The Global Economy Is Surging

The global economy is surging. Chinese GDP rose by more than 18% in the first quarter of this year. The IMF forecasts global growth for the whole of 2021 to rise to 6%, with US growth coming in at 6.4%. The 33% bounce back in US GDP in the final quarter of last year, gives some idea of the bounce back that can be expected in the next quarter, as lockouts are ended, especially given all of the stimulus that is being pumped into the economy, and it feeds into stronger global growth, such as that already seen in China. These figures have already been revised sharply upwards since January, and with stimulus packages still being introduced across the globe are likely to be revised upwards sharply again. The Eurozone Purchasing Managers Index, for manufacturing, has come in at a record 63.3 for April, again up from the March figure. The Eurozone Composite Index, which combines manufacturing and the much larger service sector, has also risen to 53.3 for last month. Any figure above 50 represents economic growth.

Yet, the world has not yet fully opened up from all of the government imposed lockdowns that have crippled economies during the last year. When those lockdowns end, in coming weeks, the surge in the global economy is likely to be even greater, and the vast oceans of liquidity that have been released are going to be soaked up by that expansion, as companies scramble to increase output to meet rapidly rising demand, to find available workers, and means of production. Already, the inevitable consequences of that are being seen in rapidly rising inflation of food and primary product prices. As companies seek to expand after a period when their own profits and revenues have disappeared due to lock down, and their balance sheets have been denuded, they are going to need to borrow like there is no tomorrow, pushing interest rates sharply higher. In fact, that is already being seen as companies seeking capital compete with governments that have engaged in huge borrowing to finance furlough and other income replacement schemes, as well, now, as major fiscal stimulus programmes in infrastructure, for capital. Yields on bonds have soared in recent weeks, even though in absolute terms they remain very low.

This illustrates the point I made some months ago in response to Paul Mason. Paul had argued,

“We’ve entered the worst economic slump since 1921, with a global economy that was already stagnant, heavily unequal and debt-burdened. Anyone who thinks the current geopolitical order will survive hasn’t understood the 1930's.”

But, as I pointed out, this is not the 1930's, and although the lockdowns and lock-outs caused the worst economic slow down in 300 years, that was not at all the same as the crisis and depression of the 1920's and 30's, which resulted from an overproduction of capital. There is no overproduction of capital currently. On the contrary, when businesses are allowed to operate, profits remain high, as does the rate of profit. The economic slowdown was a purely self-inflicted wound imposed by governments, not a result of economic conditions. And, because profits are high, when firms are allowed to operate, and the rate of profit remains high, and because, in the main, capital itself has not been destroyed during this period, as soon as firms were, and are allowed to operate, in conditions where huge amounts of liquidity have been pumped into the economy, as income replacements etc., demand surges, businesses raise prices, and obtain even bigger profits, prompting them to want to reap whilst the sun is shining, by expanding their output, which means taking on more labour, buying in more materials and so on.

As I said at the start of the lockdowns, this will be uneven. Some capital has been destroyed. Some small businesses were crushed. Small shops and service providers have gone bust, and the capital they had, small scale but possibly in large numbers, which will only be apparent when furlough schemes end, is no longer functional, unless others come along, in a similar line of business, to pick it up on the cheap. Some large scale capitals have been hit hard, such as airlines, airports, as well as aircraft producers, car producers, and in Britain, Brexit has exacerbated that, but governments are not going to allow these large strategic industries to go to the wall. They will encourage some further concentration and centralisation of capital, through mergers and acquisitions, but they will also be forced to hand over huge sums in bailouts to keep them going, whilst they rebuild revenues and balance sheets. So, when furlough schemes end, we will likely see a sharp rise in unemployment, even as, in other spheres the demand for labour rises sharply pushing up wages. This will be a problem of the wrong type of labour in the wrong places.

But, the 1930's, this most certainly is not. As I said, at the start of the lockouts, what this will do is to accelerate some of the processes that were already underway, such as the death of the High Street, the shift to online retail and so on. But, also what it means is that this surge in economic activity, the surge in demand, causing prices and interest rates to rise sharply, spells the end of the dominance of fictitious capital that has been in place since the 1980's, and which has been sustained beyond its normal bounds, as a result of state intervention via QE to inflate asset prices, and austerity to hold back economic growth.

QE could inflate asset prices only so long as government debt issuance was kept at lower levels, so that, as central banks bought existing bonds, their price rose, encouraging other speculators, and financial institutions to pile money into such speculation, starving the real economy of those funds. But, the astronomical levels of borrowing to fund unproductive consumption, over the last year, which is going to continue and increase into the next year, to finance bail-outs, infrastructure spending and so on, means that bond issuance, and other forms of debt financing is going to rise sharply. As an experiment in MMT, nearly all of the money that central banks might now pump into circulation to buy bonds, is money that is going to feed straight out into the real economy, raising inflation, and spurring further economic activity, which will spur on additional investment, which will spur on even more borrowing, and more economic activity, which will cause interest rates to rise further. The proponents of the Magic Money Tree will want to claim credit for the economic expansion, which would occur anyway, though not at the same pace, but, of course will not want to accept responsibility for the sharply rising inflation, or interest rates, or the crash in asset prices that will result from it, which could again result in attempts at a return to even worse austerity, as the state attempts to protect the ruling class owners of that fictitious capital.

Rising interest rates cause asset prices to fall, because they reduce the capitalised value of the revenues of those assets. With yields on assets at such absolutely low levels, even small absolute rises in rates represent large proportional increases, and correspondingly large falls in asset prices. As asset prices fall sharply, and as economic growth accelerates, it becomes a no-brainer for anyone with money-capital to put it to work productively in real production, where rates of profit will be many times the yields available on assets. The only thing that has driven money into the speculative purchase of assets that, in many cases, already have negative yields, is the prospect of high levels of capital gain, from continued asset price hyperinflation, stoked and underpinned by central banks. Now, that will have gone.