A warning from The Economist
So here are the highlights in italics and I’ll try to explain the meaning afterwards:
NEVER BEFORE has the global economy been so indebted. The stock of global debt has risen from $83 billion in 2000 to around $295 billion in 2021, nearly twice the rate of global GDP growth. Debt rose from 230% of GDP in 2000 to 320% on the eve of the pandemic, before covid-19 propelled it to an even higher peak of 355% last year.
This explosion is partly explained by the steady decline in borrowing costs over the past two decades.
As a result, even though global debt has exploded over the years, global interest charges, as a percentage of GDP, are well below their peak in the 1980s.
All of that could soon change. The era of super cheap money is coming to an end. Central banks are fighting against a surge in inflation.
The magnitude of the overall interest bill is vast. The Economist estimates that households, businesses, financial firms and governments around the world paid about $10.5 billion in interest charges in 2021, or 12% of GDP.
To illustrate the potential magnitude of the increase, we consider a scenario in which the interest rates faced by businesses, households and governments increase by one percentage point over the next three years.
In such a scenario, the interest bill would exceed $16 billion by 2026, equivalent to 15% of projected GDP that year. And if rates were to rise twice as fast, for example because inflation persists and forces central banks to take drastic measures, the interest bill could reach around $20 billion by 2026, or nearly $20 billion. a fifth of GDP.
Economists William Rhodes and John Lipsky, who lead the Bretton Woods Committee’s Sovereign Debt Working Group, a semi-official U.S. economic think tank, wrote in The Wall Street Journal this week about growing “challenges” in the debt market. sovereign debt.
“The warning signs of a crisis are already clear,” they said. “According to figures from the International Monetary Fund, interest payments on public debt as a percentage of government revenue are four times higher in low-income countries than in advanced economies, while the same ratio in emerging economies is twice as high.”
Ten years ago, this ratio was similar in all countries, but today, according to the World Bank, some “60% of low-income countries suffer from debt distress or are at high risk of suffering from it”.
Judgment day has been postponed again and again by the US Fed and its allied central banks around the world since the 2008 crisis. Debt and money creation have continued to pump and pump.
Global inflation means this has to stop. Inflation is now 7% on average worldwide. This is entirely a problem created by the central bank. It has nothing to do with Covid-induced supply issues. Inflation hurts workers by reducing real wages unless we fight very hard to keep up.
However, inflation is also a process by which debt is drastically reduced in value. The 1% rely on their property and control over debt to get fabulously rich. They will not allow inflation to continue and reduce its real value. But their only tool to kill inflation is to reduce the money supply by cutting credit and raising interest rates.
Keynesian economists do not understand this. They mistakenly view inflation as a cost plus problem and attribute inflation to wage increases or rising oil prices the same way they did in the 1970s. They were wrong then and the U.S. dollar suffered a drastic devaluation against gold that threatened hyperinflation before control was restored by what was dubbed the Volker Shock in 1979 – a U.S. Fed interest rate of 20 %. Mortgage rates and other debt rates followed. Year-long U.S. recessions and global economic contractions followed, as did the Third World debt crisis, as all debt was denominated in U.S. dollars.
The Keynesians lost control to the monetarist supporters of Milton Friedman following the inflationary crisis of the 1970s. Inflation was never supposed to rise above 2% and we were supposed to trust them to do so.
Monetarism was in turn abandoned in 2008 to prevent the capitalist crisis from degenerating into depression and interest rates were pushed to historic lows, money was printed and given to the 1% to settle debts between them. The same course was adopted at the end of 2019 as a new recession threatened. But Covid forced the government and central banks not just to give to the 1%, but to ensure that workers had income to support themselves during the crisis. This meant budget deficits and money creation that was not just for the 1%. It was this fact that made generalized inflation inevitable.
The requirement to raise interest rates and cut money already in the system to end inflation will also bring an abrupt end to what has been dubbed a “superbubble” in the US economy.
Today, in the United States, we are in the fourth superbubble of the last hundred years.
Previous equity superbubbles had a series of distinct characteristics that are individually rare and collectively unique to these events. In each case, these common characteristics have already occurred in this cycle.
The penultimate feature of these superbubbles was an acceleration in the rate of price progress to two or three times the average speed of the full bull market. In this cycle, the acceleration occurred in 2020 and ended in February 2021, during which time the NASDAQ rose 58% measured since the end of 2019 (and an astonishing 105% since the low of Covid-19!).
The latest feature of the large superbubbles has been sustained market shrinkage and a unique underperformance of speculative stocks, many of which are falling as the blue chip market rises. It happened in 1929, in 2000, and it is happening now. A plausible reason for this effect would be that experienced professionals who know that the market is dangerously overvalued but who believe that for trading reasons they must continue to dance, prefer to at least dance on the cliff with safer stocks. This is why, at the end of the big bubbles, it seems that the termites of confidence attack the most speculative and the most vulnerable first and progress, sometimes quite slowly, towards the blue chips.
The most important and hardest to define quality of a late-stage bubble is the sensitive characteristic of insane investor behavior. But over the past two and a half years, there’s no doubt that we’ve seen crazy investor behavior in spades – more even than in 2000 – especially in meme stocks and in electric vehicle stocks. , in cryptocurrencies and in NFTs.
This checklist for a superbubble going through its phases is now complete and the wild ruckus can begin at any time.
This means a stock market crash with a prolonged loss of value in the stock markets, bond markets and real estate market at the same time. The crisis seems inevitable and workers must prepare.
The wild swings in the value of tech stocks on Wall Street over the past week are a harbinger of what is to come and were underlined by the meta of Facebook’s parent company losing 26.4% in value in a single day, or $230 billion in value, the biggest loss by an incumbent company.
Unfortunately for the working class, we have no interest in any of the monetary theories used to sustain capitalism. We need to go beyond simply trying to fix a broken system. We need to take the economic power held by the 1% out of their hands. It means making all the money and its creation a public service. This means that banks, pension funds, insurance companies must be nationalized and placed under democratic control and planning. The 1% must be expropriated and the economy must respond to human needs and not be forced to serve only private profit and greed.