In 2023, following the economic upheavals of the Corona pandemic, the question of a coming financial crisis is once again becoming more urgent. There is now even talk of “polycrises” that go far beyond the financial sphere. In a polycrisis, the diverse shocks that ripple through the economic, political and social fields are differential and of varying intensity, but they interact and intermingle, so that the resulting (open) whole is even more overwhelmingly driven into crisis than if the crisis were merely a result of a sum of partial crises. Today, authors such as Adam Tooze or Michael Roberts speak of a whole new dynamic of a global “polycrisis” looming on the horizon
Even the elites are now aware that global capitalism is confronted with a series of interconnected crises – a phenomenon that the annual Global Risks Report of the World Economic Forum in Davos for 2023 now also refers to as a “polycrisis.” According to the report, the world faces “inflation, cost-of-living crises, trade wars, capital outflows from emerging markets, widespread social unrest, geopolitical confrontations and the specter of nuclear war.” These risks are “compounded by comparatively new developments in the global risk landscape, including unsustainable debt, a new era of low growth, low global investment and deglobalization, a decline in human development after decades of progress, rapid and unrestrained development of dual-use (civilian and military) technologies, and growing pressures from the effects of climate change” (ibid.) Taken together, “these factors will shape a unique, uncertain, and turbulent decade,” it concludes.
The totality of these crisis dynamics, all of which exhibit a high degree of feedback effects, exceeds the sum of their parts. As in quantum theory, the whole is now greater than the sum of its parts, which can ultimately only be explained by the efficacy of possibilities inherent in the entanglements of processes. The concept of entanglement shows that there is a holistic total state, which in consequence of superpositions of parts includes many more states than would follow from a mere addition and sum of the parts. This is due to the quantitative-multiplicative composition of the whole. Thus, the current polycrisis is also much more than a collection of smaller, separate crises. Instead, it inheres a version of the “Fujiwhara effect,” a term used to describe when two or more cyclones come together, overlap, morph, and even merge. However, the whole must by no means be thought of spatially or even as an entity, not even as an encompassing that starts from a wholeness, but must be grasped in terms of quantum theory as a relational structure. Mathematically, in classical physics the state manifolds are put together additively, but in quantum theory they are put together multiplicatively (“tensor product of the state spaces”).
If one follows the arguments by means of quantum and complexity theory, the term “polycrisis” in the strict sense would not simply stand for the addition of different crises, but for a globalized system characterized by manifold interconnections, interactions and interrelations – for a complexified crisis, which is much more effective than a crisis which is merely composed of the addition of different crises. An economic world system struggling with a polycrisis mutates into a kind of nightmarish “emergent” system whose causalities and effects proliferate in all directions. Tooze initially sees this crisis as a deviation from the normality of a thoroughly functional world market. Yet, he says, the polycrisis is a situation of escalating complexity, novelty, and radicality. We had been in the midst of escalation for some time.
The question that arises here is whether we can then even speak of separate crises that connect and branch out, or whether we should rather speak of sutured or overlapping processes of financial, geopolitical, and other ecstasies leading to increasing eco-economic, systemic chaos in the capitalist world system. By means of an impact matrix, it would then be necessary to link different crisis-like processes, such as the hegemony of the financial system with its bubble formations, the imbalances in the trade balances of large industrial exporters such as China or Germany, the disruptions of global supply chains, the increase in global warming and pandemics caused by zoonotic coronaviruses, state fascization, and the strength of capitalist blocs based on extractivism of mineral resources, land, and fossil fuels. It would then be possible to speak, with Alex Callinicos, of the “age of catastrophe,” a “multidimensional crisis” that, as already mentioned, is due to factors such as global warming, problems of industrial stagnation, social inequality, and financial instability, among others. From the geopolitical point of view, it would be worth mentioning the struggle for global hegemony between the U.S. and the EU on the one hand, and China and Russia on the other; from the political point of view, the erosion of the center of globalized neoliberalism as a result of right-wing populist eruptions. The war in Ukraine is a compressed expression of these intersecting crises of economy, ecology, and imperialism. It makes sense only against the backdrop of growing competition between the United States and China. The U.S., as a hegemonic imperialist state, is currently attempting to dislodge Western capitalism from the relationships that have been important in sustaining economic globalization since the 1970s by reducing European and North American dependence on China as a supplier of manufactured goods and on Russia as a source of cheap energy.
How should we now assess the prospects for the future if, like Nouriel Roubini, we predict a prolonged period of stagnation? Roubini cites several key points in support of this: The shrinking supply of young labor in the West leads to the increase of wages and thus to rising costs, which lowers the rate of accumulation of capital. Deglobalization due to the restriction of global trade in goods, services, technologies, data and investments leads to higher import prices, rising production costs and this too weakens growth. The shift of production from still low-cost countries like China to more expensive industrialized countries will lead to further cost and price increases. In this context, competition between the U.S. and China threatens to freeze into a cold war, so intense technology wars (semiconductors) could break out, among other things. If China takes a leading role in the technologies and industries of the future, such as AI, then it could make lucrative offers to many emerging economies in the areas of e-commerce, digital payment system platforms, and 5G networks. The Russian invasion of Ukraine has increased the price of energy, food, and other commodities important to global supply chains and consumption and production processes. Global climate change will continue to increase stagflationary pressures as a result of water shortages in certain parts of the world, insufficient supplies of green energy, pandemics, and natural disasters. Increasingly frequent cyberattacks are disrupting supply chains, power grids, and financial infrastructures. The power of the dollar could wane as China pursues competitive economic, trade, investment, technology, monetary, and financial policies. The U.S. dollar’s role as a major reserve currency is declining, and the resulting devaluation may lead to severe inflation and stagflation as most commodities are priced in dollars and devaluation causes prices to rise. The demand for dollars that results from their status as a global reserve currency means that the U.S. can borrow more cheaply to finance its large budget and trade deficits. But if the U.S. budget and current account deficits continue to widen while the dollar is increasingly used as a weapon for foreign policy and national security objectives by means of sanctions, then this could very soon lead to a loss of power for the dollar. Trade and financial sanctions can further disrupt global supply chains that depend on dollar financing and payments, as well as the smooth functioning of global financial markets, think of the functioning of SWIFT. Finally, financial wars lead to further stagflationary financial dislocations.
Moreover, looking at the system simply against the backdrop of the logic of financial capital in the context of the U.S. boom-bust-bailout economy, it becomes apparent that it constantly requires ad hoc intervention by the state and the central bank for its continued existence, although this moment of state sovereignty also repeatedly proves disappointing in its successes. Financial capital continues to display such extremely strong hegemonic dynamics that short-term regulations fizzle out in their effects, or the interventions of states and central banks even initiate the next round of extended accumulation, which from a certain point on again requires ad hoc interventions. Such perpetuated insecurity could thus actually escalate into the catastrophic.
The prevention of financial crises was answered by the central banks by lowering interest rates to zero, they intensified quantitative and credit easing by buying long-term bonds and mortgage-backed securities. Thus, the ecstasy of credit was enacted and talk of “QEinfinity” emerged. Households, corporations, and governments began to push debt to even greater heights due to low interest rates, until corporate debt exploded starting in 2014, especially among risky and leveraged companies. Collateralized loan obligations (CLOs), which securitized bundles of corporate loans, resembled the infamous securitized collateralized debt obligations (CDOs) from the subprime crisis. These corporate debts were financed not by banks, but by shadow banks, hedge funds, and private equity funds. By mid-2017, the Fed had begun to slowly raise interest rates, but private and public borrowers were so highly leveraged that small rate hikes caused a furor in the markets. The stock market fell 20 percent in the fourth quarter of 2018, prompting the Fed to ramp up quantitative easing again. Nearly a year before the Covid 19 crisis, the Fed failed to implement even modest policy tightening. By March 2020, the stock market was crashing, every lender was hoarding cash, and there was little money in circulation to keep the economy going. Banks, shadow banks, hedge funds, small and medium-sized businesses, and mortgage holders could not pay lenders given their heavy debt loads. Bond markets went into freefall. The Fed’s response was to keep the money flowing fast and furious, at a speed, pace, and scale much greater than ever before, even greater than 2008. Quantitative and credit easing massively reduced borrowing costs for public and private borrowers, while at the same time fiscal measures propped up tech company stocks, real estate prices, private equity, SPACs, cryptocurrencies, government bonds, and exotic credit instruments like collateralized loan obligations (LOs). Fed bailouts starting in March 2020 drove up prices for all types of assets.
By the end of 2021, we had left the pandemic behind, with tons of debt, rising budget deficits, and looser monetary policy than ever before in history. The monetization of debt is fueling bubbles that are poised to burst everywhere, whether it’s cryptocurrencies, risk-seeking hedge funds, or real estate. With the advent of inflation and central bank monetary tightening, a new crisis process has been initiated.
The Fed is in a dilemma: if it tightens monetary policy too much and raises interest rates too quickly, it could cause the cost of borrowing to rise, so that new investment in technology declines, consumer demand for products on credit stalls, and there is a general economic slump. However, if the central bank does not act, that is, reduce its monetary injections and raise interest rates, then high inflation may not be temporary at all. Although raising interest rates alone will not fight inflation either. It should be sufficiently clear by now that any money creation program, which is desperately needed to prop up the financial sector, can combine with inflation to further erode purchasing power, requiring new creative methods to control the impoverished masses. The alternative to the cheap money scenario would be for central banks to raise interest rates until the market bubbles burst. The result of delirium in the dilemma is that the Fed is looking for a middle ground. The same is true for the Bank of England and the European Central Bank.
There is a need for some regular relief from the ever-increasing debt pressures in the financial markets, and price inflation helps with that by reducing the overheating in the bond market as inflation reduces the real value of debt. However, there is still a risk of inflationary dynamics taking on a life of their own (hyperinflation). Another important point, however, is that central banks, with their tightening policies designed to fight inflation, must push the real economy toward stagnation while trying to ensure the stability of the volatile financial sector. What must be avoided at all costs is a market event triggered by the rise in debt. In the current situation, the growth of the debt bubble needs some relief, in a situation characterized by war, falling asset prices and rising consumer price indexes. This logic becomes clear when looking, for example, at U.S. margin debt, which is the debt capital used to operate on the stock market. Since October 2021, margin debt has fallen 14.5%, while the Nasdaq has lost 17.6%.
Central bank technocrats are currently continuing to raise interest rates despite recession fears and continue to sell bonds (quantitative tightening), which is referred to as “demand destruction.” The ECB has also “tightened” monetary conditions by raising policy rates by 75 basis points to 1.25% in 2022. Right now, Ann Pettifor says, central bank elephants are trampling on the livelihoods of populations around the world by intervening in markets, raising interest rates and destabilizing the economic system.
As we enter 2023, we are already seeing the impact of each 0.5% rate hike by the Fed on the U.S. housing market. The rate hikes have driven up mortgage rates, putting pressure on the real estate market. Real estate mortgage rates have more than doubled through April 2023. In addition, commercial real estate is now only 60 to 70 percent occupied. Over the next five years, more than $2.5 trillion in commercial real estate debt is expected to mature in the U.S., more than ever before in a five-year period. At the same time, 70 percent of commercial real estate loans are owned by smaller banks, making the situation worse.
But while homebuyer sentiment is at an all-time low, homebuilder sentiment remains relatively high – confirming that there is no longer a complementary correlation between real economic conditions and asset price speculation; after all, it was the Fed that kept the housing bubble rising by buying mortgage-backed securities, even if demand is now falling.
In March 2023, Silicon Valley Bank, the sixteenth largest banking institution with intense ties to tech companies in the U.S., went bankrupt and was shut down by U.S. regulators. Inflation drives up interest rates, which in turn reduces the market value of bank assets such as bonds, including primarily government bonds. Since government bonds are not carried at par or at their acquisition price, but at current market prices, with bonds accounting for over a quarter of U.S. bank assets, the decline in bond prices has been reflected in accounting problems at some banks, threatening to push equity into the red. The problem, then, is that the market valuation of assets and mortgages has fallen as interest rates have risen. Interest rates on bonds and mortgages purchased several years ago are now lower than on new mortgages and new Treasury notes and bonds. When interest rates rise, the prices of the “old securities” fall. However, if banks simply hold on to their bonds or mortgage packages, they do not have to devalue the market price of their assets accordingly. They only have to disclose the loss in market value if depositors pull their money out and the bank actually has to sell those assets to raise the money to pay off its depositors. Because SVB’s many corporate clients were not covered by deposit insurance and feared regulatory intervention, money was withdrawn and redeployed from this solvent bank. The growing gap between what investors could earn by buying risk-free Treasury securities and the small amount of money the banks paid their depositors caused wealthier depositors to withdraw their money to seek higher market returns elsewhere. Most investors knew that higher interest rates would lower the price of bonds – most severely for bonds with long maturities. Asset managers avoided such price declines by shifting their money into short-term Treasury bills or money market funds, while prices for real estate, bonds, and stocks fell.
Smaller U.S. banks in particular also recorded losses running into the billions on bonds in their portfolios. After the 2008 financial crisis, U.S. regulators had required banks to hold more government bonds, i.e. liquid assets, in their portfolios, the prices of which were now falling as a result of Fed hikes in key interest rates and were partly responsible for (previously unrealized) losses on banks’ balance sheets. Consequently, U.S. banks resorted massively to the Fed’s crisis lending programs. The Fed pumped $152 billion into the financial sector in one week through its discount window, clearly surpassing the previous weekly record of $111 billion set shortly after the bankruptcy of investment bank Lehman Brothers in 2008.
In China, too, small banks are in danger and some are already on the verge of collapse. In China, this is again due to funding shortages in competition for deposits with larger banks and high defaults by local borrowers due to China’s economic slowdown in recent years.
The share prices of crisis-hit Credit Suisse plunged by double digits in March 2023. In its wake, bank shares are plummeting across Europe. Five-year credit default swaps (CDS) for debt securities consequently shot up to 574 basis points. Credit Suisse received a liquidity line of more than $50 billion from the central bank, and regulators said it met Swiss capital and liquidity requirements. Credit Suisse clients continued to withdraw deposits Thursday. Authorities provided more than $150 billion in additional liquidity to the bank. Eventually, Credit Suisse was acquired by UBS.
The question facing markets as we enter 2023 is what happens if central banks continue to raise interest rates in response to rising inflation and continue to sell government bonds. The risk is not that government bonds suddenly become worthless because the U.S. government defaults or hyperinflation occurs, but primarily that financial markets stop functioning as prices and yields become abnormal and trillions of dollars are shuffled around in portfolios, which can trigger a crisis as hedge funds, banks and other investors now compete for cash as well. However, if sovereign debt markets become fragile, this should not be underestimated, as government bonds are the most reliable collateral. Government bonds play an important role in the financial system and for sovereigns, which in past crises have had to borrow more and more to stimulate the economy through stimulus programs and other crisis measures. As of March 2023, the market for U.S. Treasuries is suffering from a latent withdrawal of liquidity and includes securities with a face value of about $23.5 trillion.
translated by deepl.