crisis has arrived. But will the coming crash take the form of a brief recession, or a long and deep depression (as in the 1930s), or something much worse – a capitalist supernova?
To understand why this is a real question, we need to introduce a crucial feature of capitalism that has no solar analogy. The accumulated mass of capitalist wealth is an enormous dead weight that has long since exceeded the capacity of present living labor to breathe life into it.
It has so far avoided collapse thanks to the exponential growth of debt, which is nothing more than borrowing from the future, or more precisely, uses the promise of future flows of surplus value to convert today’s dead labor into capital. In contrast, our mute sun lives entirely in the present.
Courtesy of Commondreams.org