A new globalisation
From Griffith REVIEW Edition 25: After the Crisis
© Copyright Griffith University & the author.
Written by Jonathan West
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Jonathan West's biography and other articles by this writer
When the deepest economic crisis of the past fifty years finally ends, a changed world will be left in its wake. Capitalism will still be with us, but the new capitalism could differ substantially from the old. One key feature could be a new form of globalisation. In the current crisis it is already apparent that nations that were relatively ‘decoupled' from global markets as they entered this recession have done better than the more ‘globalised' ones. The lessons of their success are now under scrutiny.
Even though it's too soon to see the future clearly, the forces that will shape the new capitalism can be found in the underlying origins and peculiar character of this recession. This crisis differs from others over the past half-century, not just in its extent and intensity, but in its causes and course.
The current crisis presents two novel features. It has been precipitated by excess worldwide debt, not rising consumer prices, and the increasing complexity and integration of world markets shunted it around the globe with unprecedented speed and ferocity. How societies react to these forces will incubate the new form of capitalism. It is worth exploring further how these developments may play out, before considering how societies such as Australia might respond.
The current recession has been balance-sheet driven, not interest-rate driven. In previous postwar recessions, rising inflationary pressures typically triggered monetary tightening and a slowdown; the antidote was lower rates, which eventually promoted recovery. This time, a balance-sheet recession has stemmed from the weakened financial condition of both consumers and lenders – both have simply had too much debt.
While the crisis has surfaced in multiple forms – sub-prime housing loans, implosion of banks, collapse of automobile companies, country defaults, plunging (and skyrocketing) currencies, government fiscal crises – all are ultimately manifestations of excess leverage. Searching for causes, commentators have focused on the relatively superficial: lax financial-system oversight, overconfident mergers and corporate incompetence, and excessive executive compensation. But behind them all is the stubborn fact that global debt had simply risen to unsustainable levels.
The inevitable reaction to unsustainable debt is deleveraging – debt reduction. This will take time, perhaps several recession-and-boom cycles. But the implication is that this time, and in the future, rather than relying on ever more debt with lower interest rates to extricate ourselves from recession, global capitalism will need to learn to operate with much lower levels of leverage. It's not clear that we know any longer how to do this. Closer scrutiny reveals both how dependent our society has become on debt and how historically unprecedented are the levels to which it has risen.
While debt-to-GDP ratios have escalated furthest in the US, other developed nations including Australia and Britain face similar over-extension, and similar startling increases. To provide some sense of the disproportionate scale debt had reached prior to this crisis, at the start of the great bull market that began in August 1982, US household debt was 44 per cent of nominal GDP; by 1998-2000, it had climbed to 63 per cent; but by 2008, the ratio rocketed to 97 per cent. And that's only household debt. Add corporate and government debt, and the ratios rise to nose-bleed levels. Total US credit-market debt (households, corporations and governments) had reached almost three times GDP at the outset of the crisis, by far the highest ever recorded, and up by around five times its postwar norm.
It has been estimated that to return to its long-term average, around US$60 trillion in debt will need to be removed from the global financial system – that's US$60 trillion in buying power and assets. As total US household wealth (by far the world's largest) stood at US$51 trillion in mid-2009, this is a truly staggering sum. It dwarfs the US$3 trillion stimulus of the Obama administration, to say nothing of Australia's meagre triple-digit billions, or similar commitments in Europe.
Debt has become integral to the pre-crisis form of capitalism; a steeply rising share of all the profits of US corporations – notably including non-financial firms – now appears in financial form, largely interest on debt. Financial payments, including interest, dividends and stock buy-backs, now make up a solid majority of even US non-financial corporations' profits, and in some years virtually all net profits, up from around a third as recently as the mid-1980s. Financial assets now exceed tangible assets in aggregate. Economists have termed this shift ‘financialisation'. Rather than seeking to make a return on investment by producing goods and services at a particular cost, and selling with a margin to produce profit, companies have become increasingly reliant for their profits on the movement and manipulation of money. The basis for this extraordinary shift – and it is both huge and without precedent – has been steadily rising leverage. This raises the question of what happens if debt is no longer available.