- Published: Tuesday, 13 February 2018 10:21
- Written by Shawn Hattingh
First published: https://www.businesslive.co.za/bd/opinion/2018-02-13-bubble-will-burst-and-states-will-have-no-quick-fixes/
When the crash becomes a reality, the political and social consequences will be chaotic and very uncertain.
In early January, capitalists across the globe were celebrating the fact that the Dow Jones had rallied by 45% since the election of US President Donald Trump.
Brokers were beaming in Sandton when the JSE hit a high of 61,475 points. Up a staggering 300% since early 2009, when it was 18,465 points. Yet beneath all the exuberance, danger signs abound, including signs that stock, bond and debt markets are experiencing bubbles that will burst at some point.
The danger derives from the reactions of the ruling classes and their governments to the crisis of 2008.
The paths they chose to follow to save and increase their wealth in the aftermath of the 2008 crisis have paved the way for a future crash that could dwarf the one of a decade ago.
The main thing currently keeping the global economy stumbling along — and not crashing down as happened in the 1930s — has been massive intervention by governments in the EU, US and China.
Since 2008 the US government has spent trillions of dollars bailing out large corporations, including many that were and are effectively bankrupt, while imposing austerity on the working class. This, at times, also saw governments assisting corporations by taking on their bad debts and toxic assets — wracked up through wild bouts of speculation — by swapping financial junk for government-backed bonds.
Governments have also assisted capitalists through quantitative easing by creating money and handing it over to corporations. Far from using this money wisely, corporations have gone on a speculative binge, leading to the souring stock markets.
Low, and in some cases even zero, interest rates have been implemented by governments through their central banks to further assist corporations since 2008.
For several years the US kept interest rates at zero, while governments in the EU had negative interest rates.
Capitalism has become dependent on these low interest rates in the US and EU, without which bankruptcies would proliferate.
Now governments find themselves in a bind. The main fear of the ruling classes that control governments is inflation and rising wages for workers, which will slightly dent the vast sums of wealth being funneled up the class pyramid. To halt any inflationary pressure, the US has slowly and very cautiously been raising interest rates again.
Should interest rates be raised to levels even as low as 3%, thousands of businesses would go bankrupt in the US alone. Up to 12% of US companies’ earnings do not cover their interest repayments, and an increase in rates would propel them into bankruptcy.
According to a report by Merrill Lynch, it has been estimated that 9% of European companies are what has been described as "zombies".
The Trump government has deepened the use of the state to prop up capitalism. Slashing the business tax rate to 15% is a gift to corporations that will total trillions of dollars.
To fund all of these the bail-outs, undertake quantitative easing, keep interest rates at record low levels and fund tax breaks, governments have issued bonds. They have taken on debt. The key buyers of these bonds are central banks themselves, which is not a sign of health but of an ailing system in which private corporations are becoming loath to speculate on bonds that are possibly in bubble territory.
Buying up bonds means governments are seemingly becoming trapped in an endless spiral of debt.
This has all been part of trying to keep capitalism from falling into a depression.
Central banks buying up bonds was meant to be a temporary response to the 2008 crisis, but it has now become a feature of propping up a zombie economy.
As the Financial Times has pointed out, "the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, along with the Swiss and Swedish central banks, now hold more than $15-trillion of assets, according to analysis of IMF and central bank figures, more than four times the pre-crisis level.
"Of this, more than $9-trillion is government bonds — one dollar in every five of the $46-trillion total outstanding debt owed by their governments."
The low interest rates have also resulted in corporations enormously increasing their debt. This, however, has not been used to invest in productive sectors but has been used to speculate.
Large corporations are once again borrowing to speculate on opaque derivatives, stock markets, and even fads such as bitcoin.
As part and parcel of this, listed companies — from SA to the US — have been buying back their own shares to inflate the prices, which has in part fuelled the growing stock market bubbles.
In the US alone listed companies have spent $4-trillion since 2008 using the cheap and free money their government has given them to buy their own shares to boost the prices.
The size of the debt problem is massive. Global state and private debt has increased to over $233-trillion, 300% the size of the planet’s GDP. Even China’s debt is beginning to pose problems as it stands at over 260%.
Under such circumstance, it is not a matter of if the bubbles end, but rather when. When they do burst; the governments that have been pumping money into the financial sector may find themselves with few tools left in the box to avert a massive crisis.
Given that governments already have vast debts and are the main purchasers of their own bonds, adding further massive amounts of debt to bail out corporations when the bubbles burst may not be an option. Likewise, governments are being forced to gradually raise rates, rather than reduce them, which they used as one mechanism to assist companies in the crash of 2008.
The bad news for the ruling class, their governments and companies (and possibly everyone, including the working class) is that they are running out of space to manoeuvre and they are running out of time.
When the crash does become a reality, the political and social consequences will be chaotic and very uncertain.
Given the fact that the working class internationally is weak, further shifts to the right and even fascism could be a real outcome.
If the working class is to prevent this, it needs to revive a politics in opposition that has an effect on the actions of the ruling classes, their governments and capitalism