The global spread of the Covid-19 virus has asphyxiated the world economy. Economist George Kerevan argues that the UK economy is poorly positioned to meet the challenge.
ON 20 March 2020, Tory Chancellor Rishi Sunak introduced a revolutionary financial package which guaranteed the state to pay 80% of the wages of workers threatened with redundancy, as a result of the Covid-19 virus (Coronavirus) crisis. Why has the British ruling class resorted to such an extraordinary intervention – one that will surely haunt capitalism in future crises?
The UK is not alone. The virus has caught the entirety of global capitalism off guard. But the impact in Britain comes at a particularly vulnerable moment for the ruling class. The UK finds itself outside of the EU but without yet having secured fresh trade deals with the rest of the world, especially America. As a result, the British ruling class is suddenly bereft of any clear strategy for economic recovery in the wake of the virus emergency – an emergency that could plunge global capitalism into a depression rivalling that of the 1930s.
The asset bubble bursts
To understand the precariousness of British capitalism, we first need to grasp that the international economy as a whole has been trapped in a desperately weak position, since the financial crisis of 2008. The 2008 downturn was preceded by massive over investment in manufacturing resulting in a classic over-production crisis – which in turn caused profit rates to fall. This overproduction then triggered a lunatic speculative boom in commodities and property, while the downturn in profit rates led finance capital to switch to speculation in paper assets and derivatives, which initially offered the prospect of super returns. As the looming downturn in the real economy caused property and commodity prices to crater, the speculative financial boom imploded. This triggered a classic global liquidity crisis, leading to the near collapse of the entire capitalist system.
However, the response of global industrial and finance capital was innovative, shielded in part by the long demobilisation of the working class under neoliberalism. Central banks printed money in the form of their own reserves (so called quantitative easing or QE) and used this “cash” to buy back government bonds. This put extra cash into the financial system in vast amounts – some £445 billion in the UK – which was used not to fund real investment but to buy more bonds and company shares, while at the same time reducing interest rates to near zero. This manoeuvre pumped up share prices, resulting in the biggest bull market in history. At the start of 2020, US and UK share prices were at an historical high – despite, for instance, British manufacturing output having stagnated for a decade.
This gigantic asset price bubble gave the global system and individual capitalists the illusion of wealth and prosperity – as Donald Trump was never tired of explaining. Normally a major global recession causes widespread bankruptcies and destroys capital. This eliminates over capacity, raises profit rates and reboots the investment cycle – it also causes mass unemployment and desperate poverty, but that’s another matter. However, the use of QE and the initiation of a decade-long asset bubble effectively delayed this recalibration.
It now looks as if Covid-19 may have destroyed the asset bubble, setting in train the long-delayed elimination of zombie companies and excess manufacturing investment (plus the jobs that go with it).
In a little over a month, global stock exchanges have seen share prices plunge by over 30%. This is the biggest market “correction” on record. The sell-off has real roots. Covid-19 has caused the sudden collapse of the airline, travel and hospitality sectors, eliminating their profits, and so the value of their shares. Plus, the stalling of global economic growth has also caused the price of oil to plummet.
This has been exacerbated by a price war between Saudi Arabia and Russia, two economies on the verge of collapse. Collapsing petroleum prices have caused a share rout among energy and mining giants, which make up the largest part of the UK FTSE100 index. As global indices dropped, computer driven selling order did the rest.
Will markets bounce back?
Over the past two or three years, stock markets have been very volatile – a euphemism for jittery. Everyone knows there is an asset bubble, but nobody wants to admit it. As a result, we have seen share market drops of 10% – only for prices to recover. In a desperate bid to keep the bubble from imploding permanently, Donald Trump replaced the board of the US central bank (the Fed) with his placemen, ordering them to pump even more liquidity into the US financial system in early 2019. Plus, Trump’s massive borrowing and tax cuts artificially stimulated US consumption, giving a semblance of economic growth and job creation. These moves have temporarily stabilised the global economy over the past 12 months. But Covid-19 may be the straw that breaks the camel’s back.
The instant response of the major Western economies to the virus crisis has been to do more of the same; add more QE to boost share and bond prices. In America, the Fed has pumped in an extra $700 billion in QE. The Bank of England, now under the command of a Johnson appointee, the insipid Andrew Bailey, has offered an extra $235 billion. The European Central Bank says it is prepared to create another $820 billion in new money to buy up EU bonds. That’s a hefty $1.75 trillion in total. (Note: all this money is just invented electronically and added to the balance sheets of the big central banks.)
Unfortunately for the western capitalist class, there are only moderate signs that this QE stimulus has had any real impact on the markets, never mind on manufacturing. In the UK, Jaguar Land Rover, BMW, Toyota, Honda, Nissan and Vauxhall have shut down car production. In the US, Ford, General Motors, Fiat Chrysler, Honda and Toyota are in the process of shutting production. If the virus crisis lasts only a month (till end April, say) then output might spring back. But that optimistic scenario seems unlikely. Mass self-isolation plus the collapse of manufacturing chains, will plunge Western economies into recession. The markets know this, which is why they have been dumping shares and piling into dollars as a safe haven.
The curious thing is that Western governments – caught off guard – seem content with adding monetary stimulus (lower interest rates and QE) which do nothing for consumption, manufacturing output or employment. There is a palpable lack of fiscal stimulus, i.e. direct funding of manufacturing companies to keep them afloat, including nationalisation. This might be explained by the domination of finance capital over manufacturing capital in the various ruling ‘political blocs’ (groups of capitalist interests that dominate society at any given time) – especially in the UK, which was practically the last major imperialist economy to introduce wage support measures.
Global capitalism has no intention of committing early suicide. But if the global asset bubble really has burst, we will be in virgin political territory. It is an iron rule that if asset prices fall, then real interest rates (yields) rise. This will plunge millions of consumers and mortgage holders into debt. UK consumers were £225 billion in collective debt at the end of 2019, with average credit card debt per household running at £2,591. We can assume household debts will be even higher following the Covid-19 layoffs. This implies that consumption will not recover quickly, especially in the UK.
The asset plunge will also affect savers and pensioners, as the value of their financial nest egg plunges. This will have an added detrimental impact on sales and consumption. The result might be a prolonged recession lasting (judging by the collapse in the early 1990s of the Japanese asset bubble) several decades. If so, expect the contraction in world demand and world trade to intensify global trade wars.
Britain after Brexit
In all this, the British capitalists face particular problems following Brexit. Any intensification of trade wars leaves the UK very isolated. The US, China and Europe are continental economies with vast internal markets. They are in a strong position to raise tariff barriers against competitors and pump up domestic demand, allowing their respective bourgeoisies to restructure investment, raise levels of worker exploitation and generate surplus value. But after Brexit, the British ruling elite finds itself in a political and economic limbo.
The Johnson Government continues to play hardball with the EU over trade talks, assuming it has the upper hand. But if international trade supply lines are in crisis anyway, the Europeans may simply transfer any production they have in the UK to back home. Covid-19 is already driving the EU to seal borders – why stop there?
Ditto for Trump’s ‘America First’ ethos. Any notion that the UK can get Trump and Congress to agree a favourable Free Trade Agreement without offering up major economic, military and political concessions is ludicrous. Yet neither the Johnson administration nor the capitalist class as a whole seems to have a plan to deal with the Americans. We can be sure that Trump will force Britain to stop buying Huawei telecoms equipment – which must surely dash any chances of the UK negotiating a favourable trade deal with Beijing.
The economic problems created by Covid-19 for the UK thus extend far beyond the immediate cessation of production. If asset prices do crater on a permanent basis, it will cause havoc for City finance capital, which is the dominant fraction of the British bourgeoisie. Plus, any delay in completing trade deals with the EU and US will be catastrophic for manufacturing capital.
At the same time, the economic dislocation caused by the virus is exposing whole swathes of the British middle class to exactly the precarious living standards that the poorer sections of society have suffered since 2008 and before. Sunak’s latest wage support package is aimed at those in work. It does little for Britain’s huge petty bourgeoisie who earn their living as self-employed. They are docile at the moment but could prove an army of malcontents six or eight weeks from now. The virus is likely to create a social as well as an economic crisis for which the rich and the Johnson administration are ill-prepared as yet.
What is obvious, though, is that populist, right-wing regimes seem more than willing to abandon normal, conservative fiscal rules in order to buy themselves out of a crisis. Trump is already outspending the hated Obama regime and will do so in order to win the November presidential election. When capitalist rule is in existential crisis, anything goes. This creates a major political problem for both Labour and the SNP.
Nicola Sturgeon, for instance, has been content to demand the Johnson administration comes up with more cash to deal with the virus crisis. When Johnson and Sunak invariably comply, the SNP Government meekly takes its Barnett consequential share and replicates whatever economic measures the Tories have just introduced. This tail-ending approach can never successfully outflank a Conservative Government that will “to spend what it takes” to defend bourgeois rule. Besides, to make itself “credible” the SNP Government has abandoned its demand for an immediate independence referendum. Many of us were not convinced the SNP leadership were actually serious about this endeavour in the first place, but the virus crisis has given them the perfect opportunity to retreat.
That said, it is clear the ruling class and the Johnson administration have been blind-sided by the virus crisis. Their responses have been piecemeal and tactical, not strategic. Fortunately for the ruling elite, both middle class and working class opinion is going through a phase of “pulling together” and giving Johnson the benefit of the doubt. This phase will not last, especially if the economic crisis deepens.
For now, the left (including, in Scotland, the broad nationalist movement) needs to put maximum pressure on the Tory and devolved governments to: nationalise failing companies; requisition private medical facilities; ban evictions; freeze energy prices, rents and mortgage payments; prosecute those caught profiteering and take over their companies without compensation; institute fair rationing of essentials; introduce a Universal Basic Income; and draw up a national plan to restore production for use not profit, including a green new deal to combat climate change.
In other words, do whatever it takes to prevent the Covid-19 crisis being paid for by working people.