Covid-19: Trigger for a new global crisis
According to several influential economic and political analysts, the Covid-19 project is an updated strategic framework for radically changing the course of the global economy. Regardless of the "producer" of the crisis, no one will be left aside.
Radical changes are inevitable, the results are already visible. Global capitalism is changing its long-spent form. This is supported by the fact that an event of this type has rarely ever attracted so much media attention. It is now clear that Covid-19 is just a continuation of the disruption in the global capital market since 2008, as well as all previous crises in the last thirty or more years. In other words, the great financial crisis that escalated in 2008 has never ended. The coronavirus only deepens and speeds up the previously started “business” of monetarists and large capital owners. In a brief analysis of the genesis of the current widespread crisis, two arguments are in focus.
First, the 2008 global crisis caused by the "irresponsible" behavior of bankers, apparently only temporarily, was mitigated by two key factors. (1) The Federal Reserve (Fed) of the United States of America (USA), through monetary policy measures, best reflected in the relatively easy access to "fresh" and cheap money, but not for all "free" market participants. Guided by the same strategy, central banks and governments of other influential economies and political conglomerates (e.g. EU, UK, Japan) have been bailing out financial markets in order to recover their vital mechanisms. The money was printed in trillions and placed in economic flows at an interest rate of about 0.3 percent. It is important to emphasize the fact that large corporations are the biggest beneficiaries of cheap money, despite their excessive liquidity. The stabilization of the world capital market through global executives, including financial institutions and large corporations, has come at the expense of real and sustainable development, neglecting the vital interests of society: education, employment, healthcare, protection of scarce natural resources... In the context of cheap money placement, weaker, less developed economies also pay a great price. The reason for this is precisely multinational corporations that use easily accessible financial capital for rapid expansion through vertical and horizontal integration into whose network they are "fishing" for weaker players in the interdependent market, thus controlling the global chain of production and supply. In this chain, a major role was played by China (the second key factor), which used the vertical specialization policy to make the most of the fragmentation phenomenon of international production. This is precisely the cause of the current collapse of many businesses around the world and the recession that follows.
Neither of these two factors could hardly have had the similar effect in the event of a new crisis as 10 years earlier, for the simple reason that Covid-19 had punctured the overblown bubble of an already unsustainable international economic order based on a concentration of economic interests. First of all, China, regardless of its capacities, cannot correct errors in the global production chain in the foreseeable future. In the present circumstances, China is a major source of procurement of medical equipment and is patiently awaiting its next opportunity. On the other hand, the US Federal Reserve is already proposing and implementing a full range of measures to support the flow of credit to US businesses and families. The long-term strategy is unknown, although there is no doubt that it will resort to similar policies implemented during the Great Recession of 2007-2009. Such measures may temporarily mitigate market distortions, but in these circumstances, it is difficult to predict their long-term effects. Low interest rate policies will certainly be re-proposed to emerge from the crisis, which economists argue can, to some extent, stabilize prices and ease layoffs in the short term.
The emergence of the virus in times of volatility in the global market is irresistibly reminiscent of the 1920s, which is further explained in argument number two. The results of empirical research show that the main problem of the global economy is the continuous devaluation of the dollar (especially in the last thirty years) as a key currency in international economic exchange. The dollar, as such, has enabled the rapid redistribution of world wealth on the one hand and the uncontrolled indebtedness of countries on the other. In the last thirty years, 1% of the world's population has accumulated or "earned" $ 21 trillion in wealth. At the same time, 50% of the bottom-line population lost $ 900 billion. According to Forbes Magazine, 20 people in the world own $ 1.31 trillion in equity. According to the US Federal Reserve, 3.75 billion people have a fortune of $ 1.3 trillion. In other words, the 20 richest people own as much wealth as half the world's population. To help us understand the genesis of the economic crisis, let's go back a hundred years...
Namely, governments, led by the example of the USA, in the 1920s enabled low interest rate policies to enrich a small number of individuals. The gap between rich and poor has been the largest in human history, resulting in mass protests around the world, the rise of political populism, and the victory of radical leaders whose key policies were based on nationalism and trade tariffs. As it was then, the popularity of Donald Trump, the current President of the United States, has increased significantly with the introduction of trade barriers. The availability of cheap capital leads to an unstoppable and unfounded increase in the value of the property. In the last 10 years alone, the value of the stock has increased fourfold. As in 1929, when the relative ratio of the total value of the capital market to GDP reached a value of 141%, this ratio is still high today, at 155%. If this ratio is greater than 100%, the value of the capital market (stock market value) is overestimated, and the reasons are the large consumption of unearned money, which has been expressed in recent decades. All this generates uncontrolled internal and external debt.
If we go back to interest rates ranging from very low (late 20s), very high in the aftermath of the Second World War (20% in the early 1970s) to again very low (below 1%) in recent decades, we can conclude that the circle is closed after 90-100 years, which means that the debt is also close to the limit of 100%. The example of the US as a world economic superpower, as President Trump calls it, clearly shows that the result of economic growth is uncontrolled borrowing. The US budget deficit in 2019 reached a dizzying $ 1.3 trillion. The history of financial operations teaches us that we cannot sustain economic growth indefinitely by debts.
In light of the above, everything that follows is simply difficult to predict, which is called, in the conditions of uncertainty, the Black Swan, a metaphor for an unpredictable and rare event that goes beyond what is usually expected and has potentially severe, above all, economic consequences. It is difficult to predict it using standard measurement methods. According to the predictions of Roman rulers, the Black Swan appears every 90 years, and their claim is based on the fact that everything in life is cyclical, has its beginning, development, decline and end. Human life follows the same path, spanning four generations of 22 years between each. Whether this is the case with the economy and the current crisis fueled by Covid-19 remains to be seen. In the end, it is not difficult to conclude that this circle in the context of the behavior of the global economy can be explained by movements in the interest rate and debt levels.
Prof. Jovo Ateljević, PhD, Full Professor
Published 27.03.2020. у 12:55