The world is watching with great concern as the crisis in the banking system of imperialist countries evolves. The bankruptcy of Silicon Valley Bank followed a few days later by that of Signature Bank in the U.S.A. set off alarm bells.
Shortly thereafter, a multi-million-dollar recapitalization by major banks prevented the bankruptcy of First Republic. In Europe, Credite Suisse failed and had to be bought by UBS, another large Swiss bank.
Where is this banking crisis heading? What is this crisis signaling in relation to the evolution of the world economy as a whole?
By: Eduardo Almeida
How did the crisis begin?
Bank failures of these dimensions set off alarms in the world economy. Silicon Valley was the 16th largest bank in the U.S., the financial base for many technology startups, and was the largest bank failure since the 2008 recession.
This bank had taken advantage of the previous very low-interest rates in order to put its clients’ money into long-term U.S. Treasury securities. These securities yield more but cannot be redeemed immediately, at the risk of losing yields. However, rising U.S. interest rates have affected the economy as a whole. When customers needed their money, the bank lacked liquidity, i.e. they had no money to pay them back. And new loans were only available at higher interest rates, due to the increase in rates. This was followed by a run on the bank, which led to its failure.
Credite Suisse was Switzerland’s second-largest bank, and with it went much of that country’s international credibility.
These failures impacted the banking system as a whole. According to the Financial Times, banks in the United States, Europe, and Japan lost $459 billion in market value in March.
The imperialist governments reacted quickly, investing billions in the banks to prevent an uncontrollable expansion of the crisis. Biden guaranteed all deposits below $250,000 in Silicon Valley, and then also guaranteed those above that amount. The Swiss government provided a $54 billion emergency loan to Credite Suisse and then stood behind the operation of that bank by UBS.
In the following days, the situation apparently returned to normal. Stock markets began to rise again and government messages were reassuring.
But it all blew up again when Deutsch Bank’s shares fell 14.5%. Despite a partial recovery thereafter, the strength of Germany’s largest bank has taken a hit.
A similar process, with some differences in the type of investments and leverages of banks, is occurring in the global banking system. “Weaker U.S. banks have been losing deposits to stronger banks for more than two years – more than $500 billion has been withdrawn since the collapse of SVB on March 10 and $600 billion since the Fed [U.S. central bank] began raising interest rates,” as economist Michael Roberts explained, which “is a record.”
Now, the imperialist governments and the IMF, the spokesmen of finance capital, claim that stability has been preserved. This seems more like self-serving propaganda than a realistic diagnosis. In reality, the crisis has just begun.
Cycles: the downward trend of the capitalist economy
It is not possible to understand what is happening by looking only to the financial system for explanations. It is necessary to relate this process to the whole imperialist economy and its downward trend after the recession of 2007-2009.
The capitalist economy develops in cycles. There are short cycles of growth, boom, and crisis, lasting between eight and ten years, marked by the evolution of the average rate of profit. When the rate of profit rises, there is a new cycle of investment and the economy grows. After the boom, when profits fall, investment declines, and crisis ensues, until an increase in profits allows a new period of growth.
There are also longer trends in the economy, spanning several short cycles, generated or influenced by economic and extra-economic events such as new technologies, new markets, wars, and class struggle events.
From rise to fall
The last upward trend in the economy was the period of so-called globalization in the 1980s and 1990s, based on neoliberal plans, the restoration of capitalism in the former workers’ states (particularly in China, transformed into the “factory of the world”) and the incorporation of computers into production.
The current downward trend began with the recession of 2007-2009. There was another major international recession in 2020, which coincided with and was exacerbated by the Covid 19 pandemic but was not limited to it.
As is characteristic of these downward phases, we have short cycles with the anemic growth of the imperialist economy.
In this downward phase of the capitalist economy, China’s capitalist growth led to the questioning of its place in the world division of labor, which led to a confrontation between it and the United States.
Throwing away money
The policy of the imperialist governments, to prevent the international recessions of 2008 and 2020 from turning into depressions, was to inject massive sums of public money to save big business and in particular the banks. Never in history has so much public money been spent to save big capital.
This had two major consequences, which are still present and which condition the evolution of the world economy.
The first is the gigantic indebtedness of governments, companies, and individuals. Global debt has risen from 278% of global GDP in 2007 to a record 349% of GDP in 2022. That means $300 trillion in global debt, about $37,500 for every person in the world.
Government indebtedness is enormous, with the global average rising from 76% of GDP in 2007 to 102% in 2022. As always, workers will bear the brunt of this massive debt in the form of lower wages and precarious jobs and public services. Several semi-colonial countries are on the verge of explosion, such as Egypt, Zambia, and Turkey.
The second issue is that the destruction of old capital did not take place through the bankruptcy of enterprises with a lower rate of profit, which is typical of great crises. With the gigantic bailouts of companies, in addition to the very low interest rates in the imperialist countries, a great number of “zombie companies” are kept artificially on the verge of bankruptcy.
This situation has become less tenable with the increase in interest rates in imperialist countries.
The policy of the big bourgeoisie to restore profit rates
Even within the framework of the downward trend of the world economy, the bourgeoisie is seeking to re-establish a new upward phase. It must be recognized that it has achieved some victories in this regard.
It is a fact that there are technological advances that are already being incorporated into production, such as Industry 4.0, artificial intelligence, the 5G network, and electric cars.
It is also very significant that the world bourgeoisie took advantage of the pandemic to impose a setback in the living conditions of workers. There has been a decrease in wages and precarity in labor relations (with outsourcing and “uberization”) and a sharp increase in unemployment. There is a huge industrial reserve army, and even employed workers often live in misery.
These two conditions (progress in technology and reduction of workers’ wages) favor the bourgeoisie in its attempt to reach a new upward phase of the world economy.
However, two other elements remain major obstacles.
The first is the average rate of profit, which remains low, below the needs of the bourgeoisie for a new upward phase. Despite the fact that the leading sectors are achieving super profits, this is not enough to raise the average profits of the imperialist economy as a whole and thus relaunch the economy.
The second is the reality of the class struggle. The bourgeoisie needs to impose new defeats on the workers to guarantee sufficient stability that will allow for this new upward phase. And there are problems with that, including important divisions within the bourgeoisie itself, present in both imperialist and semi-colonial countries. From Biden to Trump, from Macron to Le Pen, passing through Lula and Bolsonaro, Petros and Uribe, Boric and Piñera, etc.
The consequences of the combination of these trends and counter-trends are manifested in the current instability of the global economy and class struggle. The current crisis in France following Macron’s imposition of pension reform and the recurrent political crises in Latin America are expressions of this reality.
The present state of the downward trend
As we have said, periods of economic growth in the short cycles of the broader downward curve are anemic. But in the last quarter of 2022, there was a significant slowdown in imperialist countries.
GDP in the U.S. grew only 0.7%, compared to 5.4% in the last quarter of 2021. The Eurozone posted 0 %, including -0.4 % in Germany, -0.1 % in Italy, 0.1 % in England, and 0.1 % in France.
Underlying this is the fact that the rate of profit of big imperialist corporations is declining. According to Michael Roberts, the rate of profit in the U.S. has been falling since the third quarter of 2022.
A particularly significant fact is that “Big Tech,” the big five U.S. technology companies (Apple, Microsoft, Alphabet, Meta, Amazon), are showing a drop in their profit rates and are laying off employees on a large scale. The leading sector, which achieves super profits in the upswing, is showing a drop in profits.
This signals the possibility of a new recession in the world economy.
The crisis erupts, Imperialist central banks raise interest rates
We can now turn to an analysis of the world financial crisis. Imperialism currently has a rampant level of parasitism, with huge financial bubbles in all countries of the world.
Huge mountains of fictitious capital (which has no direct origin in production) suck the surplus value extracted from the workers and pass it into the hands of a few imperialist financial funds. This functions as a gigantic financial pyramid that magnifies profits in times of capital’s ascendancy.
But when the rate of profit falls in the base of the economy, a financial crisis can be precipitated, which also magnifies the losses, thus deepening the crises. This is the possibility that looms on the horizon if a new world recession materializes.
After the last world recession and, in particular, after the outbreak of the war in Ukraine, persistent inflation set in in the imperialist countries.
This ended up provoking a very important change in the policy of imperialist governments. Until then, the central banks had been applying a negative interest rate (below inflation) to combat the effects of recessions. As of 2022, to face inflation, they began to use the classic recipe of bourgeois economics, which is to increase the interest rate.
In the U.S., the rate increased from 0.25% in 2022 to 5% today. The European Central Bank raised rates from -0.5% in 2022 to 3% today.
The combination of rising interest rates and falling profit rates was the trigger for the current banking crisis. It is symbolic that the first failure was that of Silicon Valley, a mid-sized U.S. bank closely linked to technology companies.
What is the outlook?
The reaction of the governments, pouring billions of public dollars into saving the big banks, expresses the continuity of imperialist world policy. However, there is a huge contradiction between the increase in interest rates and the current banking crisis. The Federal Reserve (US Central Bank) and the European Central Bank maintained the trend of rising interest rates this March, even in the midst of the banking crisis. Will they continue on this path, even in the case of new bankruptcies?
Nothing ensures that the banking crisis will be halted, even if the rise in interest rates is reversed. There is an underlying problem at the base of the economy, which is the fall in the rate of profit of large companies. The financial pyramid is being shaken.
The fall in the rate of profit points to the possibility of a new recession on the horizon. It would be the third global recession, after those of 2007-2009 and 2020. But this is a possibility, not a certainty.
The most probable tendency is that the contradictions will deepen, even in the absence of an international recession. There are already crises in place in the governments of semi-colonial countries due to the current levels of debt. Which countries will explode with these interest rates? What are the consequences in the class struggle, similar to what is already happening in France?
As we said at the beginning of the article, it seems that the crisis has just begun.
Originally published at www.pstu.org.br, 3/30/2023.
Translation by: John Joseph