Why the West is unprepared for the next economic crash

Austerity and an unstable debt mountain leave the world vulnerable to a new downturn. 

NS

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After eight years of consistent, if often anaemic, global economic growth, the risk of a new recession is rising. The recent annual report by the United Nations Conference on Trade Development (UNCTAD) was testimony to this: rising debt, increasing inequality, the absence of necessary financial regulation and the emergence of global tech monopolies led the list of economic threats in 2019.

Growth is underpinned by a highly unstable debt mountain three times the size of global output. In the UK and the US, household debt is approaching pre-crisis levels and, in the absence of significant growth in real wages, this will further constrain consumer spending – the driving force of global growth for the last 40 years. Social security cuts in both countries are also intensifying the pressure on households. Indeed, the US’s broken education system now mirrors its pre-2007 housing market; student loans are being securitised – bundled-up – and sold on financial markets in the same way that mortgages have been.

Meanwhile, the new engine of the global economy is experiencing its own problems. The post-crash boom in China – marked by localised housing bubbles, mounting debt levels and growing volatility in financial markets – looks eerily similar to the US economy pre-2007, or the Japanese economy in the early 1990s. Chinese private debt grew from $6trn in 2007 to $29trn in 2018, or 260 per cent of GDP. The $586bn Keynesian stimulus programme that that Chinese state implemented in the wake of the crash means that private and public sector balance sheets have expanded in harness.

To add to this, much of the Chinese financial system appears even more anarchic than Wall Street in 2007. Bank of England governor Mark Carney recently identified shadow banking in emerging markets as the greatest threat to global financial stability: China’s shadow banking system is worth around $15trn, or 130 per cent of GDP. Similar concerns apply to countries such as Australia and New Zealand, both in the midst of their own housing bubbles.

Yet far from intervening to rebalance growth, the world’s most powerful and creditworthy states are focused on reducing the debt that remains from 2007. Some countries, such as Greece and Ireland, have been forced into austerity, while others, such as the UK and Germany, freely chose to shrink the state.

Rather than using public spending to boost growth across the income spectrum, these economies have instead relied on quantitative easing – electronically created money used to purchase existing government bonds – to stimulate activity. In other words, central banks across the rich world have thrown money at banks in an attempt to boost asset prices and revive the consumption-fuelled, debt-driven economy of pre-2008.

Ultra-low interest rates in the global North have pushed capital out of the West in search of higher returns in emerging markets. As monetary policy starts to return to normal, capital is likely to flood back into these countries, precipitating the kinds of financial crises seen after the US interest rate hikes in the 1980s. Countries such as Turkey and Argentina are already enduring the consequences of a more hawkish Federal Reserve.

These problems aren’t primarily the result of regulatory failings or “secular stagnation” as some economists claim. Instead, they are endemic to the system of financialised capitalism that has dominated the global economy since the 1980s. With capital now free to traverse the globe in search of the highest possible returns, financial crises have become more common and more severe, large imbalances have opened up between creditor and debtor countries, and inequality within and between states open to these financial flows has increased. The Trade and Development Report highlights these issues and provides an economically sensible but politically ambitious solution: a Global New Deal that would promote more “democratic, equitable and sustainable” growth.

This is not the style of report that one would expect from any other branch of the UN, largely because it exposes the damage wrought on the global economy by the hosts of global finance, the US and the UK. But it is characteristic of UNCTAD, which was founded in 1964 by Raul Prebisch, the Argentine political economist who pioneered dependency theory: an analysis of the global economy which exposed the ways in which “core” countries in the international capitalist system subjugate those on the periphery.

When I travelled to Geneva to address the UNCTAD, the divisions identified by Prebisch remained. Delegates from the G77 expressed strong support for the findings of the report, with the Chad representative warning that “neoliberalism and financialisation” were eroding the tax bases of the global South. Meanwhile, the EU delegate called the report “overly critical” and accused UNCTAD of overstepping its mandate, comments echoed by Costa Rica, a close ally of the US.

The uncomfortable truth at the UNCTAD, and at the most recent gathering of the WTO, is that reform must begin in the rich world. If the US, the UK, and increasingly China, fail to reform their financial systems, we will continue to edge ever closer to another global crisis. And the greatest losers will, as ever, be those least able to cope with the fallout.

Grace Blakeley is writing a book on financialisation

Grace Blakeley is the New Statesman’s economics commentator and a research fellow at IPPR. 

This article appears in the 26 October 2018 issue of the New Statesman, The Brexit crash