Returning to normal?

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By MICHAEL ROBERTS*

The capitalist economy was already on a path of downward growth and a low rise in labor productivity. The increase in debt facilitated by the growth of the monetary base will constitute yet another obstacle to growth. Despite the optimism of financial markets, a return to normal is very elusive on the current horizon.

The recent release of US jobs data in May sparked a sharp rise in the US stock market. Behold, they showed a reduction in the unemployment rate from April. By following what is happening in the stock markets of the main economies, it is possible to think that the world economy is returning to normal, as the blockades imposed by most governments to combat the spread of the COVID-19 pandemic are being relaxed or even even suspended.

The world's stock exchanges, after falling precipitously when the lockdowns began, have returned to previous record levels over the past two months. This return was driven, first, by massive injections of cash and credit into the financial system by major central banks. This allowed banks and companies to lend at zero or negative rates, with a guarantee of credit return by the State, therefore without risk of loss due to default. At the same time, the US, UK and European governments created direct bailouts for large companies affected by the blockades of people movement, such as airlines, car and aircraft manufacturers, leisure companies, etc.

It is a feature of the XNUMXst century that central banks have become the main support mechanism for the financial system. They support the leverage of banks that had grown during the period of the “great moderation” – a phenomenon detailed in my book, The Long Depression. This action fought the low profitability in the productive sectors, that is, in those that create value in the world capitalist economy. For companies have turned more and more funds into financial assets. Investors borrowed at very low interest rates to buy and sell stocks and bonds and thus make capital gains. The biggest companies started to buy their own shares to immoderately increase their prices. In fact, what Marx called “fictitious capital” increased in “value” while actual value stagnated or fell.

Between 1992 and 2007, monetary injections by central banks (usually known as base money or “base money”)power money”) doubled as a share of global GDP from 3,7% of total liquidity (the sum of money and credit in its different forms) to 7,2% in 2007. At the same time, loans and bank debt almost tripled as a share of the same GDP. From 2007 to 2019, money (base money) doubled again, in percentage terms, as part of the “liquidity pyramid”. That's how central banks have driven the stock and bond market boom.

When Covid-19 hit, a global shutdown occurred that severely froze economic activity. In response, G4 central bank balance sheets grew again, now around $3 trillion (about 3,5% of world GDP). It is understood that this rate of growth is likely to persist through the end of the year as various liquidity and lending packages continue to be expanded. Therefore, money in the form of "power money” will double again by the end of this year. This action will bring the global amount of this form of liquidity to 19,7 trillion dollars, that is, to almost a quarter of the world's nominal GDP. As part of total liquidity, this form of money (base money) will become three times higher compared to the 2007 level.

It's no wonder, then, that stock markets are booming. But this fantasy world of finance has less and less to do with the production of effective value in capitalist accumulation. While the US stock market is trending back to previous levels, corporate earnings during the pandemic lockdown are seeing an even steeper drop than that of the Great Recession of 2008-9. The gap between fantasy and reality is even greater than it was in the late 90s, just before the dot.com collapse. At that moment, stock valuations collapsed by 50%, thus turning some of their fictitious values ​​into real nothingness.

But there is another reason financial markets are thriving; it is an optimistic belief being promoted by governments that the COVID-19 disaster will soon be over. The argument is that this year will be terrible for GDP, employment, income and investment in the “real” economy; however, everything should come back in 2021, when the blockades end and a miracle vaccine emerges. After the disaster there will be, therefore, for the optimists on duty, a quick “return to normal”. Speculators are now trying to jump over the pandemic abyss, back and forth, assuming that things can return to their previous dynamics.

In the US, job creation showed a sharp recovery in May. As lockdowns begin to end or ease across the US, it appears that many Americans are returning to work in the leisure and retail sectors after being given furloughs for two months. The stock market loves this, assuming a V-shaped recovery is underway. But the US unemployment rate was still 13,3%, which is more than a third higher than it was in the depths of the Great Recession. And if you include those who want full-time work but can't find it, the unemployment rate tops out at 21%. With the addition of another 3 million people who were not classified, the total unemployment rate in May reaches approximately 25% mark. In addition, the black unemployment rate has increased substantially.

The return to work of a proportion of retail and leisure employees is effectively expected. The question is whether it is possible to recover GDP and investment growth to previous levels (which were already relatively weak), in such a way as to raise the level of employment in a short period of time. Most analysts think not. Indeed, as stock markets bounce back to previous peaks, buoyed by hopes of a V-shaped recovery, most traditional economic forecasts predict a major disaster, a slow prolonged comeback, and there are even those who don't believe it. a return to previous trends.

As I have argued in previous posts, the world capitalist economy was not advancing in leaps and bounds before the pandemic. Indeed, in most major economies and the so-called larger emerging economies, growth and investment had already slowed down, while corporate profits had stopped growing. The profitability of capital in the main economies was at one of the lowest points of the entire post-war period, despite the mega-profits obtained by the so-called FAANGS (Facebook, Amazon, Apple, Netflix and Google), that is, by the giant companies of the technological media .

The US Congressional Budget Office (CBO) has drastically revised forecasts for US GDP. Now, he expects nominal US GDP to drop 14,2% in the first half of 2020, from the predicted trend in January, before the COVID-19 pandemic. It also expects that the various fiscal and monetary injections by the authorities, as well as the end of the blockades, will reduce this loss in January value to 9,4%, by the end of 2020.

The CBO expects a kind of V-shaped recovery in US GDP for 2021, but does not expect the US economic growth trend, predicted before the pandemic (already reduced due to the Long Depression, which started in 2009), to be achieved before 2029. Furthermore, it may not even go back to the previous trend growth forecast before 2030! So there will be a permanent loss of 5,3% in nominal GDP compared to pre-COVID predictions, i.e. $16 trillion will be wasted forever. In terms of real GDP, this loss will amount to around 0% cumulatively, or 3 trillion dollars in 8 values.

There is a similar forecast for Europe. After euro area real GDP recorded a record decline of 3,8% in the first quarter of 2020, the European Central Bank (ECB) forecasts a further decline in GDP of 13% in the second quarter. Assuming the pandemic lockdowns end and fiscal and monetary measures are effective in helping the eurozone economy, the ECB calculates that real GDP in the euro area will still fall by 8,7% in 2020 and then recover by 5,2 % in 2021 and 3,3% in 2022. But real GDP would still be around 4% below the level originally expected before the pandemic. Unemployment will still be 20% above the pre-pandemic forecast. And this is the “soft scenario”. In a more severe scenario, in which there would be a second wave of infection with the new coronavirus and other restrictions, the ECB predicts that the euro zone will still be 9% below the previously expected level for 2022. That is, it does not expect a return " normal” for the foreseeable future.

Outside the eurozone, the UK economy, which is already pretty weak, is unlikely to make a V-shaped return. Historically, low growth has occurred in the UK after recessions – that is, they have left it there.”permanent scars. There is even less reason now to assume that everything will be different. Indicators of global economic activity show that levels remained severely depressed in May, in fact at levels lower than those at the end of the 2008-9 crisis.

As for “emerging economies”, the picture is even bleaker. If you believe the main forecast of the Institute of International Finance (IIF), there will be a drop of -10% in 2020. Argentina's GDP this year will return to the level of 2007. For Brazil, the forecast is that there will be a drop of -7%, in 2020, which should bring the economy back to the 2010 level; it's another ten years of modest gains in GDP that are going to go away. With a drop of -9%, Mexico returns to the level of 2013. Therefore, there is a “lost decade” even before considering the effects of the currency devaluation. Brazil and Argentina may possibly have, at the end of 2020, real GDP levels similar to those they obtained 30 years ago.

Even more important as a guide to whether the major capitalist economies will indeed “get back to normal” – as US stock market investors gleefully surmise – is the level of profitability of capital. US corporate earnings figures for the first quarter of 2020 showed the direction for the future. US corporate earnings fell at an annual pace of 13,9% and were 8,5% below the first quarter of last year. The main productive (non-financial) sectors saw profits fall by $170 billion in the quarter, so there was no increase in profits compared to the first quarter of 2019 – and that is without taking inflation into account. In fact, US non-financial sector profits have more or less fallen over the past five years. The year 2020, therefore, will only add to the problems of the US corporate sector. It's hard to think that he will emerge from the containment associated with the new coronavirus pandemic with the same levels of investment as before.

In fact, when observing the profitability rate of the G7 economies, assuming that a weak return to normal happens, it is seen that it is one more step down in the long depression that the main imperialist economies (United States, Germany, Japan , United Kingdom, Canada, France, Italy) are experiencing since 1997. A graph showing the return on capital in the G7 economies as a whole follows:

The source for this graph is data provided by Penn World Tables 9.1 (IRR). This source provides the internal rate of return calculated based on a series of net capital stocks. Weighted average profitability in the G7 was calculated based on GDP figures for the seven most advanced major capitalist economies.

In this graph, it is interesting to note that the return on capital actually peaked in 1997; thus, for the full two decades of the 2017st century, there has been a downward trend in profitability (which has been interspersed, as it always does, with brief reversals. (The IRR estimate based on Penn World, which ends in 2021, has been extended to 7 , using estimates from the AMECO database (which are calculated in a similar way) By doing so, return on equity in the G2020 is likely to plunge to an all-time low in 2021 and even if a moderate recovery occurs in XNUMX .

Financial markets may be expecting a quick payback (and those investors who are following that prediction could make huge profits, but they will likely be momentary). For the hard reality is that the financial market boom is floating on an ocean of cheap credit provided by the monetary financing of nation states and their central banks. This credit is not coming from value-producing economic activity. And it is precisely this that shows the speed of money (that is, the speed of monetary transactions with goods). The credit-fuelled boom in fictitious capital did not generate faster growth in the actual value generated or in the real profitability of capital. It's just pushing a string.

Debt grew much faster than any increase in value. In fact, the debt's productivity, that is, its ability to raise production levels, has now become negative. That is, the increase in indebtedness is consistent with a reduction in GDP growth.

Keeping the active asset market going up is one thing; putting 35 million Americans back to work is another matter, especially when the majority would have to be employed by companies that do not enjoy the benefits of those in the S&P 500. Furthermore, the vast majority of companies are very far from having the conditions financial statements of major technology companies, which provide important support to stock price indices.

The reality is that the impact of the pandemic has only reinforced existing trends. Behold, the capitalist economy was already on a path of downward growth and low rise in labor productivity. The increase in debt facilitated by the growth of the monetary base will constitute yet another obstacle to growth. Despite the optimism of financial markets, a return to normal is very elusive on the current horizon.

*Michael Roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério Prado

Originally published in The Next Recession, on 6/06/2020.

 

 

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