Forget about a rising China. The dangerous part will be its decline.
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So many global troubles have arisen that the political and business leaders at the World Economic Forum in Switzerland have adopted a buzzword to capture the moment.
The inflation rate for consumer prices in the US has clearly peaked and is falling steadily. The latest figure for year-on-year inflation in December was 6.4%, down from a peak of 9.0% last summer. Core inflation (which excludes prices for food and energy) has also peaked but not by nearly as much. That’s because it is food and energy price inflation that has slowed the most. Energy price inflation has halved as oil and gas prices drop back and there has been a peak in food prices. But housing costs continue to accelerate and other services prices fell only a little; so core inflation remains ‘sticky’.
What the latest figures show is that the ‘supply shock’ to prices from supply chain blockages and shortages of food and energy supplies since the Russian invasion of Ukraine have eased somewhat.
Inflation may be subsiding as the US economy slows, but remember, the hit to average worker’s living standards has been significant since the pandemic. Inflation means a change in prices, so even if inflation slows, price levels remain higher than before. Since the start of the pandemic, US consumer prices have risen 15%, but average weekly earnings have risen only 7.8%. Wage increases have actually been higher for non-management workers; the hit to the living standards of professional and lower management staff has been greater. Even so, from the beginning of 2021 to the end of 2022, hourly earnings for lower grade workers have risen 11.5% while prices have risen 14%. Living standards have been hit across the board, as wage increases fail to match price rises – there is no wage-price spiral.
And the inflation spike is not over, partly because the supply chain blockages remain, if at a lower level, and partly because productivity growth is so low that any increase in raw material or labour costs puts pressure on profitability, forcing companies to try and compensate by raising prices. But the ability to do that is disappearing fast.
I wrote a post last September that noted profit margins were beginning to fall. Profits are made up of the profit margin between costs of production and sale prices multiplied by total revenue from sales. During the post-pandemic recovery, US non-financial corporate profit margins (that’s the ratio of profits to per unit of costs) reached multi-decade highs as the surge in inflation boosted corporate pricing power while wages languished. A true profit-price spiral.
However, margins are now beginning to be squeezed. The average profit margin for the top 500 US companies in 2022 is estimated at 12.0%, down from 12.6% in 2021, if still well above the ten-year average margin of 10.3%.
And as overall economic growth in the US slows (real GDP yoy % in graph below), corporate sales revenue growth is slowing too.
And we can see that in the profits growth recorded by the US non-financial corporate sector. Indeed, in Q3 2022, profits fell.
And the slowdown in US corporate profits is replicated in all the major economies. Below is my latest estimate of global corporate profits based on five key economies. The pandemic slump recorded a 15% fall in global corporate profits in 2020, followed by a 40% recovery in 2021, but now profits growth has slowed to just 3.4% in Q3 2022. And note, as I have done before, that profits had stopped rising through 2019, that’s even before the pandemic, suggesting that the major economies were heading for a slump before COVID emerged.
I have argued before that there are two factors driving the US and other economies into a slump this year: the first is profits, which are heading south; and the second is the cost of borrowing and servicing debt. As for profits, I have argued on numerous occasions that they 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, then investment and employment follow. So 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.
As for the cost of borrowing and servicing existing debt, the US Federal Reserve and other central banks are engaged in a severe monetary tightening by raising their basic interest rates that set the floor for other rates for borrowing; and by reducing the available money supply to raise debt. This is squeezing credit and ‘liquidity’ for companies. These two factors are what I have called the ‘blades of a scissor’ that are now closing, to end economic expansion and turn economies into recession.
A tremendous credit boom took place in 2022, which led a surge in US bank lending of $1.5trn.
Alongside bank loans, there has been an explosion in ‘low-quality’ lending that has brought debt loads in corporate America to record highs. The total US stock of “subprime” corporate debt (junk bonds, leveraged loans etc) has reached $5tn. According to the national accounts, total non-financial corporate debt (bonds and loans) stands at $12.7tn, making low-quality debt as much 40% of the total. This debt is financing very speculative or highly indebted companies either in the form of a loan (“leveraged loans”) or non-investment grade bonds (“junk bonds”) and includes corporate loans sold into securitizations called Collateralized Loan Obligations (CLOs); as well as loans extended privately by non-banks that are completely unregulated. Years of growth, evolution and financial engineering have spawned, yet again, a complex, highly fragmented and non-regulated financial market.
And this is replicated globally. Here’s last month’s annual report from the Global Financial Stability Board on the so-called Non-Bank Financial Intermediation (NBFI). It found that “the NBFI sector grew by 8.9% in 2021, higher than its five-year average growth of 6.6%, reaching $239.3 trillion. […] The total NBFI sector increased its relative share of total global financial assets from 48.6% to 49.2% in 2021.” The rise in high-risk, opaque subprime corporate debt has far-reaching consequences. Non-bank financial institutions such as hedge funds and private equity firms now account for a significant share of financial sector activity, despite enjoying far lighter regulatory and reporting requirements compared to banks and mutual funds – posing what is called “a systemic risk to financial stability”.
Up to now, because corporate profits have risen so much, even though corporate debt to GDP has risen to all-time highs, debt to profits has not (except of course for the 20% of companies deemed as ‘zombies’ ie not making enough profit to cover debt costs).
Most US firms have been able to cover their debt servicing costs comfortably up to 2021. But with debt costs set to rise even more over the next six months, if central banks stick to their monetary tightening, we can expect to see an increased inability for firms to cover their interest costs.
The blades of the scissor of slump are closing.
What would happen if the Republicans refuse to raise the debt limit? Basically, nothing. Life would go on as before.
Kristalina Georgieva says next couple of months will be ‘tough for China’ due to spread of Covid
The finances of Hispanic consumers, renters and consumers younger than 40 took a nosedive between 2021 and 2022.
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 20th 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.”
REUTERS/Mike Segar
- Nouriel Roubini cautioned the world faces severe risks that aren’t being handled carefully.
- He warned people should “live on high-alert” as inflation, climate change and the risk of military conflict threaten the world.
- Roubini also slammed the Fed for missing the mark on inflation, predicting a “deep and protracted” recession.
Top economist Nouriel Roubini has painted a gloomy picture on what 2023 has in store for the global economy.
In an interview with the Financial Times, Roubini, often dubbed “Dr Doom” for his pessimistic predictions, said a convergence of old and new problems pose risks to the world.
“I think that really the world is on a slow-motion train wreck. There are major new threats that did not exist before, and they’re building up and we’re doing very little about it,” he said.
He warned that a mix of inflation, artificial intelligence, climate change and the risk of a World War III all stand to have enormous global impact. “We must learn to live on high alert,” he said, adding “We will need luck, global co-operation and almost unprecedented economic growth” for a positive outcome.
Expanding on his downbeat predictions for next year, Roubini slammed the Federal Reserve for missing the mark on inflation, warning there’s a sure chance the economy will tip into a recession as a result of the US central bank’s aggressive interest-rate increases.
Just last week, the Fed raised rates by 50-basis points as it continues its battle to bring down inflation from near 40-year highs toward its 2% target. The central bank has boosted borrowing costs by more than 400 basis points since March, fueling sharp financial-market declines across asset classes.
“The conventional wisdom, coming from policymakers or Wall Street, has been systematically wrong. First, they said inflation’s going to be transitory . . . Then there was a debate over whether rising inflation was due to bad policies or bad luck,” Roubini said.
He warned that the oncoming economic downturn will be severe. “No, this is not going to be a short and shallow recession, it’s going to be deep and protracted,” he said.
With US inflation at 7.1% and unemployment at 3.7%, Roubini also cautioned the world’s largest economy will almost certainly face a hard landing.
Earlier this month, Roubini sounded the alarm on potential stock market losses given the likelihood of a US recession. He predicted the S&P 500 could crash as much as 25% if the US economy contracts next year.
Read the original article on Business Insider
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.