The truce in the China-US trade war does not reduce the prospect of a new peak in the world economic crisis

Last year, specialists and their institutions [1] put the spotlight in the trade war that the United State declared on China.

The debate that emerges from focuses, at most, on the dispute for the supremacy over the new technologies. It then elaborates on the geopolitical [2] issues but barely touches the real economic causes of the conflict. However, those specialists forecast that a new crisis is on the way. And they make this claim even though in the meeting between Trump and Xi Jinpging during the G20 summit in Japan on June 29th, both parts agreed on a truce. Some of them as Nouriel Roubini, known for having forecasted the 2008 [3] crack, has set a date for the new crack in the year 2020.

These specialists do not understand why, if the US economy was going well according to them, Trump attacked China, damaging his own economy. Deep down, this claim conceals the fact that those experts, even the Marxist ones, came to identify the 2008 [4] crisis with the great Recession that took place between that year and 2009. And once the financial market showed a relatively constant upturn, they assumed the crisis was over. However, analysing the real economy, it is a fact that it has not recovered since the boom of that crisis. By not recognising this decade of Great Depression that, as we pointed out in August 2018, can only be compared with two other periods of the modern capitalist development, periods that derived in the two World Wars of the 20th century. That is why the truce in the trade war of the United States against China is momentary. But the conflict will resume any time, since China simply cannot meet the demands of the US without collapsing its own economy. [5]

Despite the fact that the financial markets, meaning the shares (stocks), bonds and their combinations and by-products, respond with a relative optimism, the current tendency to a de-acceleration of the economic growth and the prospect, in a relatively short term, of a new recession or peak of the world crisis do not disappear. The key, as always, is in the evolution of the real economy, the productive economy.

Productivity deceleration, productive investments setback and the fall of the profit rate

One of the main debates among the heterodox economists, neoliberals and the Marxists alike, is about the reasons of the labor productivity deceleration in the main economies. Beside the disagreements on whether this deceleration is secular, i.e., whether it has been developing for around 50 years, they all recognize that it has been happening for at least 15 years. The productivity is one of the main components that explain the real GNP, the other one is the growth of employment rate.

This means that the growth of the real GNP can be measured by two components: the growth of labor productivity and the employment growth. And these are the reasons for all the economic turmoil in the Long Depression period that the world economy is going through since the Great Recession of 2008.

The productivity of the main advanced economies, without China, has been slowing down year after year since its recovery in the 90s, after a great fall in the 70s as a result of the application of the new information technologies. At the time eleven of the main world economies where at a yearly 2,3%; today it is down to an average of 0,7%. That is, considering cases such as Russia’s and Italy’s decreasing and the UK barely rising above 0. These data that come from an investigation of over 50 years realised by economists of the JP Morgan quoted by Michael Roberts in his blog [6] show that according to their model, the tendency is for this slowdown to continue deepening.

This fall or deceleration is explained mainly by the fall of the investment in high-tech productive assets. The same study shows how that investment has been in the low for the last 50 years. And this is not strange, since the downward curve follows the same path than the average profit rate of the system. A lower profit rate means a lower investment in technology and fixed assets.

The other factor that explains the real GNP is the evolution of the labor force, which also suffered an abrupt slowdown, going from contributing 1,7% of the productivity growth to 0,5%.

Without an increase in working hours, i.e. if the labor force is reduced, the other factor that could make for a rise in productivity is investment in fixed capital, however as we have already seen, that is not happening. This situation in the current economy is one of the factors that explains this depression that has lasted for over 10 years.

In the base of this whole process lays the fall of the capitalist profits in the real economy. In a recent study, as part of his elaboration for the Work Group of CLACSO: Crisis and World Economy, the Chilean Marxist economist Orlando Caputo shows the evolution of the profits in the main sectors of the US economy. He claims that the profit [7] fell from 2014 to the end of 2018 in the following way: in the machinery industry it went from 36,3 billions in the fourth trimester of 2014 to 18,3 billion dollars in the fourth trimester of 2018. In the production of computers and electronic devices, the profit falls from 70,9 to 39,3 billion dollars between the second trimester of 2015 and the fourth trimester of 2018. In the automotive industry, the profit goes from 36,4 billions in the fourth trimester of 2014 to 8,9 billions in the fourth trimester of 2018. In an article of July 14th Michael Roberts confirms the same trend for the two first trimesters of 2019. [8]

These observations about the corporate profitability measured by the corporative profits in relation to the balance of actives have not recovered the levels of 2008, while in fact the capital profitability is below the levels of the final 90s. This was pointed out in a global stability report of the IMF in April 2019. [9]

So the reasons to foresee a new recession must be looked for in a declining productivity and productive investment, a labor force that does not grow, all of this fed by the constant falling tendency of the profit rate.

Debt and fictitious capital growth

In its last reports, the IMF has pointed out the growing danger of a new debt crisis. Christine Lagarde stated in the G20 summit in Japan, shortly before being named president of the European Central Bank, that the debt of the US could become unbearable. The truth is that since 2018 several of the main so-called emerging economies are either in recession or too close to it, compromising the sustainability of their sovereign debts. [10] Meanwhile, the debt level of some corporations grows, as does the number of so called “zombie” companies. At the same time, household debt is growing to similar levels as those in 2007 before the crack.

In the same way the IMF alerted about sovereign debts, it has been pointing out since last year the growing concern about corporative debt evolution. A report on the blog of the IMF in November has the suggestive title of Sounding the Alarm on Leveraged Lending. [11] [12]

These loans represented at the time of that report around 1.1 billion dollars, double the amount on 2007 before the crisis. While the main investors are the so-called shadow banks, because they are not regulated by the central banks, sector in which the 2008 crisis began. 70% of those credits are in the United States. And the main loaners are the common savers that until 2007 were motivated to invest in the trash mortgages that unleashed the crisis. This means that while the debt of the citizenship grows to promote consumption, their savings are in danger of evaporating because they are chained to this financial mechanism.

States drowned by the sovereign debt, corporations taking out loans beyond their pay back possibilities for financial speculation and not for productive investment, citizens in debt and with their savings compromised, make up the explosive cocktail that explains the possibility of a debt crisis that could have the same consequences or worse than the 2008 crack.

The truce reached between the United States and China does not solve the weaknesses of the capitalist system today. Because the bottom line is that the key to the economic functioning of capitalism lies in obtaining profits in the real economy, and the profit rate is not recovering. The international recession of 1974/75 was caused by a sharp increase in crude oil prices and the US abandonment of the gold standard. The 1980-1982 crisis was caused by a real estate bubble in Europe and an industrial crisis in the main economies. The recession of 1990-2 was caused by crude oil prices. The slight recession of 2001 was the result of the bubble explosion. And the Great Recession began with the collapse of the housing bubble in the US. Although every crisis has a different trigger, underlying each one is the downward trend of profit of productive capital and finally, a slowdown or decrease in the global mass of profits.

Carlos Carcione

[1] IMF, World Bank, G20,OECD, the central banks of the main countries, etc…
[2] The two powers that want to change the world. Financial Times
[4] What is the logic of Trump’s trade war?
[5] What the US wants is China to stop its technological development and to accept that the US dictates or supervises its economic functioning[6] Michael Roberts
[7] The new crisis of the world economy. Orlando Caputo y Graciela Galarce[8] A recession of the benefits?[9] Global Financial Stability Report,IMF April 2019.
[10] The Argentinian case is an example, but something similar happens in Brazil, Turkey and South Africa, among other economies defined as rising[11] Sounding the alarm on leveraged lending.
[12] The leveraged loans are those where the relation between the debt and the capacity of payment of the debtor is outside of the standards and the norms of the financial system