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The end of the financialization of capitalism looks confusingly similar to the beginning.
In recent weeks, a great retro fever has broken out in the business press. In the face of rapidly rising inflation and a mixed economic outlook, memories of the stagflation period in the 1970s are increasingly being evoked,1 when anemic economic growth, frequent recessions, rapidly swelling mass unemployment and sometimes double-digit inflation marked the end of the phase of postwar prosperity in the centers of the world system. The concept of stagflation – a nested word formed from the words stagnation and inflation – was popularized precisely during this period of crisis, which in a sense paved the way for neoliberalism.
In September, inflation in the Federal Republic of Germany was 4.1 percent, slightly above the European average of 3.4 percent, mainly due to the expiry of the temporary reduction in value-added tax, which was intended to support mass demand in the event of a pandemic outbreak.2 Just one month later, inflation had already reached 4.5 percent, with forecasts predicting an inflation rate of five percent by the end of the year.3 In the USA, on the other hand, price inflation – measured in terms of so-called consumer inflation – accelerated from 5.3 percent in August to 5.4 percent in September. By October, the figure had risen to 6.2 percent. This is the highest level in 30 years.4 For the group of the largest industrialized and emerging countries, the G-20 states, the OECD is forecasting an inflation rate of 4.5 percent at the end of 2021.5
At the same time, growth forecasts for this year are being trimmed in many key economic areas – despite enormous economic stimulus packages in the USA and the EU: In the FRG, the Ifo Institute lowered its forecast for this year from 3.3 to 2.5 percent.6 According to the International Monetary Fund (IMF), the gross national product (GDP) of the United States is expected to grow by only six percent this year instead of seven (despite a budget deficit of 13 percent of GDP!). China, whose real estate bubble, acting as an economic driver, is in acute danger of bursting, can hope for growth of 7.8 percent, according to the latest bank forecasts – originally the figure was 8.2 percent.7
In mid-October, the IMF revised its global growth outlook for 2021 from six to 5.9 percent, although it should be borne in mind that many economic stimulus programs are still underway, new measures are being discussed (United States) or are only just being implemented (euro zone), and central banks are continuing to print money on a massive scale. The crisis measures of the United States alone are said to amount to ten times the sum spent after the bursting of the real estate bubble in 2008.8 The situation is similar in the case of the FRG, Japan, France and Great Britain.9 The state has long since risen – by force – to become a central economic actor in the neoliberal West as well, whose gigantic economic stimulus measures,10 which far outstrip all the crisis programs of the 2007-09 crisis surge, are having ever weaker effects. Mountains of debt are growing ever faster, inflation is gaining momentum, and the inflated financial sphere is becoming increasingly unstable – it is obvious that the previous measures with which policymakers combated the crisis surges have been exhausted.
A cooling economy with rapidly rising inflation – the parallels to the 1970s are reinforced by the current supply bottlenecks and the price explosion for many intermediate products, raw materials and fossil fuels,11 which evoke memories of the oil price shock of 1973, when OPEC curbed its output in response to the Yom Kippur War. In this context, the current surge in inflation appears to be driven to a much greater extent by such „external“ factors, by an insufficient supply of raw materials and energy carriers, than in the 1970s, when the consequences of OPEC’s supply boycott could be mitigated by investments in Western oil production (North Sea, Gulf of Mexico).
Interaction of inner and outer barrier of capital
Current inflation is in fact driven by an astonishingly close interaction of the inner and outer bound of capital (see also: Three-way Inflation12). An over-indebted capitalist world economy running on credit, lacking a new accumulation regime due to constant competitively mediated productivity advances, is increasingly running up against its ecological limits in its debt-driven exploitation compulsion.
The new scarcity of resources, including supply bottlenecks, results not only from the pandemic-related overloading of the ailing infrastructure in many capitalist core countries, after it was systematically underfunded or even privatized during the neoliberal decades. In addition, there is the permanently increasing demand of the global capitalist exploitation machine, which burns vast amounts of resources for speculative pyramid projects – such as absurd real estate bubbles, as currently in China and previously in the USA and Europe. The debt-financed and tremendously resource- and energy-intensive construction of real estate for speculative purposes, most of which is vacant and demolished after the bubble bursts, is currently the most important economic driver of state capitalist China – and it was the same with the real estate boom in the U.S., where entire suburban neighborhoods were demolished after it ended, although homelessness reached historic highs.
The ever-increasing hunger for resources of money acting as capital, which must become more money through the production of goods, is not only driving up demand for many traditional fossil fuels – such as coal, which is harmful to the climate – but the raw materials needed for ecological transformation are also in hot demand, with supply bottlenecks and shortages on the horizon.13 Moreover, the consequences of climate change are already causing supply to collapse and demand to rise: Brazil, for example, is having to import more fossil fuels as a prolonged drought increasingly puts the country’s hydroelectric plants out of commission, while global food production is likely to come under pressure due to increasing climatic dislocations.
Not only is the ailing late capitalist infrastructure already working at its limit in the full onset of the climate crisis, but in several sectors of the economy there is also the increasing investment anxiety of capital, which often holds back even in the face of a manifest shortage of goods due to a lack of an accumulation regime and the enormous costs involved in setting up new production sites. A prime example of this is the IT industry, where, despite long-lasting supply bottlenecks, the leading corporations act extremely cautiously when setting up new factories so as not to find themselves sitting on investment ruins in the next slump. In order to be able to produce at the global state of the art, investments in the billions are necessary in individual locations. Chip manufacturing factories take years to build, explained one industry insider, and are also „much bigger and much more expensive“ than before.14
The interaction of capital’s external and internal constraints thus manifests itself in the permanently increasing hunger for resources of a capitalist global economy that can only sustain its growth compulsion through massive money printing, a proliferating financial sector, and steadily growing mountains of debt, with the run-down social infrastructure overwhelmed by the consequences of the incipient climate and resource crisis.
Retrospect: From Stagflation to Neoliberalism.
Despite all the gradual differences, the parallels between the stagflation period of the 1970s and the current wave of inflation are unmistakable. But there is also a causal link between this crisis period and the now eroding neoliberal system, which was able to establish itself precisely in response to the stagflation. In a sense, the specific crisis constellation of the stagflation period formed the basis for the overall social breakthrough of neoliberalism – simply because Keynesianism failed because of stagflation. Stagflation was the crisis swamp from which neoliberalism crawled, which now – after a good four decades – seems to be at an end.
The oil crisis of the 1970s was only a peripheral factor in the formation of the long-lasting period of stagflation, which had its central cause in the expiration of the long postwar boom supported by the auto industry and the „Fordist“ mode of production. The markets created after the war in the course of the „automobilization“ (Robert Kurz) of capitalism were opened up in the 1970s, competition increased, while the resulting, intensified tendencies to automate production led to rapidly rising unemployment. This combination of tightening markets and falling demand caused the rate of profit in goods-producing industries to collapse in the 1970s.
The world system, characterized by Keynesian economic policy and Fordist production methods, thus found itself in a fundamental crisis in the 1970s, resulting from the exhaustion of „internal expansion“ within the framework of the Fordist accumulation regime and a falling rate of profit, which led to unmistakable tendencies toward stagnation, including the emergence of mass unemployment. (See also: The End of the „Golden Age“ of Capitalism and the Rise of Neoliberalism)15.
The hegemonic, Keynesian economic policy of the time failed in the face of the crisis because it reacted to the economic slumps resulting from the end of Fordism in the usual way with economic stimulus programs that acted only as flash in the pan and fueled inflation. Similarly, the growing trade union struggles of the period simply set in motion a price-wage spiral and further fueled inflation. Neoliberalism was able to eliminate the unions in the U.S. and the U.K. so quickly in the 1980s precisely because the public was well aware of this connection (And, moreover, this episode illustrates very well the inability of truncated social-democratic class-struggle thinking to grasp the causes of the crisis and ultimately to effectively represent even its own, domestic capitalist interests of variable capital, i.e., the working class).
Consequently, the stagflation period resulted decisively from the increasing disproportion between the stagnating real utilization of capital in the flagging Fordist commodity production and money growth in the form of higher wages (wage-price spiral) and comprehensive stimulus spending by the states. The inability of Keynesianism to confront this period of crisis opened up its opportunity for neoliberalism to rise as the new economic orthodoxy.
What neoliberalism accomplished from the 1980s onward seems absurd at first glance: Reagan and Thatcher managed in the U.S. and the U.K. to break the necks of the unions – which were blamed for inflation – and to freeze real wages for decades. Inflation, moreover, was quickly contained in the U.S. by an extreme policy of high interest rates („Volcker shock“), which triggered recessions in the centers and led the periphery into a severe debt crisis.
And yet, from the second half of the 1980s onward, a certain stabilization of neoliberalism can be noted in the centers (at the expense of the first collapses in the indebted periphery). Building on the abolition of the gold standard during the Vietnam War, the high interest rate phase of the early 1980s, which was used to fight inflation, also provided the initial spark for the financialization of capitalism. The high level of interest rates, which at times climbed to 18 percent, attracted investment-seeking capital to the U.S. financial markets, which rapidly expanded and became the dominant economic factor – while goods production in the American rust belt withered away. The United States evolved from the „workshop of the world“ to the „financial center of the world,“ and it was precisely the position of the U.S. dollar as the world’s reserve currency that made this transformation possible.
For ultimately, this neoliberal, financial market-based capitalism was based on a debt dynamic – enabled by the production of fictitious capital in the financial sphere – in which global debt has been rising faster than world economic output since the 1980s. It is ultimately an anticipation of future capital valorization in the financial sphere, which must be moved further and further into the future. This also explains why, despite stagnating wage levels and rising productivity, the U.S. did not experience a fundamental crisis of overproduction, but instead enjoyed a long upswing under Clinton in the 1990s.16 The upswing was financed on credit – thanks to the dollar as the world’s reserve currency – by means of the rapidly expanding financial markets, which produced the first global bubble in the late 1990s with the dot-com bubble, which collapsed in 2000.
The Crisis Trap
The neoliberal simulation of an accumulation regime in the financial sphere was thus based on a global mountain of debt that has been growing steadily since the 1980s and has been realized since the 1990s by means of ever newer global speculative bubbles that are gaining in size.17 In a sense, financial market-driven neoliberal globalization fled from stagflation into ever larger mountains of debt and speculative excesses, making the global financial water head – which produces periodic surges of crisis that increase in strength – ever more unstable. After the Internet bubble burst in 2000, the great real estate crash followed in 2008, to be followed in 2020 by the most severe crisis surge to date in the wake of the pandemic, which catapulted money printing and borrowing to unprecedented heights. Over the past 40 years, capitalist financial and monetary policy has thus been primarily concerned with stabilizing in the short term this debt tower that has been driven ever further on the financial markets, by enabling its continued existence after crisis spurts through a flight forward into further speculative spurts – through veritable bubble transfers.
In fact, this is done by a neoliberal adaptation of Keynesian crisis policy, by lowering the interest rate level, which, however, was not used to boost commodity prices in the real economy, but rather financial market commodity prices in the financial sphere. For the past 40 years, interest rates have been consistently lowered to provide fresh liquidity to the financial markets again and again after turbulence, with the most important low interest rate phases occurring after the crisis spurts of 2000, 2008 and 2020.18 From 2008 onward, zero interest rates are no longer sufficient to finance the increasingly indebted global system after a crisis spurt. The central banks are now buying up securities in the financial sphere to provide it with ever more liquidity.19 By printing money in this way, which can ultimately only delay the collapse of the world financial system, the central banks have in effect turned into hazardous waste dumps for the financial markets.
With the emergence of the current surge in inflation, the unresolved stagflation crisis of the 1970s is returning, as it were (see also: Corona: Ghosts of Crisis Return20), which neoliberalism was able to displace through the globalized debt tower construction of the past decades that has been described. The capitalist crisis trap,21 from which the neoliberal functional elites fled into ever more extreme financial market excesses, is now snapping shut: Inflation can no longer be banished in the financial sphere – also due to the said interaction of economic and climate crisis. The expansive monetary policy of the central banks is causing prices to rise ever faster, which brings with it the danger of this inflationary dynamic taking on a life of its own and becoming hyperinflation – especially in interaction with new bouts of crisis in the financial sphere.
For this reason, the Fed announced in early November that it would gradually scale back its monthly $120 billion securities purchase program, which in effect finances U.S. government debt and injects fresh liquidity into the financial sphere.22 Every month thereafter, the Fed’s purchases of government bonds are to be reduced by $10 billion and its purchases of mortgage securities by $5 billion until the program expires in mid-2022. Speculation sees the first Fed rate hike, which would end the current zero interest rate policy, also beginning in mid-2022.23 Similar discussions are likely to emerge soon at the ECB, but where the decision-making process is still overshadowed by the clash of national interests between the monetarist German center and the southern periphery.
But a cessation of central bank liquidity programs and an increase in key interest rates threaten recessions and debt crises. Public and private debt has already climbed to 425 percent of GDP in the centers of the world system.24 This mountain of debt, under which not least American corporations are suffering, is only sustainable at a very low level of interest rates, especially since an increase in key interest rates would lead to an economic slowdown and make it more difficult to service current liabilities.
Capitalist crisis policy has ridden to death its financial market-driven, neoliberal horse, on which it tried to flee from the inner barrier of capital for over four decades. The neoliberal postponement seems to be nearing its end, and stagflation, forgotten for decades, is returning with a much higher potential. For the most important difference between today’s wave of inflation and the historical phase of stagflation is, above all, that a high interest rate phase, such as the one initiated by Fed Chairman Volcker starting in 1979, no longer offers a way out.
The crisis trap that opens up before capitalist politics thus boils down to the fact that, inherent in the system, it can only choose the further course of the crisis: Stagflation or deflation. Should inflation be fought – at the price of a recession including a debt crisis and the threat of a deflationary spiral of the kind that devastated southern Europe under Schäuble’s austerity dictates? Or should the stimulus measures, including expansionary monetary policy, be maintained – even at the price of imminent hyperinflation? Deflation or inflation: There are only different crisis paths along which the irreversible devaluation of value can proceed. Either money is devalued in its capacity as a general equivalent of value (inflation), or the devaluation process takes hold of capital in its form as constant and variable capital, as factories, machines and wage-dependent people who suddenly become economically „superfluous.
The course the crisis will take will be determined by politics in the coming months.
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