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Demand, debt mountains and the next crash

debtThe problem – a very big problem indeed – for capitalism at its present stage is that demand is flat, or falling. That underlying pattern has existed for the past 40 years, since the demand for continent-wide reconstruction after the Second World War gradually petered out in the 1970s. Thereafter the flatness of demand was obscured by the Cold War acceleration of global arms expenditure, as well as by the world-scale development in technology applying to cars, planes and computers.

The unipolar power of the US as the world’s hegemon plus the lack of technological breakthroughs with worldwide industrial application have left a growing vacuum of demand. Demand, that is, sufficient to power a global capitalism that depends on it. That comparative vacuum which was met by the enormous explosion of debt in the 1990-2000s, and which led directly to the global financial crash of 2008-9, is once again being met by the huge expansion of debt which cannot conceivably be sustained long-term.

The one relatively bright spot last time round was China. Its growth rate fell, but was still strong by Western economy standards. Now however China is joining other nations propelled by debt-fuelled growth. Total bank and other-financial lending in China hit almost 200% of GDP in 2012, well on the way to doubling since the 125% level in 2008. Moreover the debt is growing twice as fast as the economy. That kind of debt-laden growth can survive for some time, but sooner rather than later will hit the buffers because the level of debt cannot be paid down.

Next, Europe. Lombard Research has found that EU banks are more or less insolvent and only survive because of Draghi’s famous commitment to do ‘whateve it takes’ to preserve the euro. That has meant providing unlimited liquidity to the EU banks. This again is not a long-term tenable position because the EU banks’ liabilities exposure is 350% of EU GDP (compared, say, to only 80% for US banks in relation to US GDP). Moreover the eurozone banks are not only highly leveraged, but are still expanding their balance sheets and making little effort to recapitalise.

Then there is what the Director of Financial Stability at the Bank of England has termed “the biggest bond bubble in history”. This is the flip-side of the government pumping £375bn of electronic money (QE) into the UK economy over the last 4 years. If that colossal bubble were to deflate in a rapid or disorderly fashion – signs of which were apparent when Bernanke at the US Federal Reserve indicated he might begin to reduce the QE stimulus – the consequences would be catastrophic. What makes these risks even worse is the further bubble created by Osborne’s insane help-to-buy mortgage guarantee scheme.

What is needed, but no political leader will talk about, is not the further magnification of already gigantic financial bubbles, but rather the release of the suppressed demand caused by decades of squeezing wages and the ideological taboo at the centre of neoliberal capitalism against any use of Keynesian demand stimulus.

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