debt to take a hit? Or will the pain be forced onto workers and small and medium-sized businesses, while investors in the corporate sector remain hooked up to government life support in perpetuity?
We have no answers to any of these questions, and the fact that the governments of the US and the UK seem to be making things up as they go along does not make it any easier to guess. In the context of this dramatic – almost unprecedented – uncertainty, the optimism of the summer months of 2020 is, at some point, likely to give way to a self-reinforcing cycle of pessimism. Although much depends on the policy response, societies around the world are facing mass unemployment, falling incomes and widespread corporate and personal defaults. Far from a V-shaped recession, it will probably take years for the economy to recover to pre-crisis output levels. The UK’s services-dependent economy is expected to be the worst hit within the OECD.7
The severity of the pandemic-induced recession is at least in part a result of the pre-existing vulnerabilities of the global economy. After a decade of slow growth, surging debt levels and rising inequality, we can rarely have been worse prepared for a new recession. The recovery from the 2008 financial crisis was characterised, above all, by stagnation – of wages, productivity and investment. Many wealthy economies saw the share of national income taken by labour fall.8 For the first time in decades, globalisation had gone into ‘retreat’, owing to the difficulties of its financial wing. Crossborder capital flows declined by 65 per cent between 2007 and 2016.9 Global growth was buoyed only by incredibly cheap credit and public investment undertaken by developmental states in the Global South. Central bankers were forced to keep the economy on life support through ultra-low interest rates and quantitative easing. But even with monetary policy so loose, private investment in fixed capital was not forthcoming. Instead, the main effect of low interest rates was to inflate a debt bubble three times the size of global GDP.10
The problem was clear: capitalism had lost all momentum. Many economists were predicting that a recession would hit the US, the UK and the Eurozone by 2022.11 The yield curve, which shows the returns on US Treasuries of different maturities, had inverted for the first time since 2007 – meaning that short-term government bonds had higher yields than long-term bonds.12 An inverted yield curve has augured every major recession for the last half century. In the end, the recession came earlier – and hit unimaginably harder – than expected.
All over the world, capitalists were already looking to nation-states to save them from the overlapping crises of secular stagnation, populism and climate breakdown. The Covid-19 recession has strengthened demands for government intervention, while further weakening profits and increasing the dependence of capital on the state. Central bankers and politicians have staged unprecedented economic interventions, not to help the most vulnerable through this crisis, but to save capitalism from itself. The beneficiaries will be big business, big banks and powerful political interests.
As the coronavirus unfolds in the UK, the Right is in power, and they are demanding that journalists, citizens and even health officials fall in line behind the government narrative. Questioning government policy – whether on monetary policy, statutory sick pay or welfare payments – is ‘politicising’ a public health crisis. The idea that the coronavirus crisis can be ‘politicised’ is to imply that it is not already an inherently political event. Of course, the outbreak of the virus was a natural event – though one that seems to have been prompted by unsustainable farming practices undertaken in the name of profit maximisation.13 But its economic impact, and, in particular, the distribution of costs, could not be more political. And governments are working hard to ensure that the costs do not fall on the wealthy and powerful.
In the US, Congress passed a $2 trillion stimulus package including loans to businesses that face a huge loss of revenue, while the Federal Reserve effectively moved to a policy of ‘QE infinity’.14 In other words, the Fed will not stop purchasing assets (using newly created central bank money) until it is satisfied that the risk to financial markets has passed. There is also an alphabet soup of asset purchasing and liquidity programmes supporting other markets. Through the CPFF, PMCCF and SMCCF, as well as the TALF, PDCF and MLF, the Fed is backstopping the market for corporate debt – paying little attention to firms’ creditworthiness and absolutely no attention to their environmental impact or record on workers’ rights – and the market for mortgages, auto loans, student loans and municipal bonds.15
More important than understanding the details of each of these programmes (which are truly vast) is understanding what they signify: the government is demonstrating its willingness to backstop the debts of US consumers, firms and states in order to prevent insolvencies and place a floor beneath falling asset prices. On the one hand, this seems like a positive short-term measure – few would argue that the Fed should simply allow personal, corporate, state and municipal bankruptcies to soar. But it also reveals something profound about the nature of modern capitalism. While there will be more business failures to come, particularly in vulnerable sectors such as high-street retail, the state is signalling to the corporate world at large that no matter how much debt it accrues during the upswing – and no matter what purposes it uses this debt for – when the crisis comes, it will be bailed out.
The implications of this message – which is also being sent by many other central banks around the world – are profound. The risks of running an investment-grade business have been socialised, while the gains have remained private. ‘We are all governmentsponsored enterprises now’, observes Scott Minerd of Guggenheim Investments.16 Investors are protected while the public pays the price. Over the long run, QE infinity will simply push up asset prices – including house prices – exacerbating wealth inequality. The realisation that central banks are willing to do almost anything to backstop their domestic corporate sectors and protect private wealth is a big part of what drove the stock market rallies seen through April and May 2020.
The Bank of England, the Bank of Japan and the European Central Bank have all scaled up their own asset purchasing programmes, expanding both the size of the programmes and the range of assets they are prepared to buy. These central banks are also relying on the ongoing provision of dollar liquidity through the Federal Reserve’s swap line network, which has become all the more important given the dramatic expansion in dollar-denominated loans held by nonbank institutions outside the US, now thought to be worth around 14 per cent of global GDP.17
The trillions of dollars’ worth of loans, grants and guarantees that have been generated by central banks and treasuries, in an unprecedented show of public policy firepower, quelled some of the panic in financial markets, but they have not solved the problem. In fact, piling new debt on top of old, unpayable debts will simply defer the inevitable reckoning for another day.
The general tendency across most markets will be towards consolidation, as smaller, weaker businesses fold under the pressure, or are swallowed up by their larger rivals. Some corporations will not only withstand but even gain from this crisis. Many of the world’s largest businesses were sitting on huge cash piles before the pandemic hit, providing them with the cushion they need to weather a period of falling revenues. Others – Amazon, Netflix and some of the social media giants – actively profited from the increased demand for their services in response to the lockdown.
What follows is a preliminary attempt to understand the political economy of the pandemic; I hope to return to these themes more fully in due course. We urgently need to understand the likely impact this crisis will have on our economy and prepare accordingly. The rise in state spending currently taking place across the Global North will not usher in a socialist nirvana. Instead, as Robert Brenner writes, policymakers have concluded ‘that the only way that they can assure the reproduction of the non-financial and financial corporations, their top managers and shareholders – and indeed top leaders of the major parties, closely connected with them – is to intervene politically in the asset markets and throughout the whole economy, so as to underwrite the upward re-distribution of wealth to them by directly political means.’18 The legacy of the corona crash will be the concentration of economic and political power in the hands of a tiny oligarchy, composed of senior politicians, central bankers, financiers and corporate executives in the rich world.
The challenge we will face