US corporate debt rose from $439bn in 1980 to $3.1tn in 2007, before the Great Recession. Thereafter, it mushroomed to reach $14.15tn in 2019.10 US Federal Government debt also grew rapidly, from $879bn in 1980 to $9.5tn before the Great Recession, and to $22.8tn in 2019. US Federal debt owed to international and foreign parties rose from £492bn in 1990 to $2.4tn in 2007, and to $6.9tn in 2019.11 All of this spiralling debt, of course, predated the Covid-19 epidemic which hit the global economy in 2020, exacerbating each of these growing debt piles.
These spiralling levels of household, corporate and government debt reflect the underwriting of consumption in the US, the UK and other high-income countries. For, as we saw above, the levels of investment in productive assets remained stagnant (Figure 2.2). Growing debt thus took the place of investments in infrastructure and productive capacity in the balancing of aggregate demand with aggregate production capacity. But debt is a tax on the future – it has to be repaid. When interest rates are extremely low, as in the era of the Covid pandemic, growing debt is a relatively minor problem. But these low interest rates depend on a depressed economy. If growth were to revive, the repayment schedules would place a heavy burden on sustainable future growth.
Added to this problem of domestic debt in the US, the UK and other high-income economies, is the spectre of sovereign debt – that is, money borrowed by governments. This, too, represents a time-bomb at the base of revived economic growth. For a while, it seemed as though Greece (with sovereign debts of $353bn, equivalent to 182 per cent of its GDP in 2018) was a prime candidate for sovereign default. When the Financial Crisis struck in 2008, virtually all of this debt was owed to the commercial banking system, particularly to banks in Germany and France. Had Greece defaulted at that time, the blow to the interconnected global banking system would surely have thrown the global economy into a substantial crisis. Yiannis Varoufakis, Greece’s then Minister of Finance, has chronicled the manner in which these sovereign debts were transferred from the commercial banking system to European governments. This reduced the systemic risk of a potential default, and added muscle to the arm of Greece’s creditors. In the subsequent decade, Greece implemented a traumatic austerity programme. (Because this led to a 25 per cent fall in the size of the economy, this perversely led to an increase in its debt-to-GDP ratio.) Whilst inflicting enormous costs on its suffering population, it has (at least hitherto) saved the global financial system from a financial meltdown.
Whilst Greece’s experience illustrates the power of creditors to contain disruptive defaults, however, it would be wise not to be too sanguine about the dangers to sustained global growth arising from sovereign defaults. The Council on Economic Affairs expressed its concern about the potentially contagious impact of an Italian default.12 Italy’s debt of $3.6tn in 2018 was 131 per cent of GDP, twice the levels permitted by the EU. Italy is the third biggest economy in the EU and an Italian default would hit banks across Europe. If Italy decided to leave the euro currency and return to the lira, this would cause massive losses to investors, triggering another financial crisis.
And then there is the problem of debt in the emerging economies. Between 2000 and 2017, the value of their dollar debts trebled from less than $1tn to more than $3tn. Their Euro debts more than doubled from around €200tn to more than €550tn. The vulnerability of these emerging-economy debts is not just due to their absolute size and the share of debt in their domestic economies. It is also because much of this debt was transacted in foreign currencies and by the private sector. If a debtor economy willingly or unwillingly devalues its currency, this magnifies the burden on debtors whose earnings are in local currency. A default by a large emerging economy (say Brazil), or perhaps a default by more than one emerging economy (Brazil and Argentina and Indonesia) may have serious repercussions for the sustainability of growth in the global economy. If these debts are contracted to the commercial banking system or to the private corporate sector, these dangers will be magnified.
Volatility and fragility in the financial sector threaten the likelihood of a new stock market crash
There are a number of structural characteristics within the financial system which have the potential to spill over into a systemic crisis. One potential source of instability in these markets is the fragility of automated trading systems.13 Automated trading is increasingly used to drive investments in stocks. Programmable buy–sell computer-driven systems allow for automated transactions based on algorithms designed by the programmers. This is referred to as ‘black box high frequency trading’. The share of automated trading transactions in the US rose from 15 per cent of total market volume in 2003 to 85 per cent in 2012. During the 2008 Financial Crisis, it was not uncommon for market prices to fall/rise by 5–10 per cent in a single day, largely driven by algorithmic trading. These algorithms have the potential to produce what is referred to as a ‘flash crash’. On 6 May 2010, the US Dow Jones Industrial Index fell by 9 per cent in the space of 15 minutes. This is widely believed to have resulted from unregulated automatic algorithmic trading. It is believed that the growing use of Artificial Intelligence in these systems may reduce the possibility of a flash-trading crash. Perhaps they will. However, the growing sophistication of these algorithms makes them less transparent to external intervention. If only one of these algorithms is incorrectly designed, the financial sector may easily tip into crisis.
Another possible source of disruption which is internal to the financial system is the market in cryptocurrencies such as Bitcoins. These are essentially Ponzi schemes (which are often referred to graphically as pyramid schemes). These schemes generate returns for early investors by bringing in new investors who fund the gains reaped by early entrants. However, the more investors there are in the scheme, the greater the number of new investors required to keep the system growing and to maintain the stability of the pyramid. Thus, Ponzis are inherently unstable. Moreover, because of their need for exponential growth (an ever-growing number of new investors are required to service existing investors), they have a limited life.
Unlike national currencies which are guaranteed by governments, the only value which cryptocurrencies possess is the belief that they are valuable. Their appreciation in value depends on more and more investors sharing this belief. They have no guardians, and once belief in their future value is eroded, the edifice may crumble very rapidly. Take the case of Bitcoins. The value of Bitcoin ‘currency’ has grown at an extraordinarily rapid rate – between October 2016 and October 2017 by more than 5,000 per cent. In December 2017, a Bitcoin was valued at $19,703. But its value was unstable. In early January 2019, its value had dropped to $4,057, including a fall of $1,000 in a 24-hour period. On 9 March 2020, fears of a spreading Covid-19 pandemic led to a fall of $26bn in the value of cryptocurrencies. In February 2021, the value of a Bitcoin soared to $52,000. As the financial journal Forbes warned readers, ‘Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.’14 If the Bitcoin market was small, this crazed speculation would be of little significance. In 2016, cryptocurrencies totalled less than $18bn. This rose to $129bn in 2018, and $237bn in 2019.
Disruption to global supply chains
As we will see in Chapter 5, deepening globalization after the mid-1980s helped to rescue falling corporate profitability and prolonged the life of the atrophying Mass Production paradigm. However, outsourcing production to low-wage developing economies had important economic and social consequences. In the economic sphere, it resulted in widespread deindustrialization and persistent imbalances in trade for some of the major high-income economies, notably the US and the UK. In the social sphere, in most of the high-income economies it led to the collapse in employment and income in the rust-belt regions which had powered growth in the Mass Production paradigm’s heyday.
In the chapter that follows, I will show how these and other tensions led to the election of populist governments in a number of countries, including in the US.
