Inflation, debt, recession: the crisis of the capitalist economy rears its ugly head

Nikos Anastasiadis

In an attempt to give an overview of the situation in the world economy at the moment, Citigroup CEO Jane Fraser said that the company has been focused on what she calls 

the “three Rs”: Russia, Rates and Recession. 

This sums up about right the fears of big capital, if you consider that the war in Ukraine is linked to the energy crisis and the debt problem is linked to rising interest rates and the prospect of recession.

On a similar note, in a Bank of America survey, which included 259 participants with $722 billion under management, the four biggest risks that investors marked were: 

“Inflation, a global recession, hawkish central banks and systemic credit events”. 

Inflation biting

According to a Pew Research Center analysis, inflation rates have doubled in 37 of 44 advanced economies over the past two years. In fact, the inflation rate today is higher than it’s been since the early 1980s. UK inflation is at a record 9% and rising. The largest relative increase in inflation among G7 countries was in Germany, climbing to 7.4%, the highest in 50 years. The annual inflation rate in the US accelerated to 9.1% in June, the highest since November ‘81. This led Goldman Sachs CEO David Solomon to state that state that 

“inflation is ‘deeply entrenched’ in the U.S. economy and impacting conditions on a multitude of fronts”.

It is not an overstatement to say that there is an element of panic in the capitalist establishment. Inflation is something they thought had been curbed forever – but now it is coming back to haunt them.

For those who wonder why inflation is so bad for capitalists, there are two main reasons:

The first is that inflation creates an environment of instability and uncertainty that does not encourage investments. Capitalists cannot predict the final prices that they will be able to sell the goods they produce, cannot predict the level of wages, cannot predict the exact prices of raw materials and energy and cannot predict borrowing costs. In short, inflation creates major problems in the functioning of the system.

The second is that inflation generally is an additional factor in the creation of social unrest. Workers and the poorer layers in society are forced to take to the streets to demand lower prices and better wages in order to cope with the rising cost of living. Capitalists are naturally worried about the consequences of such developments if they spin out of their control.

There is a big discussion on why inflation jumped during the last months. A complete analysis of inflation is beyond the scope of this article. However, there is no doubt that the influx of vast amounts of money during the Great Recession and the Covid pandemic in the economies certainly played a role. In addition, the most important factors at this juncture is the energy crisis and the supply chain shocks.

Speaking of supply chain shocks, the processes of a bipolar world developing in the context of the new Cold War, particularly after the Russian invasion of Ukraine, make production processes much more complicated, as Just-in-time (JIT) manufacturing as we knew it, is coming to an end. Multinationals are now forced to partially “diversify” their supply chains, aiming to have two or more alternative options, in case their first option breaks down because of economic or geopolitical factors. They are also forced to fill their inventories in order to have stocks in case of emergency. 

In addition, we should note that some of the recent price hikes are purely speculative. Recently, Elon Musk of Tesla said 

“Well, we’ve raised our prices quite a few times. They’re frankly at embarrassing levels”

For some of them rising prices may be just embarrassing, but for the majority of the population of the planet they are unbearable…

The most stunning figures are the big oil profits in the first quarter of 2022. Big oil companies made 100 bn $ in profits in the first three months of 2022 alone, and their profits had a median rise of 127% year on year, while for some they rose by over 300%! Thus, at least a part of the recent pump price hikes were not because of “Putin’s price hike” (as Joe Biden said) but because of big oil’s unsettling appetite for more profits.

A public debate has opened up on how to tame inflation, and economists are split in two camps: the ‘doves’ and the ‘hawks’. The doves are mainly the neo-keynesians and the hawks the neoliberals. As usually, both are wrong but in both approaches there is a grain of truth. 

Both camps agree that there should be a hike of interest rates in order to bring down inflation. The point of difference is how much and for how long.

The neo-Keynesians are right to point out that to generate a recession in order to bring down inflation is like killing the patient in order to avoid some side-effects. On the other hand, Neoliberals are correct to point out that without the destruction of a section of the productive capacity of the economy there is no way out of the crisis. Both take the framework of capitalism as granted, and that’s why they both end up in a dead-end. From the point of view of the working class, both sides are discussing different ways of putting the burden on the workers’ shoulders.

The fact is, that in the public sphere and in the decision-making institutions, neoliberals are back on track again, after the setbacks they faced during the pandemic. Some on the Left were quick to declare neoliberalism’s “demise”, but it is becoming more and more clear that this is not the case. 

Hiking interest rates

William McChesney Martin, who was the FED chairman from ’51 to ’70, said at the time that the job of the Federal Reserve is 

“to take away the punch bowl just as the party gets going,” 

meaning, to raise interest rates just when the economy starts to “overheat”.

The problem that the capitalists currently have though, is that the situation in the economy hardly feels like a party after the ‘07-’08 crisis, a decade of low growth, the covid crisis and now the war in Ukraine.

The fact that they are forced to aggressively raise interest rates even though the world economy was heading for a slowdown, has prompted fears of stagflation, i.e. a period of stagnation coupled with high inflation, just like we had in the ‘70’s.

Most central banks proceeded to aggressively hike interest rates. The US FED had its biggest raise since ‘94. The interest rates levels are moving from around zero to an area of more than 3% (OECD expects US interest rates to be above 3,5% by next year). The idea behind this policy is to suppress demand by sucking money from the market in order to tame inflation. Suppressing demand will of course play a role in curbing inflation, but in itself cannot solve the problem of inflation. As we explained before, rising demand is not the main reason for the recent rise in inflation.

A part of the establishment and the mainstream media are trying to put forward the idea that there is a “wage-price spiral” which is to blame for rising inflation. This is simply outrageous! Wages are rising at a far slower pace than inflation at the moment. In the US, wage growth is at around 4% while inflation is at 9%! That means that wages are actually dampening inflation, not driving it!

At the same time, it is important to note that, according to an Economic Policy Institute analysis, the value of the US federal minimum wage has reached its lowest point in 66 years, that is since February 1956!The US is currently in the longest period without an increase in the real minimum wage since Congress established the federal minimum wage in 1938!

Thus, workers are clearly not to blame for rising inflation, so they shouldn’t be the ones that will pay for it! This is clearly a blame game, in which the capitalists want to intimidate workers to stop fighting for better wages and brush aside the neo-Keynesian “inflationary policies”. It is no coincidence that a public discussion has opened up about the “Volcker shock” policies of the ‘70’s and their “merits”. Indeed Paul Volcker, as a FED chairman was decisive in implementing neoliberal policies to reverse the previously dominant Keynesian ones, causing mass unemployment and recession in order to drive down inflation.

The energy crisis will not cool down

The energy crisis, which is an important element of the current phase of the capitalist crisis, is not going away any time soon. In Europe there are strong fears about what is going to happen during the winter if Putin decides to completely close the tap of natural gas. In a recent article, the Guardian writes: 

“Can Europe replace Russian gas by the winter?

“No chance. Before the war, Russia supplied 40% of Europe’s gas supplies”.

Goldman Sachs calculates that if all Russian supplies are halted, there will be a 2,2% contraction in the EU economy.

The recent EU plan, called “Save gas for a safe winter”, which recommended that all member states cut gas use by 15 per cent, has created turbulence between Germany and periphery states. The FT writes

“Spanish energy minister Teresa Ribera added a veiled jibe at Germany, which relies on Russian supplies for more than half its gas consumption: ‘Unlike other countries, we Spaniards have not lived beyond our means from an energy point of view’.” 

When a Spanish minister mocks Germany, that is clearly a sign of serious divisions in the EU establishment. 

The European establishment faces huge problems in its attempt to reduce energy dependency on Russian gas and oil. One solution discussed, to turn to LNG imports from the US, is not realistic in the short term as LNG terminals need 2-3 years to be built. And even then, they would have to face the issue of how fast and with what cost can the US shale producers increase their output. A combination of cost and timeframe is also creating problems in different projects that are being discussed (there is even a discussion to fast-track a pipeline from Nigeria). The second problem they face is the reluctance of OPEC countries to significantly increase production, because as things stand now, they have no motive to do that, they are making record profits and they don’t want higher supply to bring down prices. And, of course, new oil and gas fields need time to develop and cannot provide a quick fix to the situation.

Russia, on the other hand, is taking advantage of the situation. According to the International Energy Agency, Russian revenues climbed in May, despite its export volumes slipping due to sanctions. 

As Reuters writes

“China’s imports of Russian oil and fuel rose by nearly a quarter of a million barrels per day in May, topping 2 million bpd for the first time, with India taking Germany’s place as the number two destination for Russian shipments in recent months.” 

It is clear that the scramble for fossil fuels will continue, and this will play a major role in the coming crisis, the exact depth of which will depend on the outcome of the war in Ukraine and the general US-China conflict. In any case, the West is paying a heavy price because of the war.

In this article we cannot take up the environmental aspects linked to the energy crisis, but they should not be in any case downplayed. The recent turn back to fossil fuels is criminal considering climate change. The resurgence of coal, oil and gas have actually rendered the 1,5C Paris agreement target totally unrealistic, as it would mean peak emissions by 2025.

Debt at historic levels

As is clear from the table above, the debt problem (both public and private) is more acute that ever. World debt is now at 256% of world GDP! This is completely unprecedented! Just to give context to this number, in 1950, after WWII when all belligerent states took on loans to cope with the war effort, the global debt was at 100% of global GDP! The debt burden poses a clear break on the policies the capitalists can introduce in order to avoid a recession, and that applies not only to the so-called developing economies but to the industrialised ones also.

Besides acting as a break in terms of fiscal policy, this avalanche of debt, coupled with rising interest rates, will definitely push a number of economies towards default. 

Just to cite an example, Italy’s public debt is at 150% of its GDP (i.e. more than $2.5 trillion), and has reached its highest level on record. In an effort to avoid a new debt crisis, the ECB introduced the “Transmission Protection Instrument”, which means that the ECB can buy large amounts of Italy’s bonds in order to keep Italian interest rates at a reasonable level. But it can only do so if a number of strict conditions are met, as New York Post reports. Strict conditions, as was clear in the previous debt crisis following the 2008-9 recession, is a euphemism for privatizations, massive austerity and economic destruction.  

The debt problem is not only affecting states but corporations also. Morgan Stanley calculates that 16% of US firms are “zombies” (highly indebted companies that are hanging by a thread). Bloomberg reports that zombie company debts total $900 billion.

This is not a US phenomenon. Zombies account for more than 20% of Europe’s companies according to DW  

High interest rates (meaning the end of “cheap money” era) will make it much more difficult for these companies to re-finance their debts, and this can lead to defaults – which in turn means mass lay-offs of workers.

Facing a global slowdown

According to IMF projections, the world output is set to half this year from 6,1% in 2021 to 3,2% in 2022. In a Wall Street Journal’s survey, economists put the probability of a recession at 44% in the next 12 months, a level which is usually seen only on the brink of actual recessions. 

As Marxist economist Michael Roberts reports  

“The major economies are moving closer to recession, if they are not already there… The latest surveys of business activity, called Purchasing Managers Indexes (PMIs), show that both the Euro area and the US are now in contraction territory (i.e. any level below 50). The composite PMIs (which put together both manufacturing and services) for the major economies in July show:

US 47.5 (contraction)

Eurozone 49.4 (contraction)

Japan 50.6 (slowing expansion)

Germany 48.0 (contraction)

UK 52.8 (slowing expansion)

Putting on the breaks (i.e. raising interest rates to cut liquidity) is aggravating these trends. Even FED chairman Gerome Powell admitted that a “soft landing is very challenging”. How deep down this road they will go, and for how long, is impossible to say. It is difficult to make precise predictions as far as the economy is concerned. But the trajectory of events clearly points out to a deepening of the crisis.

The equation capitalists have to solve is very challenging. Added to this is the fact that the West’s power has eroded. It’s one thing what they want to do (to curb inflation without going in a recession) and it’s a different story what they can do. 

As Marx pointed out 

The will of the capitalist is certainly to take as much as possible. What we have to do is not to talk about his will, but to enquire into his power, the limits of that power, and the character of those limits.

The fact is that capitalists can’t have it both ways. In the 30’s, Hugo Stinnes, a German industrialist and eventually a supporter of the Nazis, said that 

“…the choice had been between inflation and revolution”. 

Today, capitalists do not fear a revolution that will overthrow their system; therefore, they have been focused on bringing down inflation even if the cost is big. But the “cost” will at some time be paid – social explosions will inevitably surface in the coming period.

How to fight the Cerberus of inflation, debt and recession

The reaction of the working class to the coming crisis will be different than that towards the covid one. During the pandemic, there was a wide-spread feeling that the virus is to blame for the crisis. At the same time, governments stepped in with some Keynesian measures to stave off the worst effects of it. Today, for most people it is clear that this crisis was triggered by the struggle for world domination between the capitalist powers, and there is very low support for the war in Ukraine. 

Moreover, inflation is biting- and the governments are attacking living standards.

Social explosions already took place in Sri Lanka, Tunisia, Peru, Pakistan.

David Beasley, the director of the UN World Food Programme describes the situation in the following terms:

“Even before the Ukraine crisis, we were facing an unprecedented global food crisis … Then, we thought it couldn’t get any worse, but this war has been devastating.”

He added: 

“…the number of people suffering from ‘chronic hunger’ had risen from 650 million to 810 million in the past five years… the number of people experiencing ‘shock hunger’ had increased from 80 million to 325 million over the same period. They are classified as living in crisis levels of food insecurity, a term he described as ‘marching towards starvation and you don’t know where your next meal is coming from’…

“… after the economic crash of 2007-09, riots and other unrest erupted in 48 countries around the world as commodity prices and inflation rose… The economic factors we have today are much worse than those we saw 15 years ago,” 

If the crisis was not addressed, he said, it would result in: 

“famine, destabilisation of nations and mass migration”.

And concluded: 

“It is a very, very frightening time. We are facing hell on earth if we do not respond immediately.”

The fact is that the combination of inflation, slowdown and debt are forcing people to struggle. Below we put forward a number of demands that can be taken up by movements, unions and groups that engage in the struggle. Obviously, different countries have different circumstances. But they can serve to open the dialogue inside the movement on what is needed of the situation.  

We fight for:

  • A sliding scale of wages to automatically compensate workers for inflation
  • Nationalisation of the energy sector to best use energy resources, take out the profit and lower prices and organise a real green transition
  • Action Committees of workers and civil society to monitor wages and implement price controls
  • Repudiate the public debt, alleviate/subsidise the debt of workers and small enterprises, nationalise the banks
  • Progressive and high taxation of profits to fund public spending and social services
  • A public investment plan to fix infrastructures and utilities 
  • Nationalise the commanding heights of the economy, under workers’ control and management, so as to enable the planning of the economy for the benefit of the majority instead of the profits of the super-rich.
  • Fight against the war which causes continuous bleeding in all warring camps with devasting implications for the globe.
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