Are we heading towards a capitalist supernova? Over the next 18 months we will find out. Thus the Bank for International Settlements, which provides banking services for the world’s central banks, has called on them to “not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world.”Īs a result, the debate has moved on from whether there will be a global recession to how severe it will be – and whether central banks really have the guts to carry out their threats and risk a global economic crash. Now the inflation monster has risen from the dead, prompting the Fed and other central banks to attempt to kill it again before it has had a chance to gain in strength. The debt crisis immiserated millions and forced these notionally independent countries to submit to the dictates of the ‘ Washington Consensus’: wholesale privatisation, austerity and removal of obstacles to cross-border flows of capital and commodities (but not of people!). This hike in interest rates succeeded in killing the inflation monster, but at the cost of a sharp recession in imperialist countries and a devastating debt crisis throughout Africa, Asia and Latin America. The “Volcker shock”, as it became known (after Paul Volcker, then head of the US Federal Reserve), was likened by journalist Naomi Klein to “a giant Taser gun fired from Washington, sending the developing world into convulsions… Higher interest payments on foreign debts… could only be met by taking on more loans. The neoliberal era was inaugurated in October 1979 by a huge hike in US interest rates aimed at quelling entrenched and rampant inflation. The events we are witnessing mirror the dynamic that kicked off our current phase of capitalism in the first place. What has forced the Fed to aggressively raise its interest rate is the dramatic reappearance of a most feared monster: inflation. The dance of death: inflation, interest rates and debt This is a supernova that will explode one day.” As Bill Gross, the ‘bond king’, tweeted in 2016, “Global yields lowest in 500 years of recorded history. A far more appropriate and useful metaphor is that of a star, which is immense, and dies in a stupendous explosion. However, a bubble is insubstantial and delicate, and bursts with barely a sound. The Economist calculates that a 2% increase in US interest rates in 2021 would, by 2026, double the share of global GDP absorbed by interest payments.ĭecades of ever-lower interest rates have inflated what Nouriel Roubini, one of the few economists to predict the 2007-8 financial crash, famously called “the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession.” The decision of the US Federal Reserve on 15 June to hike interest rates by 0.75% – the sharpest increase in nearly three decades, with the promise of more to come – sent shockwaves around the world and has wiped trillions of dollars off the values of stock and bond markets.Īny rise in interest rates means a huge shift of purchasing power from indebted households, firms and governments to their creditors. The Economist calculates, for instance, that 27% of US GDP was swallowed by interest payments in 1989, but ‘only’ 12% of it in 2021, despite the massive growth in US debt.īut the world of ever-low interest rates has now come to an end. That’s $7trn more than the figure that astounded Bill Gross in 2016, referenced at the beginning of this article.Īs a result, interest on debt, as a share of GDP, is well below its peak at the beginning of the neoliberal era. So low have interest rates fallen since the global financial crisis of 2008 that, by 2021, $17trn of bonds were trading at negative interest rates, even before inflation is taken into account. While global debt has rocketed, global interest rates have been in almost continual decline since 1980. Global debt has grown twice as fast as global GDP since 1980 and is accelerating, while global GDP growth is slowing and threatening to go into reverse. In comparison, the annual income of the poorest 50% of humanity is just 8.5% of GDP. In 2021, debtors of all types handed $10.2tn – 12% of global GDP – in interest payments to their creditors. Global debt – of households, private firms and governments – reached a staggering $305tn (£254tn) in 2021, up from $83tn in 2000.įurthermore, global debt now equals 355% of global GDP, up from 120% in 1980 and 230% in 2000.
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