Governments around the world, at least for now, have stopped yet another global financial crisis with their bailouts of Silicon Valley Bank and others. Yet, the financial and economic crisis is far from over, especially as state competition between the United States and China fragments global capitalism. Ashley Smith interviews Michael Roberts about the system’s seemingly intractable crisis, the looming threat of war between great powers, and the desperate need for international working-class solidarity against militarism.
Michael Roberts is the author of The Long Depression: Marxism and the Global Crisis of Capitalism (Haymarket, 2016) and, with Guglielmo Carchedi, Capitalism in the 21st Century (Pluto, 2022). He writes regular commentary and analysis on his blog, “The Next Recession.”
The banking crisis is not over—it has just rolled onto a new phase. The banking busts in March revealed the impact of sharply rising interest rates, driven by central banks supposedly to “control” inflation, on the financial system in the United States and Europe.
Banks found that customers were shifting their deposits from banks to better yielding alternatives like money market funds. Even though higher interest rates usually mean better bank profits (and some larger banks have certainly got bigger profits), deposits fell sharply for the smaller regional banks.
Those banks that had used deposits to buy “safe” government bonds now faced a crisis when the value of those bonds declined sharply as interest rates rose. Silicon Valley Bank and First Republic could not fund the deposit outflow and had to be bailed out by public money and taken over by bigger banks. In Europe, Credit Suisse, a very old bank with serious underfunding problems, was forced into a merger with its rival UBS by the Swiss government.
Deposit outflows continue at a slower pace but now the crisis has moved onto an acute reduction in lending by the banks to small businesses. This is increasing the risk of bankruptcies in the non-financial sector and squeezing profits for business as interest costs rise. In Europe, the European Central Bank is worried that lending is increasingly done by non-banks, so-called shadow banks, outside their supervision, which is creating significant vulnerability to further crashes.
Moreover, regulation has clearly failed to stop bank runs and busts and the spread of a credit squeeze to the non-financial sector. One result of all this is an increasing concentration of banking—for example, JP Morgan, the largest U.S. bank, now has 40 percent of all deposits and is sucking up small banks. The same will happen in Europe.
Such a concentration makes it even more compelling to bring the finance sector into public ownership and end the speculative-driven crises. If the Federal Reserve (Fed) and the European Central Bank continue to hike rates, deposit outflows will continue and lending will fall, increasing the trend toward outright recession.
I am not sure that the Fed, the European Central Bank, and the Bank of England will pause interest rate increases. The Fed may do so this month but resume next month, and the European Central Bank and Bank of England will definitely hike again.
Inflation rates are still “sticky”—that is, the headline rates are falling as energy and food prices fall back a little, but the so-called core inflation rates that exclude food and energy are only slowly receding. They will still be well above pre-pandemic rates into 2025. High interest rates are here to stay for some time.
The inflation rates may be slowing but the accumulated increase in prices since 2020 is now 15 percent and more, and that is there forever. Wage increases over the same period are much less, while mortgage rates and rents have rocketed to thirty-year highs.
If a “soft landing” means no outright slump, that is technically possible in the United States—meaning that real GDP does not contract—but not in Europe. But if it means a resumption of reasonable economic growth, say above 2 percent a year (still pretty feeble), along with improved workers’ real incomes and lower prices, there is no “soft landing” ahead.
As for the poorer Global South, the situation is now dire. Higher global interest rates and a strong dollar have driven many very poor countries into debt defaults. Poverty levels are rising as inflation on basic commodity prices rocket. According to the World Bank, there are now fourteen low-income countries at high risk of debt distress and by the end of 2024 about one-third of all so-called developing economies will still have lower incomes per person than in 2019.
The U.S. stock market appears to be booming as inflation rates fall back and profits (for a small elite of companies) continue to be strong. But the stock market index rise is concentrated in just a few energy and tech behemoths—the rest of the company market prices are marking time. Profits for the vast swath of companies are now declining.
Productive investment remains weak, and productivity is actually falling. And that’s the United States—the best-performing major developed capitalist economy—where economic growth will be lucky to reach more than 0.5 percent this year and may contract in the second half of 2023 and into 2024. Hardly a boom. The official unemployment rate remains low historically but is starting to tick up and employment participation is not moving.
Most jobs are not paying enough to cover inflation rises. Moreover, employment is a lagging indicator of oncoming recession—first it’s profits, then investment, then sales, and only then employment.
The eurozone economies are in the doldrums and Germany is contracting. The UK is a disastrous mess with near 10 percent inflation and stagnation in GDP. Even China is unable to achieve pre-pandemic growth rates as world trade drops off and mounting corporate debt squeezes profits in its capitalist sector.
In my view, the world economy is still in what I have called a Long Depression, where GDP, investment, productivity growth, and profitability remain low. This has now lasted for nearly fourteen years since 2009. Previous depressions (1873–97 and 1929–46) lasted even longer. So, the prospects of a long new boom or recovery in capitalist production is still distant.
Marxist economic analysis reckons that such a revival of capitalism for, say, a twenty year period, first requires a sharp and sustained boost in the profitability of productive investment sectors. This would only be possible if there was a significantly deep slump that cleared away the “dead wood” of the capitalist sector, the zombie companies that make no profit. Such a slump would involve widespread bankruptcies and probably double-digit unemployment rates.
The political reaction to such a slump is why the monetary authorities and governments have chickened out and opted for bailouts, cheap credit, and rising public borrowing to avoid a major slump, thus lengthening the Long Depression. Even so, economies have suffered two such slumps in 2008–09 and 2020. But governments resorted to bailouts and subsidies to avoid a meltdown, thus driving up debt.
If profitability could be raised sufficiently, then companies could take advantage of the new artificial intelligence/robot technologies to boost productivity and shed labor over the long term. This could provide a new period of growth for capitalism.
But it is increasingly difficult for capitalism to make this happen. U.S. hegemony is weakening, and the globalized capitalist world is fragmenting. The climate crisis is coming fast. This does not suggest a new golden age for capital.
The turn to “industrial strategy” by Biden in the United States is founded on the relative weakening of U.S. hegemony in world markets and for the dollar. Globalization and free trade were the mantra of neoliberal policies from the 1980s and 1990s. The Washington Consensus was the bible for this.
Now the end of globalization after the Great Recession of 2008–09 and the startling rise of China as a rival economic power has led to a change of strategy by U.S. capital. Starting with Donald Trump, the United States has ditched the World Trade Organization and trade liberalization for more protection, subsidies, onshoring of industry, and sanctions against rival economies, especially China.
The International Monetary Fund points out that this turn from globalization can only damage prospects for world economic growth and trade expansion, and the U.S. large multinationals are fearful of profit loss from the turn.
The New Washington Consensus not only means a move to subsidies for domestic industry and trade tariffs, and sanctions on rival economies; the United States is also demanding that other capitalist economies in Europe and Asia apply the same measures against China and others, or face the consequences too. Their economies will weaken as a result.
Whether they like it or not, companies are being forced to reorganize their supply chains out of China and into other areas, which is very difficult if not impossible and will reduce productivity and drive up prices.
The globalization trend from the 1980s and 1990s came to an end with the Great Recession of 2008–09 and the ensuing Long Depression of the 2010s. That also meant a change of policy toward China from the United States. The previous policy of engagement with and investment in China gave way to the policy of containment, with the aim of strangling China’s economic rise, isolating it politically and surrounding it militarily.
The relative weakening of U.S. economic and political power and dollar dominance is leading to a more fragmented world where many countries do not want to fall into line with the United States and its junior imperialist partners. This multipolar world is beginning to look like the interwar years of the 1930s where no one power was able to dictate terms. That was also the case from 1890s in the late nineteenth century depression. It is frightening to think how these trends were resolved—by world war.
Socialists must start from what benefits labor and weakens capital. If industrial strategy involves public investment and more jobs in green industries, we should support it. But much of the industrial strategy planned by Biden and other governments is really just huge handouts and tax exemptions for capitalist companies—profits are soaring for companies in these projects.
Most important, the so-called industrial strategy will not succeed in transforming the U.S. economy. Biden’s program is a pale imitation of Franklin D. Roosevelt’s New Deal in the 1930s and even that failed to bring about full employment and strong growth. It took war to do that.
Biden’s budget after the debt ceiling farce plans to spend over $1 trillion a year on arms and defense but only $600 billion a year on public services and needs (outside of social benefits). Education, Medicare, transport, social care—all are being cut in real terms to prepare for war.
The Russian invasion of Ukraine and the subsequent slaughter of thousands and emigration of millions is a dress rehearsal for an even more catastrophic confrontation in Asia between the United States and its “coalition of the willing” and China.
We need international solidarity among the workers’ movements of Russia, Ukraine, China, Europe, and Asia like never before. The governments now running these countries must be replaced by democratic workers’ governments that remove the power of capital and can then cooperate to deal with poverty, climate change, and the protection of natural resources together, establishing a world without continual wars. This cannot be done by capital—only labor can do it.