At the IMF meeting in Washington DC, the former governor of the Bank of England, Mervyn King, warned that the global economy was “sleepwalking” into another financial crisis. With much of the UK focused on the psychodrama of Brexit, King’s remarks have received little media attention. But the issues he raised may have a far greater impact on the British economy than our future relationship with the EU.
As I outlined in a cover story for the New Statesman in March, there are many potential sources of instability in the global economy today: a slowdown in China; uncertainty over the future of monetary policy (interest rates and quantitative easing) in Europe and the US; ongoing political and economic turmoil in the Eurozone (of which Brexit is just one element); escalating global trade tensions; and rising levels of private debt.
King focused on trade tensions, monetary policy and the Eurozone in his speech, but arguably the global debt bubble – which reached $244trn earlier this year, three times the size of global GDP – is the most immediate cause for concern. As soon as global growth begins to falter, which is likely to happen as successive rich economies reach the peak of their post-crisis business cycles, this mountain of debt will begin to look more and more unstable.
The next global financial crisis is unlikely to be like the last one. As a rule, the larger the upswing of the business cycle, the harder the downturn. Since 2008, the global economy has endured the slowest recovery in history.
Following the so-called “great moderation period” from the mid-1980s to 2008 (which, in view of the expansion in credit, could be more aptly called the “great immoderation”), we have now entered what King called the “great stagnation”: low growth rates, stagnant productivity and weak investment. In the UK, wages and productivity have both flatlined for the longest time since the 19th century and millennials are now the first generation since 1881 likely to be worse off than their parents.
As Richard Koo last year argued in his superb book The Other Half of Macroeconomics and the Fate of Globalisation, the rich world may be following the path of Japan since the bursting of its debt bubble in the 1990s. To even maintain mediocre growth, Japan has depended on “Abenomics”: extremely loose fiscal (public spending and taxation) and monetary policy enacted by Japanese Prime Minister Abe. This includes continuous quantitative easing, which has swelled the Bank of Japan’s balance sheet to more than 100 per cent of GDP.
The deep stagnation experienced after these crises is the logical result of an economic model based on the continuous growth of private debt used for speculation rather than productive investment. A loan is a claim on a person’s or business’s future earnings. The person or business might use the loan for the kind of investment that would increase their future earnings – for example, a company might borrow money to build a new factory, the revenue from which will allow it to repay the loan. But if this lending is used for unproductive purposes, like raising shareholder dividends, then borrowing represents nothing more than extraction from the future.
The explosion in private debt in the rich world before 2008, and in Japan before the 1990s, is now dragging down investment and consumption. Meanwhile, the destructive and senseless logic of austerity in the UK and the Eurozone has constrained state spending, too. The result has been a severe problem of insufficient domestic demand.
With private debt and asset prices ballooning in economies such as Australia, Canada, New Zealand and the Nordic countries, it won’t be long before they too experience their Japan moment. China is in a somewhat different situation, as most of its debt is owed to state-owned institutions, but not even the immense power of the Chinese state will be able to fend off stagnation forever.
Over the longer-term, the global economy faces even more pressing concerns. After the bursting of these debt bubbles, we can anticipate the bursting of the carbon bubble. Just as they underestimated the risk of default on mortgage-lending before the crisis, investors are now underestimating the risks associated with climate change, leading them to plough money into fossil fuel assets that will be rendered worthless as a result of decarbonisation.
It is worth bearing in mind that many political revolutions – like those that rippled throughout Europe in 1848 – have not occurred during moments of crisis, but times of ongoing stagnation. While crisis creates fear and a desire to return to “normal”, steady decline encourages people to look beyond the status quo.
Today, it is quite clear that only a radical break with the past will deliver us from the post-crisis malaise and the climate crisis that has emerged alongside it. The far right would have the rich world fortify its borders and forcibly exclude all those who they do not define as legitimate citizens. As the climate crisis forces more people from their homes, this vision will become ever more unachievable and ever more appealing to many in the global north.
The only way to respond to the radicalism of the right is with a radicalism of the left. The next recession should be met with calls for a Green New Deal – a huge package of state investment that would both absorb the impact of the slowdown today and improve the sustainability of the economy over the long-term. A public banking system must be established as part of this in order to direct capital away from speculation and towards productive, sustainable investment. These plans must be accompanied by greater state and worker ownership so that the returns from growth are not monopolised by a tiny elite.
Such a plan would represent a rupture with the economic orthodoxy of the last 40 years. But faced with the threat of another recession, climate breakdown and the rise of the far right, the radical is starting to look ever more sensible.