The money mountains are tumbling down

The coronavirus outbreak is triggering an economic recession far deeper than the one that followed the 2008 banking crash. Chunks of the money mountains are breaking off and sliding into an abyss.

While we struggle to get used to the lockdown, worrying about friends, family and vulnerable people in our communities, the flesh-eating hyenas who control the world economy are struggling to protect their fortunes.

Here is a quick summary of the way it looks today in the Financial Times. (I’ve included links to the articles, although many are behind paywalls – sorry for that!)

Forecasts of economic recession. Macquarie bank, in a note to investors, said:

The global economy is in deep recession. […] Quantifying the magnitude of the near-term hit with any certainty is not possible [but] the partial data to February show that the hit to China is without precedent.

Macquarie’s models suggest that the Chinese economy probably fell by 20% (seasonally adjusted annual rate or SAAR) in the first quarter of the year, and that the rest of the

“Capital”. A poster published in the Soviet Union in 1923

world economy will sink by 15% SAAR in the second quarter – that is, “the worst quarterly contraction in the modern era”, compared to “the weakest quarter during the Great Recession” of about minus 9% SAAR.

The shock in the second quarter is likely to be broadly spread across the major advanced economies, with differences likely drive by the respective stimulus packages and government approaches to containment.

Another note, from Morgan Stanley, focuses on how its clients can profit from the recovery, once it starts:

While it’s not possible to call an absolute bottom with precision, we think it’s close on many metrics. […] Aggressive monetary and fiscal policy measures, degrossing to date, and optimism about the impact of social distancing have us leaning more positive. Even in the worst possible outcome – a depression – there is historical precedent (1930) to think we can rally sharply from the recent downturn.

In the US, for the second quarter of the year, Morgan Stanley forecasts a 30% drop in Gross Domestic Product (GDP); Goldman Sachs reckons it will be 24%.

Jan Hatzius, Goldman Sachs’s chief US economist, said that the coronavirus “has pushed the world economy into a deep recession”. The pandemic, and governments’ response to it, is “a constraint on economic activity that is unprecedented in postwar history”.

Financial markets have crashed. The upward trend in the prices of companies’ shares and bonds, almost constant since the end of the 2008-09 recession, has ended. The collapse is so severe that, although the US Federal Reserve and other central banks last week pumped in many hundreds of billions of dollars, it seemed yesterday and today not to have stopped it.

At the start of last week, the FT reported the impact on fund managers, who gather investments and play the markets with them:

The world’s three biggest fund managers have seen their assets shrink by an estimated $2.8 trillion this year as a global sell-off in financial markets heralds a decisive end to the industry’s golden era of growth. BlackRock, Vanguard and State Street Global Advisors have all seen their assets under management fall sharply as a result of the recent market chaos, during which US stocks fell into bear market territory after more than a decade of gains, and the FTSE 100 suffered its worst one-day drop since 1987.

There is a “flight to safety”, as there always is when the money men fear that their financial bets may turn sour. So the FT reported yesterday:

Traders have reported a growing global shortage of gold bars, as the coronavirus outbreak both disrupts supply and stokes demand, with one business comparing the frenzied buying of the yellow metal with the consumer rush for toilet roll.

The “flight to safety” also affected Treasury bills, i.e. promises to pay issued by the US state, regarded as among the least risky investments. Last week yields (i.e. the payments made to those who hold them) on short-term Treasury bills went negative, indicating that supply is overwhelmed by demand.

The money markets are also affected by a liquidity crisis, i.e. lack of money swirling around the system as it does normally – a sure sign of paralysis. The FT gave the example of traders who, two weeks ago after the oil price fell, tried to sell some 30-year US government bonds, “one of the safest, most easily traded financial assets in the world” – and could not find a buyer.

The FT commented:

The incident reflects the intense strain at the heart of a financial system struggling to cope with an economic shock of huge, but uncertain proportions. The ease of buying and selling even the safest, most high-quality assets has deteriorated dramatically. JPMorgan has dubbed it the “Great Liquidity Crisis”, noting that it has piled extra volatility on to already fragile market conditions.

The liquidity crisis affects markets in corporate bonds, foreign exchange and other financial instruments. The number of contracts available in the US market for share-market-linked futures has fallen by 90% since mid February.

Central banks are spending billions to defend the system. On Monday, the US Federal Reserve (i.e. the US central bank) mobilised funds to protect the markets, going further than it did in 2008. “It’s a bazooka and it was needed”, said Jim Shepard, the bond issuance boss at Mizuho in New York.

The first part of the Fed’s programme offers bridge loans of up to four years to big companies, in exchange for newly-issued corporate debt sold to the Fed. The second part allows the Fed to purchase corporate debt that is already in circulation.

These measures – which yesterday (Monday) still had not halted the stock market fall – came on top of last week’s decision to cut interest rates nearly to zero, and to buy back $500 billion worth of US Treasury bonds and at least $200 billion in mortgage-backed securities.

The European Central Bank last week launched a €750 billion “bazooka” of its own. Its boss Christine Lagarde said there are “no limits to our commitment to the euro” – and the bank later denied a claim by Robert Holzmann, a right-wing governing council member from Austria, who said there are limits.

Note that these central bank splurges are separate from government stimulus packages, such as the $2 trillion under discussion in the US, and the two extra budget announcements by the UK chancellor – which, along with partial nationalisation of the railways, have effectively junked thirty years of the Tory party’s monetarist dogma.

The oil price crash is both cause and effect. The market crashes are stoked by very real downturns in economic activity caused by the coronavirus outbreak – and none more so than reduced oil demand and crashing oil prices.

The initial trigger for the oil price to fall was the breakdown on 7 March of talks between Saudi Arabia and Russia about limiting output. But the FT reports today, under the headline “Oil industry faces biggest crisis in 100 years”, that as coronavirus lockdowns sweep Europe and north America,

the latest estimates suggest 10 to 25 per cent of global [oil] consumption could vanish in the coming few months. […] Such is the scale of the demand collapse that it risks overshadowing the price war between Saudi Arabia and Russia. […] The result is likely to be storage tanks being filled to the brim within months. […] Respite will come only once the most expensive oil production starts to shut down, or the weakest producers go bust.

The FT has also tracked the meltdown of consumer markets that is pushing rich countries’ economies into recession. The paper estimates that: road traffic has “at least halved in many of the world’s largest cities”; “global restaurant demand has ground to a halt”; footfall in shops has fallen by 70% year-on-year in the US; cinema bookings are down by two-thirds on last year; and global daily air flights were down by more than 20% in the seven days up to 21 March, compared to the same period in the previous month.

I am not gloating about this crash. The people who control the money will try to save their own necks and to heap pain and hardship on working people. But still, the crisis is laying waste to neo-liberal dogma and the policies based on it. It exposes the rottenness of the whole edifice. And allows us to imagine the potential of, and work towards, an economy that serves people, not profit. GL, 24 March 2020.

■ Thanks to the Ecologist, which also published this article.

4 Responses to The money mountains are tumbling down

  1. tompainesghost says:

    The UK government is now borrowing money from the Bank of England directly, not going through secondary banks as previously. This apparently is in line with Modern Monetary Theory, which claims that governments can just print money when they need to. I have no opinion on MMT, but I do consider that the coronavirus pandemic has opened up fault lines in neoliberal states that account for the prevarication and shifts in policy from Johnson and Trump: a contradiction between the interests of finance capital and government legitimacy. Read more at coloneldespard.wordpress.com.

  2. Reblogged this on The Most Revolutionary Act and commented:
    The people who control the money will try to save their own necks and to heap pain and hardship on working people. But still, the crisis is laying waste to neo-liberal dogma and the policies based on it. It exposes the rottenness of the whole edifice. And allows us to imagine the potential of, and work towards, an economy that serves people, not profit.

  3. […] mid March, oil prices collapsed, and last week they went negative. Brent crude (the main marker price for crude oil on this side of […]

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