This time last year, in a cover story for the New Statesman, I warned that the global economy was heading for another recession, for which policymakers were ill-prepared. Eleven years after the 2008 crisis, the world economy was visibly entering dangerous territory, with many economists predicting that a recession would hit the US, the UK and the Eurozone by 2022. As storm clouds gathered on the horizon – Brexit, a US-China trade war, a real war between the US and Iran – others predicted that the recovery could be thwarted even sooner.
But no one could have foreseen that, within a year, the global economy would fall into perhaps the deepest recession in modern history through the global spread of a deadly disease. The coronavirus pandemic is one of those rare things – a genuine “exogenous shock” generated by nature, rather than the internal contradictions of global capitalism. The economic shock caused by the virus, however, is interacting with the pre-existing vulnerabilities of the global economy. After a decade of slow growth, surging debt levels and rising inequality, the world has rarely been worse prepared for a new recession.
The recovery from the 2008 financial crisis was characterised, above all, by stagnation – of incomes, productivity and investment – and multiple, overlapping vulnerabilities emerged. Five interrelated storm clouds stood out to me in March 2019: slowing growth and rising debt in China; global monetary tightening; the unresolved Eurozone crisis; global trade instability; and rising private debt in the global North.
The problem was clear: capitalism had lost all momentum. With wages, productivity and investment stagnant in many parts of the world, central bankers were forced to keep the economy on life support long after the 2008 crisis had ended (through ultra-low interest rates and new money creation through quantitative easing). The result was an increase in debt – particularly corporate and household debt – along with a rise in asset prices, which exacerbated pre-existing inequalities and triggered a reaction against globalisation that threatened the entire economic order.
In the end, the recession came earlier – and hit unimaginably harder – than expected. But the world’s other economic problems have not gone away: in fact, the coronavirus crisis will exacerbate them.
As the crisis escalates, corporate and personal incomes will collapse, threatening to trigger a wave of bankruptcies as people and businesses are unable to pay their debts. Asset values will tumble further, triggered by fire sales as corporations and households struggle to meet their financial obligations. While banks are better capitalised than they were in 2008, such a systemic crisis will significantly weaken the health of the financial system.
Only dramatic state intervention has forestalled such an outcome. In the US, the Federal Reserve lowered interest rates to near zero and has now agreed to purchase an unlimited amount of assets – including corporate bonds for the first time – in an effort to keep markets functioning. Central banks across the world have followed suit, with a particularly ambitious asset-purchasing programme from the Bank of England worth £200bn.
Last weekend, the US Congress agreed to a sweeping bailout package worth up to $1.5trn, including measures to undertake significant corporate bailouts. In the UK, the Chancellor announced a wage subsidy of 80 per cent (up to £2,500 a month) and £330bn of state-backed loans, in addition to the £30bn stimulus announced in the Budget. The World Bank now plans to make $12bn available to support states less able to raise their own funds. Much more will be needed – by the end of the year, governments across the world will likely have undertaken vast corporate bailouts, becoming major shareholders in some of the world’s largest companies.
Meanwhile, capital has already started to flood from the global South into the safe haven of the US, which, along with the struggle to contain the virus itself, is threatening the solvency of emerging economies (such as Turkey and Argentina). The Eurozone is desperately struggling to respond to the crisis without altering the fundamental structure of the bloc, which places limits on states’ fiscal policy, placing a huge amount of pressure on the European Central Bank. Global trade is set to collapse, even if Trump halts his trade war, and globalisation itself is likely to grind to a halt if, as seems likely, the crisis long endures.
Some corporations, however, are likely to withstand – or even profit from – this crisis. Many of the world’s largest businesses were sitting on huge cash piles before the crisis hit, providing them with the cushion they needed to weather a period of falling revenues. Others – Amazon, Netflix, some of the social media giants – will actively profit from the rising demand for their services associated with the crash. The general tendency across all markets will be towards consolidation, as smaller, weaker businesses fold under the pressure, or are swallowed up by their larger rivals.
Anyone could have predicted the world was on course for a recession last year, but few could have imagined that 2020 would be the year in which the world entered a new phase of global capitalism, with the links between states, banks and the world’s biggest corporations becoming ever tighter, until they seem to fuse entirely. With hindsight, it is clear that the stagnation of the last ten years represented the death knell of the era of financialisation, which collapsed under the weight of its own contradictions in 2008. This year, we have witnessed the birth of its replacement: state-monopoly capitalism.
Those on the left have few reasons to rejoice about the rise in state spending currently taking place across the global North. The legacy of this crisis will be the concentration of economic and political power in the hands of a tiny oligarchy, composed of senior politicians, central bankers, financiers and corporate executives.
The challenge we will face when this crisis subsides will be to wrest control back from those who have taken advantage of this moment to increase their power and wealth. The only way to do so will be through a radical democratisation of national economic and political institutions, giving workers, consumers and communities a say in decision-making within publicly-owned companies, central banks, and throughout the local and central state. The alternative is to watch as democracy is finally consumed by capitalism.