Archive for category: #NextRecession

There has been a burst of optimism about the state of the world economy since the beginning of the year. At the end of last year, the consensus of many economic forecasts was that the major economies were heading into a slump in 2023. Most of the internatiol agencies were forecasting a slowdown in economic growth at best and at worst a contraction in national outputs of the major economies. I too posted a forecast for 2023 as “the impending slump”.

But now the mood has changed. The consensus view is that the G7 economies (with the sorry exception of the UK) will avoid a slump this year. Sure, there will be slowdown compared to 2022, but the major economies are going to achieve a ‘soft landing’ or even no landing at all, but just motor on, if at a low rate of growth. The international agencies have upgraded their forecast for growth.

Whereas the Eurozone economies were expected to contract in 2023 because of the energy crisis and Russia-Ukraine war, now the EU Commission reckons that the region will avoid a ‘technical recession’ this year. The winter was warmer than expected and oil and gas reserves built up by Eurozone governments (at great expense) have managed to avoid power outages despite applying sanctions on Russian energy exports. Unemployment has stayed low and consumers have continued to spend more, using up savings built up during the COVID lockdowns. At least, that is the explanation provided for renewed optimism.

The IMF too has joined the party in revising up its forecasts. And the IMF chief economist now firmly rules out a recession in the major economies this year (again with the exception of the UK). Pierre-Olivier Gourinchas, said 2023 “could well represent a turning point”, with economic conditions improving in subsequent years. “We are well away from any [sign of] global recession.” Its world growth forecast for this year has been lifted from a previous 2.7% to 2.9%, basing its estimate, not just on a warm winter in Europe but also on the opening-up of the Chinese economy after the end of its zero-COVID policy. This would boost production globally and also demand for European exports. Half of this year’s forecast expansion will come from China and India alone as the major advanced economies will slow to 1-2% growth, with the UK the only major economy contracting.

As for the US, the mood is very positive. Last month’s net job figures showed a jump of over 500,000, with the official unemployment rate falling to 3.4%, its lowest in 54 years! Also the latest retail sales data showed a sharp jump up in January, suggesting Americans are continuing to spend and keep the economy buoyant. As the labour market is booming and consumers are spending, all talk of a recession this year is clearly baloney.

But wait, let’s examine the data more closely. Continuing with the US economy, the best performing among the top seven (G7) capitalist economies, much of the last year’s increase in employment and the low unemployment rate can be explained by statistical adjustments and by the large number of people who have not returned to work after COVID, thus causing a very tight labour market. January saw a statistical adjustment that added in an extra 1.6m to add to the payrolls that had been missing from data. And here’s the other thing. Back last March 2022, there were 132.6m Americans in full-time work. In January 2023, there were 132.6m. So there was no increase in full-time jobs in ten months. Instead part-time jobs rose by 1.5m! What we have is a ‘strong’ labour market where workers can only get part-time, often casual work, and where they often take two or three jobs to make ends meet in the face of rocketing prices of necessities.

And remember even if the international agencies have raised their forecasts for this year just a little, they are still forecasting very weak growth in 2023 – indeed economic growth way below the ten year average pre-pandemic, which in turn was below the average in the years before the Great Recession of 2008. The IMF calculates that the pandemic slump has ‘scarred’ economies to the tune of an average 4% pts loss of real output since 2019 relative to trend growth before.

Even though the IMF has ticked its forecast up along with a more optimistic view of this year’s economic activity, its 2.9% global forecast is still well below the average of 3.8% a year during the Long Depression of the 2010s, which in turn was a downgrade of growth before the Great Recession of 2008-9. The fastest growing G7 economy this year will be Japan at 1.8%. The UK will be the only economy in a slump. The Eurozone is forecast to grow only 0.7%.

The Eurozone economy grew just 0.1% in Q4 2022, so no contraction. However, this figure included the ludicrous GDP growth recorded for Ireland. Germany and Italy contracted while France just escaped contraction. Outside the Eurozone, both Sweden and the UK contracted. Overall investment is still below the level at the end of 2019.

It’s a similar story in the US. US real GDP growth has slowed from 5.4% yoy in Q4 2021 to just 1.0% yoy in Q4 2022 (by Greg Daco). More significant, inventories (ie stockpiling goods) contributed over half the annual rate in Q4. Sales to Americans (consumers and producers) were virtually flat, while business investment rose at under a 2% rate.

US real GDP growth has finally returned to its pre-pandemic trend rate but after three years of recession and below trend growth (by Jason Furman).

And let’s weigh in with the factors that suggest the US is heading for recession this year. First, a sizeable section of the economy is already contracting. The housing market has been slumping for months. Productivity growth has been virtually non-existent, thus keeping output growth dependent more employees and driving up production costs per unit of output, both for raw materials and for wages.

Indeed, the manufacturing sector in most major economies is already contracting. The US manufacturing PMI ( a measure of activity) is well below the contraction point of 50.

And there is the rising cost of borrowing. The Federal Reserve, the ECB and the Bank of England are all engaged in raising their policy rates of interest,ostensibly to reduce inflation rates that have rocketed in the last year or so. I have argued in several posts that the inflationary spike is not caused either by previously ‘excessive’ monetary injections or by ‘excessive’ demand generated by too much government spending – and certainly not from ‘excessive’ wage demands by workers. The cause lies with the failure of the capitalist sector to supply enough to meet the demands of workers and capitalists as economies came out of the COVID slump; particularly in energy and food – and of course, the fossil fuel and other companies have taken advantage of shortages by raising prices.

As Andrew Bailey, governor of the Bank of England, once said: “Monetary policy will not increase the supply of semiconductor chips, it will not increase the amount of wind (no, really), and nor will it produce more HGV drivers.” Nevertheless, the central banks continue with their ‘shock therapy’, which is only increasing the cost of borrowing and servicing existing debt while having little effect on inflation rates.

It’s true that headline inflation has peaked and is beginning to fall. But ECB board member Isabel Schnabel admitted only recently that the recent fallback in the headline inflation rate was not down to ECB policy. “You can’t say monetary policy is having such an impact that we can hope for inflation to reach our 2% target in the medium term.”

Inflation is subsiding a little mainly due to the peaking of energy and food prices. ‘Core’ inflation (excluding food and energy) is proving ‘stickier’. According to the IMF, even by 2024, projected average annual headline and core inflation will still be above pre-pandemic levels in more than 80 percent of countries.

Moreover, this is the inflation rate, not the level of prices. Even if inflation slows, it still means that price levels will remain much higher than they were before the pandemic – 15% higher in the case of the US, and much higher in other economies. That is a permanent hit to living standards and the ability to spend more, as wage increases and now even profit rises cannot keep up.

And what happens to profits is key in a capitalist economy. During the recovery in 2021 after the COVID slump, profits rocketed, partly from government subsidies and partly from the ability to raise prices. But now the worm is turning. Rising interest costs are squeezing at one end, while slowing economic growth and sales are squeezing at the other. Profit margins are falling from highs. According to FactSet, US corporate operating profits (sales minus costs) are falling.

As I have argued ad nauseam, if profits for capitalists start to fall and continue to fall, that will lead to an ‘investment strike’ and the laying off workers in order to reduce losses. Already we have seen that falling profits in the media-tech sector has meant sharp reductions in workforces. That will spread to the rest of the economy if other sectors cut back.

All the so-called ‘high frequency’ indicators of economic activity are signalling recession in the US economy. First, the bond yield curve remains inverted – I have explained before what this means as a reliable indicator of an impending recession. The inversion is now -80bp, which has not been seen since three months before the deep slump of 1981-2.

The New York Fed recession probability indicator stands at 57%, higher than before the Great Recession.

And the very pertinent Conference Board Leading Economic Index (LEI) recorded its 10th straight monthly decline – the longest streak of declines since the global financial crash of 2007-8. The trajectory of the US LEI continues to signal a recession over the next 12 months.

Maybe the major economies won’t go into a slump this year. But even if the stats don’t show a recession, it will feel like it for millions in the advanced capitalist economies and for the billions in the so-called Global South, when output growth slows to no more than 1% a year in the advanced economies and well below previous rates in the Global South, when employment stops improving and unemployment starts to rise, while inflation rates continue to outstrip wage growth.

Can global capitalism endure? William Robinson tries to answer this question in his book entitled with the same question. Robinson is professor of sociology at the University of California, Santa Barbara. In a fast-moving account, Robinson covers a lot of ground in offering the reader a vision of the global capitalist crisis and the accompanying international conflagration.

It flows like an essay rather than a stodgy full-length book. As Robinson says, “my aim is to present a “big picture” snapshot in a shorter work and from the vantage point of global capitalism theory that takes into account some elements of global capitalism that have come further into focus in recent years, especially the ever-deeper financialization and digitalization of the global economy and society.”

As such, the book offers no original research and relies on the work of others. Fair enough, as Robinson’s objective is to convince the reader that the “survival of global capitalism beyond the present crisis requires a substantial restructuring involving a measure of transnational regulation of the global economy and a redistribution of wealth downward. Even at that, though, a new period of economic reactivation and prosperity will not bring to an end the threat to our survival. For that, we must do away with a system whose drive to accumulate capital puts it at war with the mass of humanity and with nature. Only an ecosocialism can ultimately lift us from the threat.”

Robinson bases his theory on the nature of crises in capitalism on Marx’s law of profitability, but with his own attempt to reconcile that law with alternative theories. “Marxist political economists have debated whether overaccumulation and attendant crises are caused by a fall in profitability or by overproduction and underconsumption. I am not convinced that these two approaches must be incompatible so long as we start the analysis in the circuit of production.”

Robinson agrees that capitalist crises have their origin in over-accumulation or the overproduction of capital. And that this overaccumulation originates in the circuit of capitalist production, ultimately in the tendency for the rate of profit to fall. And the evidence for this is strong. “While figures for the rate of profit tend to vary depending on who is doing the reporting and through what methodology, one report after another has confirmed the long-term secular decline in profitability, notwithstanding short-term fluctuations, and along with it, the steady decline since 1970 in the growth of the net stock of capital (a proxy for productive investment) in the rich countries of the Organization for Economic Cooperation and Development.”

Robinson agrees with me (see my book, The Long Depression) that crises in capitalism are both cyclical and secular, or ‘structural’. “In the history of capitalism there have been periodic crises of two types, cyclical and structural. Cyclical crises, sometimes called the business cycle, occur about once a decade and show up as recessions. There were recessions in the early 1980s, the early 1990s, and at the turn of the twenty-first century. World capitalism has experienced over the past two centuries several episodes of structural crisis, or what I call restructuring crises, so-called because the resolution of such crises requires a major restructuring of the system.” Here Robinson sympathises (as I do) with ‘long wave’ theory, namely that capitalist growth tends to take place in long waves beyond cyclical crises.

For Robinson, the most important structural change in capitalism in the last half of the 20^th century was globalization and rise of the multi-nationals. And in “this age of global capitalism the world economy is now inextricably integrated and functions as a single unit in real time.” But that trend came to an end in the 21st century and capitalism is now in a period of stagnation. “Wild financial speculation and escalating government, corporate, and consumer debt drove growth in the first two decades of the twenty-first century, but these are temporary and unsustainable solutions to long-term stagnation.”

Robinson argues that the accumulation of fictitious capital gave the appearance of recovery in the years following the Great Recession. But it only offset the crisis temporarily , while in the long run it exacerbated the underlying problem: “the key point with regard to the crisis is that the massive appropriations of value through the global financial system can only be sustained through the continued expansion of fictitious capital, resulting in a further aggravation of the underlying conditions of the crisis.”

Robinson makes the correct point, that “so gaping is the chasm between fictitious capital and the real economy that financial valorization appears as independent of real valorization. This independence, of course, is an illusion. The entire financial edifice rests on the exploitation of labor in the “real” economy. If the system came crashing down, the crisis would dwarf all earlier ones, with the lives of billions of people hanging in the balance. The unprecedented injection of fiat money into the financial system may result in a new kind of stagflation, in which runaway inflation is induced by such astronomical levels of liquidity even as acute inequality and low rates of profit prolong stagnation.”

Capitalism can only endure if it can find some new structural change. This Robinson sees coming possibly from “digital restructuring and through reforms that some among the global elite are advocating in the face of mass pressures from below”. That could unleash a new round of productive expansion that attenuates the crisis for a while. So capitalism could manage to “catch its breath again” through digitally-driven productive expansion that becomes strong enough to restore sustained economic growth and launch a new long boom.

However, Robinson counters, that any such expansion will run up against the problems that an increase in the organic composition of capital presents for the system, namely the tendency for the rate of profit to fall, a contraction of aggregate demand, and the amassing of profits that cannot be profitably reinvested. “But before such a time that a crisis of value would bring the system down, it is certainly possible that restructuring will unleash a new wave of expansion.” Robinson makes the pertinent point that “the breakdown of the political organization of world capitalism is not the cause but the consequence of contradictions internal to a globally integrated system of capital accumulation.”

But a new boom to happen, the state would have to intervene to build new “political structures to resolve the crisis, stabilize a new global power bloc, and reconstruct capitalist hegemony, given the disjuncture between a globalizing economy and a nation-state-based system of political authority.” And that seems unlikely, given the break-up of the US hegemony and the rise of a multi-polar world.

Robinson’s pessimism about the ability of capitalism to find a way out is compounded by the ecological crisis, which “makes it very questionable that capitalism can continue to reproduce itself as a global system.” Never before have crisis and collapse involved such matters as human-induced climate emergencies and mass extinction.

As Robinson sums it up: “the literary critic and philosopher, Frederic Jameson, once observed that: “it is easier to imagine the end of the world than it is to imagine the end of capitalism.” But if we do not imagine the end of capitalism—and act on that imagination—we may well be facing the end of the world. Our survival requires that we wage a battle for political power; to wrest power from the multi-nationals and their political, bureaucratic and military agents before it is too late.”

Every year, I analyse the US rate of profit on capital. This is because the US data is the best and most comprehensive to use and because the US is the most important capitalist economy, often setting the scene for trends in global capitalism. We now have the data for 2021 (that’s as far as the official national data go).

There are many ways to measure the rate of profit a la Marx – see http://pinguet.free.fr/basu2012.pdf). I prefer to measure the rate of profit by looking at total surplus value in an economy against total private capital employed in production; to be as close as possible to Marx’s original formula of s/(C+v), where s = surplus value; C = constant capital – which should include both fixed assets (machinery etc) and circulating capital (raw materials and intermediate components); and v = wages or employee costs. My calculations can be replicated and checked by referring to the excellent manual explaining my method, kindly compiled by Anders Axelsson from Sweden.

I call my calculation a ‘whole economy’ measure, as it is based on total national income after depreciation and after employee compensation to calculate surplus value (s); net non-residential private fixed assets for constant capital (so this excludes government, housing and real estate) (C); and employee compensation for variable capital (v). But as said above, the rate of profit can be measured just on corporate capital or just on the non-financial sector of corporate capital. Also profits can be measured before or after tax and the fixed part of constant capital can be measured based on ‘historic cost’ (the original cost of purchase) or ‘current or replacement cost’ (what it is worth now or what it would cost to replace the asset now). And it can also include circulating capital (raw materials and components used in a period of production) in addition to fixed assets (machinery, offices etc).

There used to be a big discussion over which measure of fixed assets to use to get closer to the Marxian view. For an explanation of this debate, see my previous posts and my book, The Long Depression (appendix). Fixed assets can be measured as historic costs (HC) or current costs (CC). The difference is caused by inflation. If inflation is high, as it was between the 1960s and late 1980s, then the divergence between the changes in the HC measure and the CC measure will be greater – see http://pinguet.free.fr/basu2012.pdf. When inflation drops off, the difference in the changes between the two HC and CC measures will narrow. Over the whole post-war period up to 2021, there was a secular fall in the US rate of profit on the HC measure of 27% and on the CC measure 26%. So, for an empirical measure of the rate of profit over a long period, there is nothing to choose between the HC and CC measures.

Most Marxist measures usually exclude any measure of variable capital on the grounds that ‘employee compensation’ (wages plus benefits) is not a stock of invested capital but a flow of circulating capital turning over more than once in a year – and this rate of turnover cannot be measured easily from available data. So most Marxist measures of the rate of profit are just s/C. But some Marxists have made attempts to measure the turnover of circulating capital and variable capital so that these can be included in the denominator, thus restoring Marx’s original formula s/(C+v).

Brian Green has done some important work in measuring circulating capital and its rate of turnover for the US economy, in order to incorporate it into the measure of the rate of profit. He considers this vital to establishing the proper rate of profit and as an indicator of likely recessions. Here is Green’s past post on his method: https://theplanningmotivedotcom.files.wordpress.com/2021/11/1997-2020-various-rates.pdf.

Green’s work is valuable in showing the short-term variations in rates of surplus value and profit caused by changes in circulating capital. Green considers these short-term variations as an important indicator of the cycles of boom and slump in a capitalist economy. But they do not alter significantly the longer-term trends in the rate of profit. If you include circulating capital and variable capital in the measurement of the rate of profit, this will make a difference to the level of the rate of profit, but not much difference to the trend and turns in the rate of profit since 1945.

I used to make my own annual calculations for the US rate of profit for the whole economy and for the corporate sector alone. But we can now use the excellent database produced by Deepankur Basu and Evan Wasner (https://dbasu.shinyapps.io/Profitability/) for the corporate sector only, which is similar to my method of measuring the rate of profit. So I have replicated their results and highlighted where the rate of profit fell and rose. The Basu-Wasner measure excludes variable capital from the denominator. You can include it using their database, but it makes little difference to trends and turning points in the rate of profit since 1945. The graph below shows the US rate of profit in the corporate sector up to 2021.

The first thing to notice is that Marx’s law of the tendency of the rate of profit to fall is confirmed by the trend in the US rate of profit. This has fallen 27% over the period 1945-2021. We can also discern the huge fall in profitability from 1965-82 from 23.2% to 13.5%. And we can identify a recovery during the so-called neo-liberal period from 1982 to 17.5% in 2006. After that, the rate of profit falls gradually, but in a series of booms and slumps, in what I call the period of the Long Depression, to 16.3%.

What you also notice from this measure is that the US corporate rate of profit rose from 1982 up to a peak in 2006. So it could be argued, as some have done, that Marx’s law cannot be the underlying cause of the Great Recession in 2008-9 if the US rate of profit was reaching a 25-year high in 2006. But if we look just at the non-financial corporate sector (NFC), a proxy for what we might call the ‘productive’ part of the capitalist economy (where workers create new value for capitalists), then it is a different story. In Marxian value theory, the financial sector does not create new value; it takes a cut from the profit extracted from labour in the non-financial (productive) sector. And it is the rise in financial sector profits particularly since 1997 that distorts the corporate rate of profit up to 2006 (see graph below).

So looking at NFC profit rate is more relevant to the underlying health of the US capitalist economy. When the rise in financial profits is taken out of the data, we find that non-financial sector profitability peaked much earlier than 2006; instead back in 1997.

What the NFC graph also shows is that there has been a secular fall in the US rate of profit on non-financial capital over the last 75 years – a la Marx. Basu-Wasner calculate the average annual fall in the rate of profit at -0.42%. Between 1945 and 2021, the NFC rate of profit fell 32%.

In the so-called ‘golden age’ of post-war US capitalism, the NFC rate of profit was very high, averaging over 20%, rising 6% from 1945-1965. But then came the profitability crisis period between 1965 and 1982, when the rate of profit fell 44%. This provoked two major slumps in 1974-5 and 1980-2 and led to the strategists of capitalism trying to restore the rate of profit with the ‘neoliberal’ policies of privatisation, the crushing of unions, the deregulation of finance and globalisation from the early 1980s onwards.

The ‘neoliberal’ period of 1982-97 saw the rate of profit in the non-financial sector rise by 34%, although at the 1997 peak, the rate was still below the average in the Golden Age. Then came a new period of profitability crisis, which I have dubbed the Long Depression. In this period, which includes the Great Recession of 2008-9 and, of course, the COVID slump of 2020, the rate of profit fell 15%. In 2020, the US rate of profit in its non-financial sector reached a 75-year low, but recovered in somewhat 2021, but still below the pre-pandemic rate in 2019.

This brings us to the causes of the changes in the rate of profit. According to Marx, changes in profitability depend primarily on the relative movement of two Marxian categories in the accumulation process: the organic composition of capital (C/v) and the rate of surplus value or exploitation (s/v). If C/v outstrips s/v, the rate of profit will fall, and vice versa.

On the Basu-Wasner current cost measure, since 1945, there has been the secular rise in the organic composition of capital (OCC) of 40%, while the main ‘counteracting factor’ in Marx’s law of the tendency of the rate of profit to fall, the rate of surplus value (ROSV), fell slightly by 5%. So the rate of profit fell 32% from 1945 (see graph below).

In the profitability crisis of 1965-82, the NFC rate of profit fell 44% as the organic composition of capital (OCC) rose 29% and the rate of surplus value (ROSV) fell 28%. Conversely, in the so-called ‘neo-liberal’ period from 1982 to 1997, the rate of surplus value rose 14%, while the organic composition of capital fell 15%, so the rate of profit rose 34%. Since 1997, the US rate of profit has fallen around 15%, because the organic composition of capital has risen 28%, outstripping the rise in the rate of surplus value (8%). In other words, in the first two decades of the 21st century US non-financial sector capitalists exploited the workforce even more, but not enough to stop the rate of profit falling. So Marx’s law of profitability is confirmed by the results in each of these periods, as it is for the whole period of 1945-2021.

I have argued in many places that the profitability of capital is key to gauging whether the capitalist economy is in a healthy state or not. If profitability persistently falls, then eventually the mass of profits will start to fall and that is the trigger for a collapse in investment and a slump. And one of the compelling results of the data is that each post-war economic recession in the US has been preceded by (or coincided with) a fall in the rate of profit and by a slowdown in profit growth or an outright fall in the mass of profits. This is what you would expect cyclically from Marx’s law of profitability. The Great Recession and the pandemic slump of 2020 were preceded (or accompanied) by particularly sharp falls in profitability and profits growth.

It now looks very likely that by the end of this year, 2022, the major economies will be entering a new slump, just three years after the pandemic slump of 2020. US corporate profits fell in Q3 2022, according to the latest released data. Indeed, non-financial corporate profits fell nearly 7% on the quarter. US corporate profits slowed to 4.4% yoy from 7.7% yoy in Q2 and sharply from peak yoy growth of 22% at the end of 2021. Non-financial profits have slowed to 6.4% yoy.

A profits contraction has started as wages, import prices and interest costs are now rising faster than sales revenue. Profit margins (per unit of output) have peaked (at a high level) as unit non-labour costs and wage costs per unit are rising and productivity stagnates. The post-pandemic profits bonanza is over. When we get full data for 2022 corporate profitability, expect it to have fallen again as we enter a new slump in the US in 2023.

Kohei Saito is an associate professor at Tokyo University and an erudite Marxist scholar. Not a candidate for a best-seller in the non-fiction book world, you might think. But you would be wrong in this case. Saito’s new book (currently in Japanese), which analyses the relationship between capitalism and the planet, has been a smash hit in Japan, with over half a million sales already.

In the English version out shortly, the book is entitled, Marx in the Anthropocene: Towards the Idea of Degrowth Communism

The book’s message is stark and clear. Capitalism’s rapacious drive for profit is destroying the planet and only “degrowth” can repair the damage by slowing down social production and sharing wealth. Humans need to find a “new way of living”, and that means replacing capitalism.

Saito is deeply sceptical of some widely accepted strategies for tackling the climate emergency. “In my book, I start a sentence by describing sustainable development goals [SDGs] as the new opium of the masses,” he said in reference to Marx’s view of religion. “Buying eco bags and bottles without changing anything about the economic system … SDGs mask the systemic problem and reduce everything to the responsibility of the individual, while obscuring the responsibility of corporations and politicians.”

He continues: “We face a very difficult situation: the pandemic, poverty, climate change, the war in Ukraine, inflation … it is impossible to imagine a future in which we can grow the economy and at the same time live in a sustainable manner without fundamentally changing anything about our way of life. “If economic policies have been failing for 30 years, then why don’t we invent a new way of life? The desire for that is suddenly there.”

Saito reckons it is necessary to end mass production and the mass consumption of wasteful goods such as fast fashion. In his earlier more academic text in English, called Capital in the Anthropocene, Saito also advocates decarbonisation through shorter working hours and prioritising essential “labour-intensive” work such as caregiving. In effect, Saito promotes what could be called ‘de-growth Communism’.

Saito’s uncompromising message has seemingly captured the imagination of Japan’s youth. “Saito is telling a story that is easy to understand,” says Jun Shiota, a 31-year-old researcher who bought Capital in the Anthropocene soon after it was published. “He doesn’t say there are good and bad things about capitalism, or that it is possible to reform it … he just says we have to get rid of the entire system.”

In his academic work, Saito has followed John Bellamy Foster and Paul Burkett, in showing that it is wrong to claim, as some Greens do, that Marx and Engels ignored the impact of capitalism on the planet and the environment. In particular, Saito won the Isaac Deutscher prize in 2018 for his learned analysis of Marx’s notebooks on agriculture and the exhaustion of the soil revealing Marx’s deep interest in ecology.

In this earlier work, Saito points out that his approach “is a clear continuation of the “metabolic rift” theory advocated by Foster and Burkett.” Saito argues that it is quite apparent today that mass production and consumption under capitalism has tremendous influence upon global landscape and causes ecological crises. So Marxist theory needs to respond to the situation with a clear practical demand that envisages a sustainable society beyond capitalism. Capitalism and material conditions for sustainable production are incompatible. This is the basic insight of ‘eco-socialism’. The antagonism between red and green needs to be dissolved.

In his earlier book on Marx’s notes on agriculture under capitalism, Saito reckons that Marx attempted to analyze how the logic of capital diverges from the eternal natural cycle and ultimately causes various disharmonies in the metabolic interaction between humans and nature. Marx analysed this point with reference to Justus von Liebig’s critique of modern ‘robbery’ agriculture — Raubbau — which takes as much nutrition as possible from the soil without returning any. This ‘robbery agriculture’ is driven by profit maximisation, which is simply incompatible with the material conditions of the soil for sustainable production. Thus, there emerges a grave gap between the logic of capital’s valorisation and that of nature’s metabolism, ie ‘metabolic rifts’ in human interaction with the environment.

In the key passage on the concept of the metabolic rift, Marx wrote that the capitalist mode of production “produces conditions that provoke an irreparable rift in the interdependent process between social metabolism and natural metabolism prescribed by the natural laws of the soil. The result of this is a squandering of the vitality of the soil, and trade carries this devastation far beyond the bounds of a single country (Liebig).” With an expansion of capitalist accumulation, the metabolic rift becomes a global issue. So for Saito eco-socialism argues that the ecological crisis and metabolic rift is the central contradiction of capitalism.

According to Saito, in The German Ideology, written in 1845, there was a turning point in Marx’s travel towards an ‘ecological dimension’ in his critique of capitalism. Saito reckons this is when he begins to use the term ‘metabolism’ and refines his understanding of the concept as the general metabolic tendency of capital. Saito argues that Marx progressively realises that capital’s continuous expansion exploits not just labour, but also nature in the search for profit, leading to the destruction of the soil, deforestation and other such forms of the degradation of natural resources. Capital wants more and more value and, in particular, surplus value. That becomes the purpose of production and the metabolic harmony that existed between humans and nature before capitalism is broken. There is now a metabolic rift caused by capitalism.

Now there is a debate arbout whether using the term ‘metabolic rift’ is useful because it suggests, at least to me, that at some time in the past before capitalism there was some metabolic balance or harmony between humans, on the one hand, and ‘nature’, on the other. Any emphasis on rifts or ruptures has the risk of assuming that nature is in harmony or in balance until capitalism disturbs it. But nature is never in balance, even without humans. It is always changing, evolving, with ‘punctuated equilibriums’ to use the term of Marxist paleaontologist Stephen Jay Gould – such as the Cambrian explosion, with many species evolving as others go extinct. The rule of the dinosaurs and their eventual extinction had nothing to do with humans (despite what the movies may depict). And humans have never been in a position to dictate conditions on the planet or with other species without repercussions. ‘Nature’ lays down the environment for humans and humans act on nature. To quote Marx: ‘Men make their own history, but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and inherited from the past.’

It’s true that Marx refers to the robbing of the soil by capitalist production. In Capital, Volume I, Chapter 15 on machinery Marx says: “Moreover, all progress in capitalist agriculture is a progress in the art, not only of robbing the worker, but of robbing the soil; all progress in increasingly the fertility of the soil for a given time is a progress towards ruining the more long-lasting sources of that fertility. The more a country proceeds from large-scale industry as the background of its development … the more rapid is this process of destruction. Capitalist production, therefore, only develops the techniques and the degree of combination of the social process of production by simultaneously undermining the original sources of all wealth – the soil and the worker. “(Marx, 1995 [1887])

Saito argues that “Marx’s critique of political economy, if completed, would have put a much stronger emphasis on the disturbance of the “metabolic interaction” between humanity and nature as the fundamental contradiction of capitalism.” That may be Saito’s view, but was it Marx’s? Is the ‘metabolic rift’ the “fundamental contradiction of capitalism”? In my view, Saito does not offer a justification for this claim.

For Marx, capitalism was a system of “brutal exploitation” of labour power in production for profit, not one of robbery or dispossession. For Marx, agriculture under capitalism is a sector that exploits labour in the same way as industry. Marx rejected the Ricardian theory that the profitability of capital tended to fall because of diminishing returns in agriculture. Marx’s law of tendency of the rate of profit to fall depended on a rising “organic” composition of capital (the word “organic” perhaps taken from Liebig, as Saito suggests), where the material value of machinery and natural materials rises in cost relative to the exploitation of labour power. But contrary to Saito’s conclusion, Marx rejected Liebig’s soil exhaustion theory of the limits of capitalism and rejected the implied Malthusianism that population would outrun the availability of food and the necessities for human life.

Saito’s book is subtitled: ‘Towards the idea of de-growth communism’. De-growth has become increasingly popular among many environmentalists and leftists. Jason Hickel, a prominent proponent of de-growth, defines it like this: ‘The objective of degrowth is to scale down the material and energy throughput of the global economy, focusing on high-income nations with high levels of per-capita consumption.’

There is a big debate here – as expressed in the critique by ex-World Bank chief economist and expert on global inequality, Branco Milanovic. Milanovic argues that any proposal to redistribute income and wealth to the global South by stopping or even reducing accumulation and GDP growth in the rich countries is economically irrational and politically infeasible. De-growth proponents like Hickel says Milanovic is misrepresenting the de-growth argument because he has a ‘blind faith’ in economic growth. I leave the readers here to consider the arguments.

Suffice it to say now that, under capitalism, accumulation happens for accumulation’s sake, to invest more and thus to make more profits without a plan and purely in the interests of private profit. When workers are in control of the surplus, will we not develop and grow the productive forces to make life better and easier for ourselves and more sustainable for the earth and its inhabitants? Wouldn’t we especially expand ‘green’ productive forces to build say, more (and better) schools, public transportation etc.? Shouldn’t socialists strive to repair the underdevelopment created by imperialism by assisting in the development of productive forces in the formerly colonised world?

“Yet for all its stinginess, capitalist production is thoroughly wasteful with human material, just as its way of distributing its products through trade, and its manner of competition, make it very wasteful of material resources, so that it loses for society what it gains for the individual capitalist.” (Marx). The wasteful and environmentally unsustainable consumption patterns of the working class are not produced by ‘personal’ choice but are system-induced.

But the proponents of de-growth seem to argue that there are absolute ‘planetary limits’ and a fixed ‘carrying capacity’ that cannot be surpassed by humans if we want to avoid ecological collapse. Here there’s no distinction between socially produced limits and natural limits. But degrading nature, exterminating species and threatening to destroy the atmosphere of the planet are the result of the contradictions to be found in the capitalist mode of production itself, not in some existential threat from outside the system. Increased rates of pollution and environmental degradation occur because capitalists pursue profits at the expense of the environment, not because of the technologies themselves. Socialists should distinguish between the instruments of production and their use under capitalism.

In a socialist de-growth scenario, the goal would be to scale down ecologically destructive and socially less necessary production (what some might call the exchange value part of the economy), while protecting and indeed even enhancing parts of the economy that are organised around human well-being and ecological regeneration (the use value part of the economy).

Saito is right that ending the dialectical contradiction between humans and nature and bringing about some level of harmony and ecological balance would only be possible with the abolition of the capitalist mode of production. As Engels (1896) said, “To carry out this control requires something more than mere knowledge.” Science is not enough. “It requires a complete revolution in our hitherto existing mode of production, and with it of our whole contemporary social order” (ibid.)

“If there was no intervention today, gilt yields could have gone up to 7-8 per cent from 4.5 per cent this morning and in that situation around 90 per cent of UK pension funds would have run out of collateral… They would have been wiped out.” So says a UK bond trader yesterday.

A liquidity crisis erupted in British bond markets after the announcement by the new right-wing Conservative government that it would spend up to £60bn to maintain and energy price cap for householders for up to two years, subsidise business energy costs AND also cut corporate and income taxes. The total hit from this largesse (mainly to the rich) to the UK public debt level over the next few years has been estimated at over £400bn or nearly 20% of GDP. With UK public debt already at 100% of GDP, that sounded the death knell for the UK bond prices. Yields (interest rate) surged.

UK ten-year govt bond yield (%)

Alongside this, the Bank of England plans to hike interest rates yet further over the next year to ‘control’ inflation. So the cost of borrowing and servicing debt is rocketing. Suddenly, investors holding government bonds were facing serious losses, particularly pension funds that tend to invest on long-term bonds using short-term interest rates to borrow – short-term interest rates up; long-term bond prices down. That’s a mismatch on asset values and a credit liquidity squeeze was on.

In the case of the UK, apparently pension funds and others had been employing yet another piece of financial jiggery-pokery called “liability-driven investment” schemes . This was the practice of buying bonds that are then used as collateral for loans to purchase more bonds – as much as £1.5trn over the last decade since the global financial crash. If the value of the bonds used for collateral drop like a stone, as they have just done, then the ability to borrow vanishes. So the BoE has been forced to loan £65bn to such bond holders to bail them out of their Ponzi scheme.

And it was not just in the UK with its crazy government. Even in the US, with supposedly a ‘sensible’ administration that is not cutting taxes or funding price caps, the credit squeeze is also there. The $24tn US treasury market has been hit with its most severe bout of turbulence since the coronavirus crisis, underscoring how big swings in international bonds and currencies and jitters over US rate rises have spooked investors. “Right now, it is all about market volatility,” said Gennadiy Goldberg, a strategist at TD Securities. “You have investors staying away because of the volatility — and investors staying away increases volatility. It is a volatility vortex.”

The US 10-year treasury yield, a key benchmark for global borrowing costs, has surged to more than 4 per cent from 3.2 per cent at the end of August, leaving it set for the biggest monthly rise since 2003. It is on track for its sharpest ever annual rise. The two-year yield, more sensitive to fluctuations in US monetary policy, has leapt 3.55 percentage points this year, which would also mark an historic increase.

Tightening liquidity (credit) has hit all those wild speculative assets hard. Take so-called NFTs. Trading volumes for the ridiculous non-fungible tokens (NFTs) have tumbled 97% since January, and the blockchain-bound digital art and collectibles market went from $17 billion to just $466 million in September, according to Bloomberg,. Similarly, the fall in the Bitcoin price has wiped out nearly all the gains from cryptocurrencies of the last few years.

As I have argued in previous posts, there are two blades of the scissors that are closing to deliver a slump: falling profitability and rising interest rates; or falling earnings and tightening liquidity, if you like.

Take the first blade. Marx explained the role of credit in capitalist production very clearly in Capital. Credit is essential for capitalist investment and production: “the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection.”

But this beneficial role for capital has a dark side. “The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, …. the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system.”

So credit helps capitalist production to continue even when profitability is falling but only “up to a certain point”, after which “credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production.” In other words, the level of credit now becomes debt that acts as a burden on further expansion and even triggers crises. If the gap between inflated financial prices and profits in the rest of the economy is large enough, a financial collapse can precipitate a full-blown recession. All of a sudden, credit dries up. When credit is needed the most, financial institutions are too frightened to lend it. As Rosa Luxemburg once argued, “after having (as a factor of production) provoked overproduction, credit (as a factor of exchange) destroys, during the crisis, the very productive forces it created.”

But as Guglielmo Carchedi puts it: “the basic point is that financial crises are caused by the shrinking productive base of the economy. A point is reached at which there has to be a sudden and massive deflation in the financial and speculative areas. Even though it looks as if the crisis has been generated in these sectors, the ultimate cause resides in the productive sphere and the attendant falling rate of profit in this sphere”. (Behind the Crisis).

And that brings us to the other blade in the scissors of slump: profits. I have discussed what is happening with profits in a recent post. Corporate profit margins, having reached record highs, are now sliding down as the costs of production rose from the end of the COVID slump and revenue growth slows.

In a report, JP Morgan economists concluded, “relative to its pre-pandemic trend, cumulative global profits since the pandemic are still over 20% depressed.” And now profits growth is disappearing. JP Morgan forecasts that “Combined with rising interest rates, profit margins will fall, dampening overall earnings.”

Even the Federal Reserve has noted this. In a recent paper, a Fed economist noted that “over the past two decades, the corporate profits of stock market listed firms have been substantially boosted by declining interest rate expenses and lower corporate tax rates.” These factors were responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the prior two-decade period.

The significant decline in corporate interest rates allowed interest expenses to decline as a share of earnings, even as corporate debt rose.

This was a feature of 21^st century capitalism: falling interest rates and plentiful liquidity, even in a period where profitability was not rising. Indeed, the response to falling profitability in the major economies was not to go for liquidation of the weak and unprofitable to clear the decks, but instead for the monetary authorities to save the banking system and prop up ‘zombie’ companies with zero- interest rate policies and ‘quantitative easing’.

But all this has done is to expand the credit-debt mountain to unprecedented highs without restoring profitability in the productive sectors. The bulk of the rise in earnings has been from speculation in the financial sector, property and in a few technology areas. The rest of the productive base of capitalist economies has been struggling – thus we have low investment growth, low productivity growth and ever larger credit liabilities that, as profits now begin to fall, are coming back to bite capital.

Rising inflation has led to rising interest rates as central banks switch from quantitative easing (QE) to quantitative tightening (QT) to try and control inflation. However, that is just exacerbating the slowdown in growth into outright recession – and generating a credit squeeze that threatens to hit not only financial assets but also corporations globally, So it’s back to QE!

In previous posts, I have noted that an inverted bond yield curve is a pretty accurate indicator of a coming slump. An inverted yield curve is when the interest rate on, say, ten-year debt is lower than on 3m or 2yr debt. That only happens when investors are so worried about possible recession that they tend to buy government bonds as a safe haven, driving down their yield, while central banks are hiking short-term rates to levels that threaten to bring down the financial house of cards.

The US yield curve has been inverted now for some time (red line).

One analysis reckons that since 1990, a 1 per cent increase in the Fed Funds rate (the central bank rate) flattens the 2-10 yield curve by 35 basis points on average. So, if the Fed Funds rate hits 4.75 per cent as forecast by the market that could flatten the curve by 1.58 per cent, leading to a curve that is inverted by as much as 1.28 per cent (the 2-10curve started this year at 0.3 per cent) by the end of the year.

Moreover, this credit squeeze is being exported by a strong dollar to the rest of the world’s economies, particularly those with large dollar-denominated debt. The US dollar is super strong against other currencies as it is seen as a ‘safe-haven’ for investors to hold their cash and assets as inflation spirals and the world slips into recession. But a strong dollar and rising interest rates are pushing the world economy into slump. “These recessionary forces emanating from the US and the rising dollar come on top of those created by the big real shocks. In Europe, above all, there is the way in which higher energy prices are simultaneously raising inflation and weakening real demand.” Martin Wolf, FT.

And the recessionary forces are getting stronger to the point that many economies are probably already in a slump. The latest forecasts by the World Bank and by the OECD, as well as the IMF, portend a slump, confirming the indications of the inverted yield curve. In its latest economic forecast, the OECD reckons the world economy is slipping into recession driven by high energy prices, rising interest rates and China’s slowdown. The OECD now forecasts just 2.2% global growth next year and as 4% is needed to keep pace with rising global population, that will mean a fall in per capita growth.

“The world economy is paying a high price for Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. With the impacts of the COVID-19 pandemic still lingering, the war is dragging down growth and putting additional upward pressure on prices, above all for food and energy. Global GDP stagnated in the second quarter of 2022 and output declined in the G20 economies. High inflation is persisting for longer than expected. In many economies, inflation in the first half of 2022 was at its highest since the 1980s. With recent indicators taking a turn for the worse, the global economic outlook has darkened.”

The OECD wants to blame the impending recession on the Russian invasion of Ukraine and Putin, but the world economy was already heading into a slump just before the COVID pandemic broke and the recovery after the COVID slump was already petering out in 2021 before the Russian invasion.

The World Bank is more accurate: “To cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional 2 percentage points, according to the report’s model. If this were accompanied by financial-market stress (which has now started – MR), global GDP growth would slow to 0.5 percent in 2023—a 0.4 percent contraction in per–capita terms that would meet the technical definition of a global recession.”

One of the features of the 21^st century in the major economies has been low unemployment, at least in the official figures. But much of this employment has been in low-paid services sectors, part-time or temporary. Now even here, there are signs of cracks. In the US, full-time jobs are falling, to be replaced by part-time employment. And in another sign of a weakening labour market, weekly working hours are down over the last six months to the lowest reading since the COVID slump in April 2020.

The other feature of the last decade and post-pandemic period in both the US, Europe and the UK has been the huge rise in property prices. That too is now showing signs of fading. This month home prices in the US fell outright for the first time since 2012. Mortgage rates have doubled, making it increasingly impossible for many to buy homes.

So falling profits; rising interest rates; slowing economies and a credit crisis. “What can be done?”, asks FT columnist Martin Wolf –“Not that much.”, he replies to himself. The impending world slump cannot be avoided. “What is known is that the central banks’ ability to support the markets and economy are for a while gone. …Even previously credible G7 governments, such as the UK’s, are learning this truth. The financial tide is going out: only now do we notice who has been swimming naked.”

Or are they already drowning?

Global corporate profits growth is heading south, according to analysis by JP Morgan economists. JP Morgan estimates that, after surging a humungous 89% (4q moving ave) in 2021, global corporate profits moderated to a still-solid 24% in the year ending in 2Q22. And they reckon that “on net, the level of profits is 17% above its pre-pandemic trend, but still making up for lost earnings through the pandemic.” However, JP Morgan expects “slowing in profit growth in the coming quarters as inflation cools while labor markets remain tight. Additional pressure is coming from rising corporate borrowing rates as central banks press on with the steepest tightening cycle in decades.” The scissors of a future slump (falling profits and rising interest rates) are beginning to close.

During the post-pandemic recovery, corporate profit margins (that’s the difference between revenues and costs per unit of production) reached multi-decade highs as the surge in inflation boosted corporate pricing power while wages languished.

But things are changing in 2022. Profit margins are sliding down as costs of production rise and revenue growth slows.

When broken down by sector, JP Morgan finds that each of the 10 sectors comprising the total economy show a slowing in earnings growth from multi-decade highs posted in 2021, although only four have experienced outright contraction since the beginning of the year. Although the profits boom in 2021 was broad-based in all sectors, it is clear from the data that the bulk of profit gains were in energy and raw materials including food. And that’s where the biggest falls are coming.

In the past, I have constructed a measure of global corporate profits. My measure is a GDP-weighted average of year-on-year corporate profits from five countries (US, Japan, China, Germany and the UK). This is a smaller universe than that compiled by JP Morgan economists. They track MSCI corporate earnings from 29 countries. That sounds better but there are some serious caveats to the JP Morgan measure. First, it is based on reported earnings in company accounts that always exaggerate earnings. My measure relies on more accurate national government measures of profit. And second, JP Morgan measures the change in those profits on a 4q moving average, not year-on-year for each quarter. That tends to make the up and down changes more exaggerated than year-on-year measures.

On my model, the change in global corporate profits to H1 2022 looks like this:

Several things emerge from this figure. First, global corporate profit growth had ground to a halt even before the COVID pandemic broke and lockdowns and the collapse of international trade ensued (-2.1% yoy in Q4 2019). Second, the huge statistical recovery in 2021 (peaking at 54.4% in Q2 2021) has now given way to a fast slowdown in year-on-year profits in 2022 (to just 6.2% in H1 2022).

How does the JP Morgan model compare with mine?

Considering the differences in the data between the two models, there is still quite a similar trend found. There was a boom in profits after the mini-recession of 2016, then a fall in 2019 (heralding a new slump in investment and GDP in the major economies), and then the fall in the pandemic (although my figures show a small rise). The recovery of 2021 is more moderate with my data than JP Morgan’s. The first half of 2022 is comparable.

Both data show what JP Morgan concludes, “relative to its pre-pandemic trend, cumulative global profits since the pandemic are still over 20% depressed.” And now profits growth is disappearing. JP Morgan forecasts that “pricing power is expected to ease––particularly in energy––while wage pressures are unlikely to moderate as quickly. Combined with rising interest rates, profit margins will fall, dampening overall earnings.” What I have called in the past, the scissors of slump (rising interest rates and falling profits), are beginning to close.

Why does tracking the change in the profits of the capitalist sector globally matter? As I have argued in numerous places, profits are the driving force of capitalist investment and therefore employment and income growth. If the profitability of capitalist investment falls and eventually leads to a fall in total profits, it is the strongest indicator of an impending slump in capitalist production. The close (if lagged) relationship between profits and investment is well established by several studies including my own.

JP Morgan is certainly convinced of the relationship between profits and investment, with the former leading the latter: “we expect corporate profit growth to slow further in coming quarters. This weakness will negatively feed back on business capex.”

Jay Powell, the chair of the US Federal Reserve, made a keynote speech at the annual summer symposium of central bankers in Jackson Hole, Wyoming, USA. This was closely watched by financial investors and economists to see if Powell was going to support the strategy of a ‘Fed pivot’ on interest-rate policy. The pivot is supposed to be a softening on the current aggressive hiking of the Fed’s policy rate. The pivot would keep interest rates from rising too much and thus sustain the stock market and the economy. After all, the US year on year inflation rate had subsided a little in August from a high of 9.1% to 8.5%; and real GDP was again confirmed in decline in the first half of 2022, while consumer spending has been falling back. So the signs of recession have increased, if the US is not already there.

US CPI inflation (yoy %)

But that made no difference to Powell. His speech made it clear that there would be no ‘Fed pivot’. Powell reckoned that inflation was still too high and so the Fed’s tightening cycle was far from done. “With inflation running far above 2% and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause. ” He went on to tell us that we are going to suffer a hit to jobs and living standards as a result of the Fed’s tightening policy, but that could not be avoided: “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Financial investors took the speech badly. The US S&P 500 and the Nasdaq tumbled 2.5% and 3%, respectively. So no Fed pivot then. Powell was determined: “a lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”

Powell claimed that “The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.” Well, they may take responsibility, but the problem is that central banks cannot deliver on low inflation with their monetary tools of higher interest rates and withdrawing liquidity in what is called quantitative tightening (QT). All through the decade of the Long Depression after the Great Recession of 2008-9, central banks tried to get inflation up to their 2% target rates by keeping interest rates at zero or even below and through quantitative easing (QE) ie buying government and corporate bonds and increasing the money supply. But none of these measures worked. Inflation stayed below target and so did economic growth. Instead, what QE brought was a huge stock and property market bubble. Now it’s the other way round and it still won’t work. QT will bring a stock market and property crash; and recession, not lower inflation.

That’s because inflation depends on the relation between supply and demand for goods and services. That’s obviously a truism of capitalist economics. But while central banks may affect aggregate demand to some extent, monetary policy has little or no effect on aggregate supply. That depends on productive investment, which in turn depends on the profitability of that investment. And that’s the problem.

The current inflationary spiral is mainly due to constrictions on supply, particularly in energy, food and other commodities, as well as global supply chain blockages for many components and products needed to meet demand. But underlying these immediate causes is the long-term decline in productive investment and labour productivity growth in the major capitalist economies, as I have argued before. So the Fed and other central banks can do little but sink their economies further into the Jackson Hole by raising the cost of borrowing for investment and consumption.

At Jackson Hole, various mainstream economists present papers on the state of capitalist economies and on the efficacy of monetary policy. It was revealing what Gita Gopinath, the former IMF chief economist had to say. “Existing (mainstream – MR) models cannot explain the inflation surge”, Gopinath said. For example, the so-called Phillips curve which purports to show that tight labour markets and rising wages cause inflation, does not fit the facts, said Gopinath, as economies have experienced rising inflation without wages leading it. She also admitted that the IMF had failed to predict any rise in inflation rates (not just in energy and food but in what are called ‘core prices’ in the shops and services).

Gopinath argued that the current high inflation rates were due to massive global fiscal stimulus by governments during the COVID slump, putting too much money into the hands of households (!); heavy spending on goods (!); and an unexpected fast recovery in demand globally after COVID (!). But having presented an array of graphs to justify her argument that inflation was the result of too much demand; she then slipped in a sentence: “Alongside a contraction in potential output and employment.” And here we have it. It was the inability of capitalist production to deliver to meet demand. This was the main cause of demand exceeding supply and driving up inflation. So when the Fed and other central banks continue to tighten monetary policy, they will drive down demand (ie investment and consumption) and given already weak and stagnating supply, all that will happen is that they will trigger a slump because the ‘supply side has not recovered from both the Long Depression and the COVID slump.

At Jackson Hole, former White House economist Jason Furman was there to tell us that neither the US nor the Eurozone had returned to the pre-pandemic trend growth, as hoped for. Instead, both economies were heading south again. And that the main reason was very poor productive investment growth. “Using the expenditure components, the biggest source of the shortfall is the that non-residential fixed investment (or business fixed investment) remains way below what the CBO (Congressional Budget Office) thought it would be.”

But the Fed, the ECB and the BoE will plough on driving up interest rates just as the economies they preside over head towards a slump. The US Conference Board’s index of the US Top 10 Leading Indicators has had a 100% success rate in anticipating every recession over the last 40+ years. And the indicators are now on the cusp of forecasting a new slump.

“The US LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at the Conference Board. “Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy. The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.”

We shall soon see how ‘mild’ or deep the Jackson Hole is for the major economies.

Is the global inflationary spiral peaking? And if it is and inflation is set to fall over the next year, then has the inflation scare been just a momentary blip and now things will start to turn back to the previously low pace of inflation in the prices of goods and services?

That seems to the view of investors in financial assets in the US, where the stock market has rallied by as much as 20% from lows in mid-June; and both government and corporate bond yields have steadied. Markets seem to believe in what is called the ‘Fed pivot’, where the US Federal Reserve, having hiked its policy rate aggressively since April, will now start to end its hikes going into 2023 as inflation subsides.

Certainly, there is some evidence of peaking inflation in the US where the consumer price inflation (CPI) rate slowed more than expected in July to 8.5% year over year from a 40-year high of 9.1% in June. But looking beneath the headline rate, it is less convincing that US inflation is heading downwards, at least at any significant pace. The slowing in July was mainly due to falling gasoline prices. Food inflation (10.9%) and electricity price inflation (15.2%) continued to accelerate. And stripping out food and energy, the so-called ‘core’ inflation rate stayed steady at 5.9%.

Source: Fred

And outside the US, there is still little sign of peaking. The Eurozone inflation rate rose in July to 8.9% yoy, while the UK rate hit double-digits (10.1%), with the Bank of England forecasting a peak of 13%-plus by early 2023, and other forecasters calling a 15% rate. Even Japan, the economy of stagnation and deflation for decades, achieved a 2.6% yoy rate in July. This was the 11th straight month of increase in consumer prices and the fastest pace since April 2014.

Nevertheless, perhaps there are signs globally down the road that inflation rates will ease at least during 2023. Crude oil prices are still 40% above a year ago, but prices have fallen from their peak of $120/b in June to $90/b. That should feed through to energy prices, at least for transport fuel. In contrast, natural gas prices are at all-time highs. This is particularly bad news for Europe, which depends heavily on gas imports from Russia.

The EU is trying to impose sanctions (including energy sanctions) against Russia over the invasion of Ukraine. But that means searching for new sources of supply, the competition for which globally is driving up prices. A combination of tight supplies and soaring demand amid persistent heatwaves across Europe (including a historic drought triggered by an arid summer that set heat records across Europe), threatens to halt energy shipments along the Rhine River while limiting hydroelectric and nuclear power production. At the same time, Russia’s Gazprom keeps reducing flows through the Nord Stream pipeline (now down to roughly 20% of its capacity), citing issues with turbines. So energy prices in Europe could rise even further as winter approaches.

Source: Fred

The other driver of inflation has been food. And here at last global food prices have dropped from all-time peaks, particularly after the agreement brokered between Russia and Ukraine to allow grain shipments through the Black Sea to world markets. But commodity prices in general remain over 50% higher than this time last year.

Source: FRED

And that other key driver of global inflation, post the COVID slump, supply chain blockages, caused by lockdowns, loss of staff, lack of components and the slow regearing of transport logistics, is finally showing some easing. Even so, the New York Fed global supply chain pressure index (GSCPI), that measures various indicators of container ship and port blockages, is still much higher than before the COVID pandemic began.

Source: New York Fed

And take all this evidence of moderating inflation with considerable caution: for at least three reasons. The first is that central banks have no control over the pace of inflation because rising prices have not been driven by ‘excessive demand’ from consumers for goods and services or by companies investing heavily, or even by uncontrolled government spending. It’s not demand that is ‘excessive’, but the other side of the price equation, supply, is too weak. And there, central banks have no traction. They can hike policy interest rates as much as they deem, but it will have little effect on the supply squeeze. And that supply squeeze is not just due to production and transport blockages, or the war in Ukraine, but in my view, even more so to an underlying long-term decline in the productivity growth of the major economies.

So the second reason for not expecting a sharp fall in inflation rates is that productivity growth has slowed so much that the supply-side cannot respond adequately to the recovery in demand for goods and services as economies came out of the COVID slump. For example, US productivity of labour (output per employee) has taken a huge tumble in the first half of 2022, down 3% over two quarters, the biggest half-yearly fall since records began.

Source: BEA, author

Official figures tell us that US employment is rising. But at the same time, the latest US real GDP figures show that national output fell in the first half of this year. That is the arithmetical reason for why US productivity has fallen. But the underlying causal explanation is to be found in the long-term tendencies in the US economy; and not just there, but in most of the major economies.

The key to sustained long-term real GDP growth is high and rising productivity of labour. But productivity growth has been slowing towards zero in the major economies for over two decades and particularly in the Long Depression since 2010. US labour productivity growth is now at its weakest for 40 years. Indeed, before the COVID pandemic, the world economy was already slowing down towards a slump after ten years of a Long Depression.

The productivity crisis is driven by two factors: first, slowing investment growth in productive (ie value-enhancing) sectors compared to unproductive sectors (like financial markets, property and military spending). As a percentage of GDP, US productive investment has steadily fallen, both in net private and public civilian investment.

Source: Federal Reserve, Doug Henman

And second, behind this decline in productive investment is the long-term decline in the profitability of such investment compared to investing in financial assets and property. Profitability of investment in the main value-creating sectors is near post-1945 lows.

SOURCE: BEA, Basu-Wasner, author

That brings me to my third reason for caution on inflation subsiding: the risk of increased wage demands driving up prices. When productivity growth is low, even small wage rises demanded by employees can sharply raise employee costs per unit of output. Companies are then forced to take a hit on their profits and/or try to raise prices to compensate. A so-called wage-price spiral could ensue. At least that’s the claim of the mainstream theory.

Source: FRED

So far, that has not happened. And the mainstream economics charge that wage rises are causing the current inflation acceleration or even that future wage rises will do so is not backed by evidence historically.

Instead, average real wages have been falling sharply. The IMF reckons that the average European household will see a rise of about 7 percent in its cost of living this year relative to what was expected in early 2021. Employees everywhere are now trying to restore living standards through wage rise demands, in Europe and the US. If they are successful, this will most likely lower profits. Already, after reaching all-time highs, US corporate profit margins have begun to fall.

Source: BEA, author

That means the major economies could enter a period of stagflation, not seen since the late 1970s, where inflation rates stay high, but output stagnates. Indeed, it could be worse than that. The risk of an outright global slump is rising. If central banks continue to hike their policy rates, all that will do is increase of cost of borrowing for consumers and companies, driving weaker companies into bankruptcies and suppressing demand across the board. Sure, that may finally reduce inflation but only through a slump.

The recovery from the COVID slump of 2020 has petered out. The world economy is teetering on a slump according to the latest data by JP Morgan economists. Their measure of global economic activity (global PMI output) has slipped to 50.8 (anything below 50 is a recession), which is a 25-month low. JPM say that the 50.8 measure is equivalent to a world economic growth rate of just 2.2%. That’s near ‘stall speed’ and remember includes China, India and other large economies. The global manufacturing sector is on the cusp of contraction and the services sector is slowing fast.

As the IMF puts it, “The global outlook has already darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one.” says the IMF in its latest economic forecast. The IMF has reduced its forecasts for global economic growth. Under its baseline forecast, the IMF now expects world real GDP growth to slow from last year’s 6.1 percent to 3.2 percent this year and 2.9 percent next year (2023). This forecast slowdown from 2021 to 2022 is the biggest one-year drop in economic growth in 80 years! “This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook.” At the same time, the IMF forecast for the inflation rate has been revised up. Inflation this year is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies and is projected to remain elevated longer.

And these are the baseline forecasts for growth with the risks “overwhelmingly tilted to the downside.” There is a risk that “inflation will rise and global growth decelerate further to about 2.6 percent this year and 2 percent next year—a pace that growth has fallen below just five times since 1970. Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world.”

It will be even worse in the so-called developing countries: “many countries lack fiscal space, with the share of low-income countries in or at high risk of debt distress at 60 percent, up from about 20 percent a decade ago. Higher borrowing costs, diminished credit flows, a stronger dollar and weaker growth will push even more into distress.” The share of emerging market bond issuers with yields above 10% is now higher than at any time since 2013.

Source: IMF

Recession fear is now at levels worldwide last seen in 2020.

At the very least, global inflation rates are still likely to be much higher than before the COVID pandemic by this time next year – and at the worst, the global economy could have entered a new slump only three years from the last one.

Last week, Ukraine’s foreign private creditors agreed to the country’s request for a two-year freeze on payments on about $20bn of foreign debt. This would enable Ukraine to avoid defaulting on its overseas borrowings. Unlike other ‘emerging economies’ in debt distress, it seems that foreign bondholders are happy to help Ukraine out – if only for two years. The move will save Ukraine $6bn over the period, helping to reduce pressure on central bank reserves, which slid by 28 per cent year-to-date, despite significant foreign aid.

Ukraine’s economy is, not surprisingly, in a desperate state. Real GDP is projected to decline by more than 30% in 2022 and the unemployment rate is at 35% (Constantinescu et al. 2022, Blinov and Djankov 2022, National Bank of Ukraine 2022). “We are grateful for the private sector support of our proposal in such terrible times for our country,” responded Yuriy Butsa, Ukraine’s deputy finance minister, “I’d like to emphasise that the support we’ve received during this transaction is hard to underestimate . . . We will stay fully engaged with the investment community further on and hope for their involvement in the financing of the rebuilding of our country after we win the war,” Butsa said.

Here Butsa reveals the price to pay for this limited largesse by foreign creditors.: the accelerating demand of foreign multi-nationals and governments to take control of Ukraine resources and bring them under the control of foreign capital without any restrictions and limitations.

In a past post, I had outlined the plan to privatise and hand over the vast agricultural resources of Ukraine to foreign multi-nationals. And for several years now, a series of reports by the Oakland Institute economic observatory has documented the takeover of foreign capital. Much of what is below comes from Oakland.

Post-Soviet Ukraine, with its 32 million arable hectares of rich and fertile black soil (known as “cernozëm”), has the equivalent of one-third of all existing agricultural land in the European Union. The “breadbasket of Europe,” as it is called, had an annual production of 64 million tons of grain and seeds, among the world’s largest producers of barley, wheat and sunflower oil (for the latter, Ukraine produces about 30 percent of the world total).

As I explained in my previous post, the planned takeover of Ukraine’s resources partly provoked the conflict: the semi-civil war, the Maidan revolt and the annexation of Crimea by Russia. As the Oakland Institute has outlined, to limit unrestrained privatization, a moratorium on the sale of land to foreigners had been imposed in 2001. Since then, the repeal of this rule has been a main goal of Western institutions. As early as 2013, for instance, the World Bank provided an $89 million loan for the development of a deed and land title program needed for the commercialization of state-owned and cooperative land. In the words of a 2019 World Bank paper the aim was an “accelerating of private investment in agriculture.” That agreement, denounced at the time by Russia as a backdoor to facilitating the entry of Western multinationals, includes the promotion of “modern agricultural production … including the use of biotechnologies,” an apparent opening towards GMO crops on Ukrainian fields.

Despite the moratorium on land sales to foreigners, by 2016, ten multinational agricultural corporations had already come to control 2.8 million hectares of land. Today, some estimates speak of 3.4 million hectares in the hands of foreign companies and Ukrainian companies with foreign funds as shareholders. Other estimates are as high as 6 million hectares. The moratorium on sales, which the US State Department, IMF and World Bank had repeatedly called to be removed, was finally repealed by the Zelensky government in 2020, ahead of a final referendum on the issue scheduled for 2024.

Now with war grinding on, Western governments and corporations are stepping up their plans to incorporate Ukraine and its resources into the capitalist economies of the West.On July 4 and 5, 2022, top officials from the US, EU, Britain, Japan, and South Korea met in Switzerland for a so-called “Ukraine Recovery Conference.”

The URC’s agenda was explicitly focused on imposing political changes on the country – namely, “strengthening the market economy“, “decentralization, privatization, reform of state-owned enterprises, land reform, state administration reform,” and “Euro-Atlantic integration.” The agenda was really a follow-up to the 2018 Ukraine Reform Conference which had emphasized the importance of privatizing most of Ukraine’s remaining public sector, stating that the “ultimate goal of the reform is to sell state-owned enterprises to private investors”, along with calls for more “privatization, deregulation, energy reform, tax and customs reform.” Lamenting that the “government is Ukraine’s largest asset holder,” the report stated, “Reform in privatization and SOEs has been long awaited, as this sector of the Ukrainian economy has remained largely unchanged since 1991.”

The irony is that the 2018 URC plans were opposed by most Ukrainians. A public opinion poll found that just 12.4% supported privatization of state-owned enterprises (SOE), whereas 49.9% opposed it. (An additional 12% were indifferent, whereas 25.7% had no answer.)

However, war can make all the difference. In June 2020, the IMF approved an 18-month, $5 billion loan program with Ukraine. In return, the Ukraine government lift[ed] the 19-year moratorium on the sale of state-owned agricultural lands, after sustained pressure from international finance institutions.. Olena Borodina with the Ukrainian Rural Development Network commented that, “the agribusiness interests and oligarchs will be the primary beneficiaries of such reform…[This] will only further marginalize smallholder farmers and risks severing them from their most valuable resource.”

And now July’s URC has re-emphasised its plans to take over the Ukraine economy for capital, with the full endorsement of Zelensky government. At the conclusion of the meeting, all governments and institutions present endorsed a joint statement called the Lugano Declaration. This declaration was supplemented by a “National Recovery Plan,” which was in turn prepared by a “National Recovery Council” established by the Ukrainian government.

This plan advocated for an array of pro-capital measures, including “privatization of non critical enterprises” and “finalization of corporatization of SOEs” (state-owned enterprises) – identifying as an example the selling off of Ukraine’s state-owned nuclear energy company EnergoAtom. In order to “attract private capital into banking system,” the proposal likewise called for the “privatization of SOBs” (state-owned banks). Seeking to increase “private investment and boost nationwide entrepreneurship,” the National Recovery Plan urged significant “deregulation” and proposed the creation of “‘catalyst projects’ to unlock private investment into priority sectors.”

In an explicit call for slashing labour protections, the document attacked the remaining pro-worker laws in Ukraine, some of which are a holdover of the Soviet era. The National Recovery Plan complained of “outdated labor legislation leading to complicated hiring and firing process, regulation of overtime, etc.” As an example of this supposed “outdated labor legislation,” the Western-backed plan lamented that workers in Ukraine with one year of experience are granted a nine-week “notice period for redundancy dismissal,” compared to just four weeks in Poland and South Korea.

In March 2022, the Ukrainian parliament adopted emergency legislation allowing employers to suspend collective agreements. Then in May, it passed a permanent reform package effectively exempting the vast majority of Ukrainian workers (those at businesses with fewer than 200 employees) from Ukrainian labor law. Documents leaked in 2021 showed that the British government coached Ukrainian officials on how to convince a recalcitrant public to give up workers’ rights and implement anti-union policies. Training materials lamented that popular opinion towards the proposed reforms was overwhelmingly negative, but provided messaging strategies to mislead Ukrainians into supporting them.

While workers’ rights are to be removed in the ‘new Ukraine’, in contrast the National Recovery Plan aims to help corporations and the wealthy by lowering taxes. The plan complained that 40% of Ukraine’s GDP came from tax revenue, calling this a “rather high tax burden” compared to its model example of South Korea. It thus called to “transform tax service,” and “review potential for decreasing the share of tax revenue in GDP.” In the name of “EU integration and access to markets,” it likewise proposed “removal of tariffs and non-tariff non-technical barriers for all Ukrainian goods,” while simultaneously calling to “facilitate FDI [foreign direct investment] attraction to bring the largest international companies to Ukraine,” with “special investment incentives” for foreign corporations.

In addition to the National Recovery Plan and the strategic briefing, the July 2022 Ukraine Recovery Conference presented a report prepared by the company Economist Impact, a corporate consulting firm that is part of The Economist Group. The Ukraine Reform Tracker pushed to “increase foreign direct investments” by international corporations, not invest resources in social programs for the Ukrainian people. The Tracker report emphasized the importance of developing the financial sector and called for “removing excessive regulations” and tariffs. It called for further “liberalising agriculture” to “attract foreign investment and encourage domestic entrepreneurship,” as well as “procedural simplifications,” to “make it easier for small and medium enterprises” to “expand by purchasing and investing in state-owned assets,” thereby “making it easier for foreign investors to enter the market post-conflict.”

The Ukraine Reform Tracker presented the war as an opportunity to impose the take over by foreign capital. “The post-war moment may present an opportunity to complete the difficult land reform by extending the right to purchase agricultural land to legal entities, including foreign ones,” the report stated. “Opening the path for international capital to flow into Ukrainian agriculture will likely boost productivity across the sector, increasing its competitiveness in the EU market,” it added. “Once the war is over, the government will also need to consider substantially lowering the share of state owned banks, with the privatisation of Privatbank, the country’s largest lender, and Oshchadbank, a large processor of pensions and social payments,” it insisted.

Elsewhere there are less explicit pro-capital polices offered by semi-Keynesian Western economists. In a recent compilation by the Center for Economic Policy Research (CEPR), various economists have proposed Macroeconomic Policies for Wartime Ukraine. In this the authors “emphasise at the outset that Ukraine’s crisis is not a setting for a typical macroeconomic adjustment programme. ie not the usual IMF fiscal austerity and privatisation demands. But after many pages, it becomes clear that there is little difference in their proposals than those of the URC. As they say “the aim should be to pursue extensive radical deregulation of economic activity, avoid price controls, facilitate matching of labour and capital, and enhance the management of seized Russian and other sanctioned assets.“

The takeover of Ukraine by capital (mainly foreign) will thus be completed and Ukraine can start paying back its debts and providing new profits for Western imperialism.

The announcement that US President’s Biden’s Inflation Reduction Act (IRA) has got the backing of pro-business, coal-mining owner Democratic Senator Manchin has been greeted with a wave of optimism that the US target of cutting carbon emissions in half before the end of this decade (or 40% compared with 2005 levels), can be met. “This bill will really turbocharge that transition to clean energy, it will transform markets where already solar PV, wind and batteries are in many cases cheaper than incumbent fossil fuels,” said Anand Gopal, executive director of policy at Energy Innovation, an open source research body. “Increasingly I’m more optimistic that keeping the temperature rise under 2C (3.6F) is more reachable. 1.5C is a stretch goal at this point.”

The bill will cut US emissions by between 31% and 44% below 2005 levels by 2030, according to Rhodium Group, a non-partisan research firm. A separate analysis by Energy Innovation, another research house, has found a similar reduction, of between 37% and 41% this decade.

But will it do the trick of saving the planet? First, the IRA has to get through Congress and even after a huge watering down of the bill to accommodate Manchin, there is still no certainty that it will get past a Republican opposition. As it is, the bill actually allows for an expansion of oil and gas drilling in national parks and land as a sop to Manchin. There may be yet more concessions to the fossil fuel lobby.

Then there are actual measures proposed in the IRA. “This is a massive turning point,” argues Leah Stokes, a climate policy expert at the University of California, Santa Barbara. “This bill includes so much, it comprises nearly $370bn in climate and clean energy investments. That’s truly historic. Overall, the IRA is a huge opportunity to tackle the climate crisis.” But is it? Much of the bill is really tax credits to companies to invest in clean energy projects as well as a rebate of up to $7,500 for Americans who want to buy new electric vehicles. There is $9bn to retrofit houses to make them more energy efficient, tax credits for heat pumps and rooftop solar and a $27bn “clean energy technology accelerator” to help deploy new renewable technology. A further $60bn would go towards environmental justice projects and there is a new program to reduce leaks of methane, a potent greenhouse gas, from oil and gas drilling. Much of this is not direct public investment in climate projects but incentives to the private sector to do the right thing. The capitalist sector is being left to deliver on these targets.

And that’s the US. Elsewhere in the world, investment in meeting the already very modest target of limiting the global temperature rise to 1.5C by 2030 is looking way too little. Indeed, the opposite is happening. For example, because of the threatened loss of energy in Europe from blocked Russian imports, the EU parliament has voted to designate gas and nuclear as sustainable! The need for energy to heat homes and fuel industry and transport after the Ukraine crisis has come into conflict with the aim to save the planet. The irony is that a global recession would reduce the demand for fossil fuel energy globally and so help reduce the impact on the planet.

And then there is the war itself. The military sector globally is the largest emitter of greenhouse gases in economies. And yet Nato’s secretary-general Jens Stoltenberg promised the alliance’s Madrid summit recently that there would be a nearly eightfold expansion in forces on high alert to 300,000. And member countries are also hiking defence spending to at least 2 per cent of GDP , “which is increasingly considered a floor, not a ceiling”. Russia’s military spending in 2021 hit $66bn, says the Stockholm International Peace Research Institute. But even then, the US was spending $801bn a year and other Nato members about $363bn. NATO will be outspending Russia’s military by about 10 to one in the region, notes Dan Plesch of SOAS, University of London.

What the war and sky-high energy prices have brought home is that carbon pricing is no answer to controlling global warming. In effect, we’ve now got a global carbon tax, inflicting real hardship on people around the world without necessarily doing much to speed the transition from carbon.

I have argued against this ‘market solution’ in previous posts. Instead we need a global plan of public investment into things society does need, like renewable energy, organic farming, public transportation, public water systems, ecological remediation, public health, quality schools and other currently unmet needs. And it could equalize development the world over by shifting resources out of useless and harmful production in the North and into developing the South, building basic infrastructure, sanitation systems, public schools, health care. At the same time, a global plan could aim to provide equivalent jobs for workers displaced by the retrenchment or closure of unnecessary or harmful industries. None of those outcomes are offered by the IRA.

The other counter to the optimism now again coming forth on abating climate change and global warming is the risk of what is called in statistics a ‘fat tail’ in the probability of where global temperatures are likely to reach in the next few decades. The IPCC tends to look at the most probable outcome ie say a 2.5C increase by 2050. That’s bad enough. But there is still a reasonable probability that it could be much worse. Last year’s IPCC report suggested that if atmospheric CO doubles from pre-industrial levels – something the planet is halfway towards – then there is a roughly an 18% chance that temperatures will rise beyond 4.5°C. What would be the impact of that ‘fat tail’ coming through?

Well, just on GDP terms, one study shows that “a persistent increase in average global temperature by 0.04 °C per year, in the absence of mitigation policies, reduces world real GDP per capita by more than 7 percent by 2100. On the other hand, abiding by the Paris Agreement goals, thereby limiting the temperature increase to 0.01 °C per annum, reduces the loss substantially to about 1 percent.” The estimated losses would increase to 13 percent globally if country-specific variability of climate conditions were to rise commensurate with current annual temperature increases of 0.04 °C.

But that’s just the loss of GDP. The point is that if global temperatures were to reach above the optimistic 1.5C or 2.0C increase and beyond, the impact on the planet is exponential not gradual. “There are plenty of reasons to believe climate change could become catastrophic, even at modest levels of warming,” said lead author Dr Luke Kemp from Cambridge’s Centre for the Study of Existential Risk, (https://www.cser.ac.uk/). Then what one study has called ‘the four horsemen of the climate apocalypse’ will appear, namely “famine and malnutrition, extreme weather, conflict, and vector-borne diseases.” The ‘fat tail’ of probability would deliver rising temperatures that pose a major threat to global food supply, with increasing probabilities of “breadbasket failures” as the world’s most agriculturally productive areas suffer collective meltdowns. Hotter and more extreme weather could also create conditions for new disease outbreaks as habitats for both people and wildlife shift and shrink.

The modelling in this study concluded that areas of extreme heat (i.e. an annual average temperature of over 29 °C), could cover two billion people by 2070. These areas are not only some of the most densely populated, but also some of the most politically fragile. “Average annual temperatures of 29 degrees currently affect around 30 million people in the Sahara and Gulf Coast,” said co-author Chi Xu of Nanjing University. “By 2070, these temperatures and the social and political consequences will directly affect two nuclear powers, and seven maximum containment laboratories housing the most dangerous pathogens. There is serious potential for disastrous knock-on effects,” he said.

The IRA may make some small inroads into emissions reduction in the US, if fully implemented (and as I say, there are serious doubts about that). But globally, there is little sign that global warming can be stopped at the Paris target; more likely global temperatures will rise above a 2C increase and beyond, as governments struggle to reconcile the need for energy at reasonable prices and reducing emissions (unless a major global slump solves the contradiction for a while). The four horsemen of the climate apocalypse are on the horizon.

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