The economy's empty smile

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October's market jitters show how confidence in the recovery can flip into panic. But what underlies the turmoil?

Appropriate mood music for London’s stock exchange last month, according to the Financial Times’s James Mackintosh, might have been Anthrax’s “I’m Alive”. For those readers unfamiliar with thrash metal, the relevant lyrics are: “An empty smile / And you’re hypnotised / Selling lies, my enterprise / The sheep just get in line / Capitulate so easily / The power of fear.”

The fear gripping markets was a symptom of deeper problems.There is a growing recognition that, far from returning to pre-crisis rates of expansion, the world economy is caught in a period of stagnation. The Eurozone in particular is struggling to emerge from crisis, with Germany, Europe’s powerhouse, teetering on the edge of recession. Combined with this, several big emerging economies are now stuttering.

The methods that helped push the economy out of the mire in 2008 have created new distortions. In Britain, Japan and the US there were ambitious programmes of quantitative easing (QE) — central banks creating money to buy bonds from financial corporations, flooding the market with liquidity and pushing down the rate of return on safe investments. This was meant to spur banks to lend to corporations which would invest in production. Instead QE led to a “search for yield”, as banks ploughed money into a series of often highly risky bubbles. The stock market boom and property price bubbles from China to Britain were two results.

The exuberance was short lived. By spring 2013 the threat of a “tapering” of QE by the US Federal Reserve led to a “taper tantrum”. Money that had flowed into emerging economies suddenly started to flow out. Now tapering has become a reality, the problems have re-emerged. China is a particular cause for concern. Here the state responded to the crisis of 2008 with a wave of cheap credit.
Debt grew from 130 percent of GDP in 2008 to 220 percent in 2013. As this unsustainable situation unravelled, the slowdown in growth rates hit other emerging economies, such as Brazil, that had come to rely on exports to China.

Amid this gloomy picture, Britain has the highest predicted growth of any of the G7 advanced economies. But the growth is coming in a highly distorted manner. Far from the British expansion being a result of a “march of the makers” as chancellor George Osborne predicted, manufacturing output is still well below its pre-recession peak. The slowdown in the Eurozone, the market for half of British exports, threatens to further undermine the recovery.

Not that it feels like recovery for most. Unemployment may have fallen to a six-year low, but real wages have fallen by 8 percent since the crisis, the longest and deepest squeeze on pay in 150 years. The shedding of jobs from the public sector has cut off one of the routes by which badly paid and young workers could achieve better wages.

The pain is not shared evenly. Chief executives at FTSE100 companies now earn 120 times more than the average for those they employ, up from 47 times in 2000. Falling unemployment has not been accompanied by rising productivity. Output per hour is now 15 percent lower than it would have been if pre-crisis trends had continued, and well below that of similar economies.

In part this is because the jobs that are being created are often shoddy ones. There are also pools of people trapped in badly paid self-employment, driving taxis, for instance, or working on construction sites. But it also reflects a much deeper problem: pitifully low levels of investment in the real economy. This investment strike is part of a global phenomenon.

What it reveals is that the fundamental problem that emerged in 2008 has not been resolved. Ultimately investment is driven by profitability. In the decades preceding the crisis a mass of unprofitable investment had built up, dragging the rate of profit down. The growth of credit in the years leading up to the crash reflected this. As the Financial Times’s Martin Wolf writes, “Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand to absorb potential supply.” Each bubble “is greeted as a new era of prosperity” only to “collapse into crisis and post-crisis malaise”.

Capitalists can try to restore profits by squeezing workers — as they have done in Britain, the US and across the Eurozone. But this is not enough. What has to happen is a process of “deleveraging”, in which some of the mass of debt is paid off or allowed to collapse, accompanied by a clearout of some of the mass of unprofitable investment.

Instead debt has continued to grow since 2008, slower than before in the developed economies but much faster in emerging ones. Similarly, there was a spike in bankruptcies in 2008-9 but relatively few since. A mass of unprofitable “zombie companies” persist, servicing their debt but barely turning a profit.

In this situation we can expect more instability, attacks on workers, sluggish growth and, potentially, a new slump somewhere down the line. In the words of another Anthrax song: “The savage mutilation of the human race / Is set on course / Protest and survive, protest and survive”.