What has caused the unfolding chaos in the world economy?

The strategists of the bourgeoisie had imagined that the Covid-19 shutdowns had merely put an already fragile world economy on pause. Once the economy reopened, it would merely be ‘unpaused’ and would proceed to stagger on as before. This is far from how things have turned out in reality. The world economy is now in the grip of chaos.

It is spring 2020. The pandemic is beginning. Large parts of the world economy are closing down. Both production and demand are collapsing to historically low levels. The price of oil is imploding and contracts for future oil deliveries (so-called ‘oil futures’), are selling at negative rates. The social situation is extremely tense, arriving hot on the heels of an ominous year for the ruling class in 2019. The risk assessment agency Verisk Maplecroft estimates that in the last year: “[A] quarter of all countries in the world experienced significant increases in social unrest”. The same agency predicts that this could become “the new normal” going forward into 2020. Central banks and governments everywhere are wide awake to the fact that should millions of workers lose their livelihoods from one day to the next, extreme social unrest and probable revolt against the existing order will follow. They have therefore decided to go all in on “rescue packages” – releasing trillions of dollars of debt and printed money into the world economy.

In the course of the following two months, more than $10 trillion would be pumped into the economy in the United States alone. That is three times more than the amount funnelled into the economy in the two years after the Great Recession between 2008 and 2010. This money didn’t just go to the coffers of the financial sector – it also made its way into the pockets of consumers. Much of this took the form of so-called ‘helicopter money’, as in the coronavirus relief cheques that Trump handed to every US citizen. It was all financed by debt and the printing press, and it led to an explosion of the money supply.

More than $10 trillion have been pumped into the economy in the United States alone in the first two months of the pandemic / Image: In defence of Marxism

The governors of the central banks and strategists of capital knew that from a bourgeois economic point of view, this policy was deeply irresponsible. When the money supply is increased without production keeping up, it is bound to result in inflation and economic instability. But confronted with the risk of social upheaval and a mortal fear of losing everything here-and-now, kicking the can of the more long-term economic problems down the road was preferable. The negative consequences of the giant stimuli would have to be dealt with further down the road as they emerged.

Initially, the massive stimulus worked. Demand quickly exploded, in particular in the West. People renovated their homes, bought bicycles, cars and computers. Demand went from zero to sixty in an instant. But consumption patterns had changed. Demand constituting trillions of dollars and euros shifted from one sector to another, in particular from services (which were inaccessible due to lockdowns) to consumer goods. At the same time, various parts of the production were periodically shut down to stop the spread of the virus. The entire laboriously constructed mechanism of world supply chains disintegrated as a tidal wave of ‘artificial’ demand swept over the market. The supply crisis was born.

A delicate network

The supply crisis is the result of the collapse of the very delicate network of global trade. For decades – particularly since the fall of the Eastern Bloc and China’s integration into the world market – what has been referred to as ‘globalisation’ has rolled forward. It has resulted in greater and greater economic integration of the whole world. More and more complex supply chains, aided by very low transport costs, meant that goods might be produced in one corner of the world, assembled in another, packed in a third, sold in a fourth, etc., etc.

Part of this process was also the development of so-called ‘just-in-time’ production. The idea was to reduce inventories to their absolute minimum. In essence, this meant minimising the delay in the process of capital circulation, speeding up the turnover of capital and thus increasing the annualised rate of return.

So, for instance, if $1 million of a capitalist’s capital sits idle in the form of finished goods before being sold, only to return $10,000 upon its sale in a year, this represents a deplorable waste for the capitalist. As long as this capital is sitting idle it is not circulating and not realising a profit. The capitalist would prefer to speed up this process of circulation. If the same capital can be made to circulate 20 times in a year, the capitalist could realise $200,000 on the same fraction of their capital. The same is true of the commodities – both raw materials and unfinished goods – that the capitalist purchases for the purpose of production. There is no use having a stock sitting idle if they can get away with it. It’s preferable to cut inventories to a minimum to ensure that as little capital as possible is sitting idle at any one time, thus boosting the speed of its circulation.

Just-in-time production by no means solved the intrinsic contradictions of the capitalist system. Nevertheless, from the point of view of the individual company, supply chains were extremely efficient. But this whole construction is extremely fragile / Image: Bertel Schmitt, Wikimedia Commons

Techniques to achieve such ends have been perfected over the last decade. Starting in a few large factories like Toyota, this approach has spread to the entire world economy – from the major producers all the way down to the smallest units.

For example, in the past, when you would go to the mechanic to get a spare part for your car, the mechanic would take it down from the shelf in their extensive inventory. But with ‘just-in-time’ processes, the same mechanic can avoid having a large and expensive inventory. He simply orders the part from his supplier, and they will have it delivered to his workshop the very next day. He has thus saved on investment in a substantial stock – capital that can be used in another part of his business – at the price of incurring a small additional cost associated with purchasing each part individually.

But, as we will touch upon later, just-in-time production by no means solved the intrinsic contradictions of the anarchy of the capitalist system as a whole, or of overproduction. Nevertheless, from the point of view of the individual company, supply chains were extremely efficient. Instead of having local warehouses, the entire world catalogue of goods became their warehouse. But this whole construction was extremely fragile.

The ‘bullwhip effect’ on steroids

In discussions of supply strategy, one often hears discussion of the so-called ‘bullwhip effect’. The term denotes a situation in which a sudden peak in demand sets off a domino effect, with exponentially cascading reverberations being felt back through the supply chain.

Let us take an example: a store usually sells 250 boxes of water per month. Suddenly the demand rises, the entire stock of 250 boxes is liquidated in one week. The store is surprised – they therefore contact their wholesaler and place an order for 500 boxes in order to keep up with the higher demand. The wholesaler is just as pleasantly surprised by the seemingly expanding market and places an order for 1,000 boxes with its distributor in order to keep up with the expected demand. The distributor places an order for 1,500 with the manufacturer. The manufacturer places orders for raw materials corresponding to 2,000 boxes at its suppliers. Thus, a short-lived 250-box increase in the demand for water – perhaps prompted by a week of particularly warm weather – turned into 2,000 crates at the other end of the supply chain. When demand returns to normal next month, the effect will operate in reverse, with massive overproduction being the result, with the last links in the chain perhaps even facing the risk of bankruptcy as a result of having invested heavily in machines and raw material to satisfy a non-existent new market that they believed to have come into existence.

The bullwhip effect is now working its way back through supply chains with exponential force, because suppliers anticipate that the present higher level of demand is the ‘new normal’ that they must adjust to going forward / Image: public domain

The same process is acting as an exacerbating factor in the present situation, leading to the extreme bottlenecks and shortages we presently see all over the world. But in this case we are not talking about just one commodity. No, this is far more serious: we are talking about a process going on simultaneously throughout the whole world economy. Demand not only shifted markedly between sectors and products, but was greatly increased by the free money being doled out through insane quantities of government and central bank stimulus. The already prevailing anarchy of capitalist production has reached new heights since the onset of the pandemic. Producers have no chance of estimating future demand based on data from previous years, since no one knows whether the changes in consumption patterns are permanent.

On the supply side, no one knows whether producers will close down tomorrow due to new outbreaks of the delta variant (or the next upcoming variant). And with essential ports having been shut down in order to stop the spread of infection, international logistics chains have completely clogged up. Empty containers are in the wrong places and ships have to wait for weeks outside ports to unload their goods. There is extreme uncertainty as to whether raw materials, components and semi-finished products will arrive tomorrow or in six or twelve months. Chaos reigns.

The bullwhip effect is now working its way back through supply chains with exponential force, because suppliers anticipate that the present higher level of demand is the ‘new normal’ that they must adjust to going forward. Furthermore, at every level of supply chains, companies are deliberately hoarding out of fear of having to stop production once more on account of missing components – as we have seen, for instance, for many brands in the auto industry. The largest players with the most money can place large orders with suppliers that reach far into the future, demanding priority over deliveries to other customers. This further exacerbates shortages affecting the system as a whole. There are no statistics about the scale of hoarding. The only evidence is anecdotal. But there is no doubt that it is occurring on a massive scale.

The existing production apparatus is unable to keep up. What does a manufacturer who is inundated with orders do? In addition to raising prices, he naturally allows himself to focus on those products that offer him the highest margins: the more expensive high-end products. This means that there may even be a drop in the supply of certain products – such as old computer chips, which are used in the automotive industry's simple components like dimmers in rearview mirrors.

The combined effect of all the above-mentioned factors is the ultimate ‘bullwhip effect’ on steroids. The gap between supply and demand has assumed astronomical dimensions.

Back to ‘normal’ – but what is ‘normal’?

If the woes of the world economy were just a question of a giant ‘bullwhip effect’ in the context of an otherwise healthy boom, then things would sooner or later settle back to normal with a minor correction in the markets. But the world economy is by no means healthy and by no means “normal”.

Since 2008, states and central banks have artificially kept economies afloat through extremely low interest rates and support purchases in financial markets. This was an irresponsible policy, intended to give crutch support to the market out of fear of the social and political consequences of a major economic collapse.

In effect, the central bankers and governments tried to achieve the impossible: to remove an essential part of the capitalist system – its regular crises of overproduction. These periodic disasters are part and parcel of the capitalist system. Without them capitalism and its market economy cannot function – with or without the use of just-in-time production methods. One of the central contradictions of the capitalist system is that the working class produces more value than it receives in wages. While this is the source of the surplus value accrued by the capitalists, it also means that the working class – as the big majority of the population – is unable to buy back the value that it has created. Of course, as long as the capitalists plow back their profits into new means of production, machinery, factories etc. to stay competitive in the market and in anticipation of increasing market share, the wheels keep turning. Demand and supply seem to balance each other out and overproduction doesn’t show itself. Workers are hired to make the new machinery, they buy consumer goods, etc. It’s an upward-reaching, virtuous spiral. But all this new productive capacity in the end must result in even more goods being produced and sold to the very masses that the capitalists are exploiting. As Marx explained: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.”

At some point, as in 2008, the contradictions that have piled up become too great and burst to the surface. In a sense, the crisis itself represents the temporary solution of this contradiction: it destroys overproduction, overcapacity, and bad debt. Through destruction, it lays the groundwork for a new recovery and a resetting of the business cycle. The working class pays the price, but such a price is unavoidable under capitalism and is indispensable to the system’s functioning.

But this is not how things played out in 2008. Unlike in the 1930s, the crisis was not allowed to do its dirty work. The ruling class was quite simply too afraid of the destructive forces that would be unleashed. A tsunami of working-class desperation and anger – on account of the increased size and power of the working class, many times bigger than that of the Great Depression – would have engulfed the ruling class. The state therefore saved the companies, and above all the banks.

Everything that ought to have perished in an inferno of bankruptcy and social catastrophe, according to the logic of capitalism, was saved by the “caring” hand of the bourgeois state. Mountains of debt grew higher and higher. Bankrupt ‘zombie companies’, banks and even countries could continue their existence as an economic ‘living dead’ so long as cheap credit could be had in abundance. The stock markets took off again and rose to dizzying heights unknown in history. The housing bubbles were reflated. All asset classes took off.

With the governments' rescue packages after 2008, risk was eliminated from the markets. The price signals, which are absolutely crucial in a market economy to allocate capital, have been hugely distorted or rendered completely useless. Normally, investors would demand an extra high interest rate in order to lend to companies with poor credit ratings, due to the increased risk. Today, interest rates on high-risk bonds in the United States are on average lower than inflation. Enormous tidal waves of cash wash around the system in pursuit of interest. Since the pandemic and the gigantic stimuli that accompanied it, the distortion of price signals have become many times worse. Risk is simply no longer an issue for financial speculators. The financial markets have been given the impression that central banks will always intervene and turn the market around should any problems arise. That the market will always go up and up and up. This misunderstanding seemed to be confirmed by the behaviour of central banks in the spring of 2020, when they intervened with their huge monetary gifts and, in a very short time, turned a historically deep and sudden stock market crash into a new stock mania. How are markets and supply chains expected to find their way back to a ‘healthy’ balance once the ‘invisible hand’ of the market has been put out of action? The present chaos is thus partly a product of capitalism’s deep organic crisis, whilst also partly being the product of the ruling class’ own political response – the latter no longer daring to let their own economic system function, “as it should”, for fear of it being toppled in the course of the social explosions that such a free-running crisis would cause.

Globalisation

The current chaos and uncertainty mean that large companies are in the process of reorganising their supply chains and making them more local and regional and, in general, more robust. But this is not something that can possibly happen overnight. And it’s definitely not free. Factories must be closed and others must be built. This is a process that takes years, not weeks and months. But the chaos after the pandemic also plays into an already existing trend: increased protectionism and imperialist rivalry. Ever since the failure of the WTO’s Doha Round, which started way back in 2001, globalisation has slowed and been thrown into reverse.

The crisis of 2008 gave impetus to centrifugal forces, as individual countries tried to export their way out of the crisis at each other’s expense / Image: Antonio R Villaraigosa, Flickr

The crisis of 2008 gave further impetus to these centrifugal forces. Individual countries tried to export their way out of the crisis at each other’s expense. It increasingly became a struggle of ‘every man for himself’. Trade barriers were raised. When Trump came to power in 2016, he accelerated this process, initiating a direct tariff war against China in an attempt to hold back the growing economic giant by political means – keeping it from challenging the dominance of US imperialism. Joe Biden has energetically continued the very same policy.

In other words, even in the medium term, it is out of the question that there will be a return to the same level of globalisation and the same kind of supply chains that we saw before the pandemic. The world economy has entered a period that shares more in common with the beginning of the 20th century than with the previous two decades. This will have many consequences: lower productivity growth, a downward pressure on profit rates (which in the long run the ruling class will seek to counteract by squeezing wages) and higher prices as far as the eye can see. It's a recipe for class struggle.

What are we facing?

It would be naive to think, as the central banks assure us, that the inflation we are beginning to see spread across the globe is just a transitory phenomenon. They have begun an inflationary spiral by printing money in gigantic quantities and pumping it into an economy in chaos, whilst interest rates are kept at artificially low levels. This policy has kept the wheels of the economy turning and, as a nice aside, made the rich spectacularly richer, as the prices of all asset classes rose. But it has not been without its consequences. The gigantic aid packages and monetary stimuli since the pandemic are building on top of decades of the same policy. The world economy has long since become something akin to a credit-junkie, and the ruling class has poured everything it could muster into feeding this addiction.

The gigantic aid packages and monetary stimuli since the pandemic are building on top of decades of the same policy. The world economy has long since become something akin to a credit-junkie, and the ruling class has poured everything it could muster into feeding this addiction / Image: In defence of Marxism

In just a single quarter following the pandemic, the so-called M2 measure of money supply in the United States increased by 16%. In previous years, the rate of increase was around 3-4% per year. The annual rate of increase in the money supply has now stabilised at around 13% (from August 2020 to August 2021). Inflation in the US is constantly creeping up and at the time of writing has reached over 6%. With interest rates just over 1% and monthly bond purchases of $120 billion, the US Federal Reserve still has its foot down on the accelerator as far as inflation is concerned. Although, they have started talking about ending this policy... at some point.

In the EU, inflation figures have so far been lower than in the United States, standing at 4.1% in October for the eurozone as a whole, and 4.5% for Germany in particular. However, the latest German PPI figure (October 2021), which gives a figure for inflation of prices of German manufacturers, showed a sharp increase by 14.2% on an annualised basis. The last time this index reached such levels was in 1974.

Sooner or later, central banks will have to change course and try to beat down inflation. This will mean a halt to support purchases and interest rate hikes. The financial markets will react like a junkie deprived of their fix: they will go into shock. Rising interest rates will also have huge consequences for inflated housing markets in both the US and Europe, where millions of workers risk personal bankruptcy. But the problems do not stop here. In the third quarter, there were signs that growth in the US is slowing. If true, this would take us into dreaded stagflation territory. That is, an economic situation combining simultaneous stagnation and inflation. This is the classic Catch 22 situation for the governors of central banks: If you raise interest rates to tackle inflation, it will hammer an already weak economy into a deep recession. If monetary policy is loosened to boost growth, it will accelerate inflation and eat up the purchasing power of the working class and the profits of the capitalists, ending in a crisis by another route.

But unlike the stagflation of the 1970s, when the US had a government debt of around 30% of GDP, today it stands at 125%. And the budget deficit is a whopping $2.769 trillion for 2021 alone (i.e. about 13% of US GDP). Figures such as these used to be seen in the statistics describing bankrupt and semi-bankrupt underdeveloped countries. Now we are talking about the world’s most powerful imperialist power and the protector of global capitalism. There is no way this can continue.

One crisis is piling up upon another. On the surface it all appears as a particular concatenation of accidents. But these are accidents, which express a deeper necessity: decades of “kicking the can down the road” in all areas have solved nothing. They have simply postponed and exacerbated all of capitalism’s contradictions. The system is now reaching its limit and a severe crisis is approaching on the horizon.

Capitalism can only function if its natural and recurring crises of overproduction are allowed to purge productive capacity, thereby laying the groundwork for a new boom. For over two decades, three major crises (2001, 2008, 2020) have been prevented from doing just that through debt being piled up to the heavens. The world has never been so indebted. This is particularly true of the rich countries. No human has ever experienced what we see unfolding today. But sooner or later, it will all come crashing down on top of us – as we are already beginning to see with the chaos and crisis in supply chains, with inflation, the climate crisis, and the energy crisis in Europe and Asia. The entire accumulated burden will be passed on to the working class with catastrophic social consequences.

The whole thing can almost feel absurd. But there is no use in laughing or crying over the situation. Above all, it is necessary to understand. We have to face the reality as it actually is: the world capitalist system is in disarray. We must prepare for a bitter and protracted class struggle that will be neither easy nor pleasant. The more we have learned from past experiences, the better organised we are, and the stronger we are, the better placed we will be to deliver this wounded system its death blow. Clearing the anarchy of capitalism out of the way is the only way to create a society suited for human beings: a society in which we ourselves have rational and democratic control over the economy and our common future.