Stock crash shows up sham recovery

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The world’s stock markets were once more in turmoil as Socialist Review went to press.

The immediate trigger appears to have been the sharp downturn in Chinese share prices since July.

This, in and of itself, is a big problem for the Chinese authorities. As well as seeking to contain growing struggles by workers, they have encouraged so-called “middle class” Chinese to invest their savings in the stock market.

So we have the bizarre spectacle of a supposedly Communist regime, also avowedly committed to the market, using $200 billion of state money to try — unsuccessfully — to prop up share prices.

This failure alone will puncture the belief that the Chinese state can simply snap its fingers and overcome the country’s economic problems.

It is possible that markets elsewhere overreacted to the panic in Chinese markets. However, the fears of investors around the world are not without foundation. There are deeper problems underlying the turmoil.

First of all, below the froth of stocks and shares, the Chinese economy is experiencing real difficulties. Chinese growth has relied on massive levels of investment, and since 2008 this has been heavily dependent on credit.

What Marxists call “overaccumulation” takes place when investment runs ahead of the capacity to generate profits. This seems to be happening in China.

As Martin Wolf asks in the Financial Times, “Does it make sense to invest 44 percent of GDP and yet grow at only 5 percent?” The answer, clearly, is no.

Slowing Chinese growth also affects other economies, especially in the Global South, that have sought to piggyback on China’s boom by supplying it with basic commodities.

For instance, Brazil is now in the grip of its worst recession since the 1930s. The Saudi economy is also under pressure as oil prices have plummeted.

Worse still, there is now concern that rather than the wider global economy entering a new period of expansion, all that has been achieved since the crisis of 2007-8 has been to place the system on life support through measures such as quantitative easing and ultra-low interest rates.

Profitability remains in the doldrums. The European and Japanese economies are stagnant, and even US performance is, by historical standards, meagre, flattered only by how bad things are elsewhere.

So there is concern that once interest rates begin to rise and quantitative easing is tapered off, it may lead to a new crisis.

This explains why commentators such as former US treasury secretary Larry Summers, who was already arguing that the world economy risks “secular stagnation”, is now urging the Federal Reserve to postpone any increase in interest rates.

Faced with low returns on traditional investments such as US treasury bonds, investors have engaged in a wild “search for yield” that has led them to seek out more risky assets, especially in emerging markets.

Once interest rates begin to rise in economies such as the US, these flows are expected to go into reverse.

So Summers argues, “There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks and businesses to borrow money and engage in financial engineering.”

But now, “At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.” In other words, keep the bubbles going to prevent a collapse.

We have for some time pointed out in the pages of Socialist Review that underlying the crisis of 2007-8 was a long period of relatively low profitability. This can only be resolved through a destruction of large amounts of unprofitable capital and unsustainable debts. Until this happens, we should not expect strong recovery.

For the time being the world system is caught between a series of bubbles and the possibility of a new slump ahead — and market volatility is the inevitable result.

For more on economic crises go to Michael Roberts’ blog