08 January 2012

Weak points in the global economy

A dangerous new year, Part 2 of 3

If there is to be an intensification of the crisis in 2012, where is it likely to start? At the moment, implosion in the eurozone seems the most likely possibility. The EU is probably already in a recession, and growth will be further strangled by the increasingly tight grip of austerity as the major economies of Italy and Spain implement the same measures that have already destroyed the Greek economy. With mounting social unrest and the increasing implausibility of recovery in Italy and Spain, investors will once again run for the exits, forcing the ECB and Germany to finally decide whether they will bail out the southern countries or set about drawing and quartering the euro.

Even without a sudden collapse, Europe’s prospects are bleak. But a sudden intensification of the crisis would spread the panic to China (15.6 percent of Chinese exports went to the EU last year through November, making Europe its largest market) and the US, exposed mainly through investment.

East Asia is vulnerable to a downturn in its export markets to the west, but its own internal problems pose at least as big a threat. Neither Japan nor South Korea look like having a strong year, but the real danger is a hard landing for China’s economy. With its major export markets stagnant or worse after 2008, China maintained its rapid growth rates by inflating a huge speculative bubble in real estate and spending massive amounts on infrastructure. This strategy is now running out of steam. The government spent the last year attempting to ease the housing bubble down, but it now risks losing control of the process. Infrastructure spending is slowing as debts pile up, revenues fail to materialize, and corruption scandals proliferate. Popular discontent, much of it directed against arrogant and abusive officials, is a tinderbox that would have a significant economic impact if ignited.

The Chinese state, unlike those of the other major economies, both understands broadly what it needs to do to move toward a new growth model and probably has the capacity to do it. But any wrong step, moving too quickly or too slowly in any one of the multiple realms it must coordinate, could rapidly undo the whole project. If that happened, it could pull down the rest of the global economy. The direct effects on the rich countries, which rely much less on exports to China than vice versa, would be limited. But it could set off a new financial crisis as China’s demand for raw materials evaporates, taking with it the sheen of plausibility for financial operators’ speculation in the commodities markets. The effects on global investor confidence, as the only bright spot in the world winked out, could also be substantial.

Finally, despite a new round of surging optimism that the US economy is finally on the mend, glaring weaknesses still cloud the horizon. Consumers remain highly indebted. The housing market is still a wreck. Although there have been several months of minute increases in the jobs numbers, wages are still not rising. Political paralysis makes further job losses in the public sector likely.

These problems are all symptomatic of the underlying dysfunction: the growth of the last 15 years, founded on debt and speculation, is no longer viable. Businessmen, immersed in the immediacy of their trade, don’t know what to expect, so the rising volatility in asset markets is no surprise. The recent uptick in other indicators like jobs might best be understood as another example of the volatility in business sentiment, which follows from investors’ inability to understand the objective possibilities before them.

If this interpretation is right, it won’t be long before there’s another slump in confidence, which could be set off by the slightest infelicity: another temper tantrum by the Republicans, some sharp fluctuations in the commodity markets, the faux populism of the Obama campaign, another round of popular unrest. This time it might soon correct itself, but it might also develop momentum and pull the economy back into recession.

The danger of “contagion” among the world’s three great value complexes should not be overstated – the internal regional markets of all three are much more important than the trade conducted among them. Even in China, most dependent of the major economies on exports, less than 10 percent of so-called value added takes place in the export sector.

The real threat of a blow-up in any one of these regions is not in the direct effects of slumping demand for the exports of the others. Rather, a sudden shock in one place threatens to reveal as fraudulent in all the major economies the misplaced confidence in valuations of all kinds that is still propping up the global economy. This is not merely a matter of speculative bubbles but extends deep into the so-called real economy, where judgments about the value of production are based on the false assumption that output will ultimately find a market.

Once this is revealed as a sham, we can expect a wave of disinvestment, one of whose effects would likely be to tip the extremely fragile global financial system over the cliff. Assuming, that is, events don’t move in the opposite direction, with another financial crisis pulling down the rest of the global economy. The exact succession of events in the collapse will be somewhat contingent, but however it unfolds it will follow from the underlying contradictions now grinding away at the foundations of the global economy.

In either case, having already exhausted the conventional tools of fiscal stimulus and monetary policy trying in vain to overcome the first collapse of 2008, all the major states would find their backs to the wall. And facing them would be an enraged mob animated by whatever populism is able to seize the moment.

Part 1: Capital’s global terrain
Part 3: Towards the disintegration of the global economy?


  1. Here's an indication of what may be driving the temporary improvement in US indicators: a big jump in consumer borrowing in November. If borrowing took off again, we could even see a return to debt-fueled growth that could go on for years before another spectacular collapse. But far more likely is that consumers, whose psychology has been permanently altered by the crash of 2008, will lose confidence and we'll see those numbers drop again soon.

  2. I wonder whether what the other possibilities are than a collapse in a major value center. It seems to me that the problem of lagging demand in North America might become moot if demand rises in China or BRICS countries. I understand that seems unlikely with growing disinvestment in China and massive inflation in South America, but I think to be rigorous we need to consider the possibility for some epochal shift in the configuration of accumulation away from the traditional value centers. If this isn't possible without catastrophe, why not? If this isn't likely without catastrophe why not?

  3. Yes, that's a fair point, but given the extremely limited position of the peripheral countries, especially in terms of productivity, demand would have to increase massively there to make up for even a minor contraction of demand in the rich world. China is the wild card, because it starts from a higher level, the capacity of its state to manage the economy is greater than any other, and the state actually has a pretty solid game plan for the transition.

    So it's definitely possible that if the rich world can stumble along without a big crash for a few more years, and if China can navigate the numerous dangers in its path and simultaneously keep its extremely high growth rate going, and at the same time several of the main peripheral economies - India, Brasil, Indonesia, México, Russia, Turkey - start attaining China-like rates of (non-speculative) growth, then there could be a fairly smooth transition to a new global configuration of growth. Obviously that's a lot of conditions, but we should keep the possibility in mind.