North America, western Europe and Japan are caught in a stagnation-financialisation trap.
As we pen these lines, the 44th Annual World Economic Forum at the
Swiss Alpine resort of Davos skis into itssecond day. The individual net
worth of the world’s billionaires has zoomed upwards in the year gone
by and continues to as stocks rally in the new year, never mind the
austerity measures, the lay-offs and the wage cuts imposed upon millions
of working-class people. Along with a mix of prime ministers and
presidents, top officials in governments, central banks and
international institutions, corporate CEOs, and, of course, celebrities
and “social entrepreneurs”, the super-rich are discussing the “reshaping
of the world” and its “consequences for society, politics and
business”.
But talking in Washington about the “safety” of the international
financial system, just the week before, the managing director of the
International Monetary Fund, Christine Lagarde, mentioned the
unmentionable – the threat of deflation. Deflation, she said, was “the
ogre that must be fought decisively”. Now, in folklore, an ogre is a
man-eating giant, cruel and terrifying, and that is why one dare not
speak its name; deflation is considered a subject out of bounds, beyond
the pale, off limits. But, in late 2002, Ben Bernanke, when he was a
member of the board of governors of the United States Federal Reserve
and not yet its chairman, did talk about deflation and “making sure it
doesn’t happen here”, an historical account though. The important point
here, however, is that the general decline in prices is merely a side
effect of a more catastrophic economic disaster – a severe collapse of
aggregate demand that obliges firms to cut prices in order to find
buyers. Deflation, if it does occur in the US, western Europe and Japan,
even with nominal interest rates close to zero, will raise real
interest rates to further dampen capital spending, thereby worsening
economic stagnation. Moreover, it will heighten the financial distress
of debtors, increase the already high share of bank loans that are in
default (because the real value of the debts escalates), raise the
number of bankruptcies and bank failures, and thereby heighten the
fragility of the financial system. All this did happen in the US during
1930-33. Can it happen again?
It is intriguing why Lagarde is warning of such a possibility now.
Certainly the rate of inflation is much below the 2% annual rate that is
the target of most of the central banks in the developed capitalist
countries, this despite the very easy monetary policies being
implemented. But as far as the real economy is concerned, the latter has
been like “pushing on a string”, as the good old economics textbooks
once put it. The Fed’s “quantitative easing” (QE) – to reduce long-term
interest rates by purchasing massive amounts of long-term US government
bonds – has not managed to stimulate the real economy through easing
liquidity. It has not quite managed to resume the flow of credit in the
real part of the economy. But Lagarde and a section of the transnational
financial elite want this highly accommodative monetary policy to go
on. The reason is that the funds made available to Wall Street at very
low interest rates as a result of the QE programme have been used to
speculate in the financial markets and keep them buoyant. Indeed,
financial speculators have used these cheap funds from the US to
“invest” in the emerging markets to reap high rates of return.
The question being asked is whether the new chairman-designate of the
Fed, Janet Yallen, will allow this party of the financial aristocracy
to go on. Lagarde and the financial aristocracy, the latter the
super-rich beneficiaries of the QE programme, certainly want it to. So
also the bonus recipients among Wall Street bankers – the bonus pool at
Goldman Sachs is said to have increased by $600 million in 2013, mainly
as a result of the rise in the investment banking firm’s share price.
Lagarde seems to be placing her hopes of keeping the global economy
afloat on the emerging markets to which a part of the cheap funds flow.
But some of these economies have also slowed down, and if the QE
programme is now tapered off, economic growth there may fizzle out,
taking the world economy down with them.
One of the world’s most prescient economists of the present economic
malaise has been the late Paul Sweezy, who, way back in the 1970s,
viewed the financialisation of the process of capital accumulation as
one of the ways in which a mature monopoly-capitalist economic system
tries to overcome its tendency to stagnation. He, along with his
colleague, the late Harry Magdoff, who handled facts and data so well,
both then editors of the
Monthly Review, in the 1980s, explained
why financialisation emerged as a hazardous rescuer of the faltering
economy, also hinting at grave political and global repercussions when
the monopoly-capitalist economies are caught in the
stagnation-financialisation trap. This is exactly the present economic
malaise in the Triad – North America, western Europe and Japan – and its
grave political repercussions cannot but be far off.
