The United Nations has added its voice to the growing list of international organizations, including the World Bank and the World Trade Organization, warning that interest rate hikes imposed by the US Federal Reserve are creating the conditions for a crisis. financial crisis and a global recession.
In its annual report released earlier this week, the United Nations Conference on Trade and Development (UNCTAD) said that after a “recovery” in 2021 “the global economy is in the midst of cascading and unfolding crises. multiply”.
He said that with incomes still below 2019 levels in many major economies, “growth is slowing everywhere”.
Rising interest rates and highly volatile bond markets mean that “indebted countries, including more than half of low-income countries and about a third of middle-income countries, are moving ever closer to default. “.
With an eye clearly on the class struggle, he said economic hardship, stemming from a cost-of-living crisis in advanced and developing countries, compounded by the threat of new outbreaks of COVID-19, effects of climate change and cuts in public spending, “is already triggering social unrest that can quickly escalate into political instability and conflict”.
Highlighting the effects of interest rates on the economy, the report says that each one percentage point increase in the Fed’s key interest rate reduced economic output in rich countries by 0.5% and 0.8% in poor countries over the next three years; and more drastic hikes of 2 and 3 percentage points (such hikes are already being implemented) would further depress the “already stalled economic recovery” in emerging economies.
Speaking on the report, UNCTAD Secretary-General Rebeca Grynspan said: “There is still time to step back from the brink of recession.” But the current action plan harms the most vulnerable, particularly in developing countries, and “risks tipping the world into a global recession”.
The rate hikes, led by the Fed and led by central banks around the world, were initiated in the name of fighting inflation. But they will do nothing to drive down prices which are the result of supply restrictions, speculation and the exploitation of profits by big business, the details of which are contained in the report.
In an interview about the report, Richard Kozul-Wright, leader of the UNCTAD team that prepared it, said: “Are you trying to solve a supply-side problem with a supply-side solution? request ? We think this is a very dangerous approach.
This is a misplaced analysis. The objective of central bank policy is not the reduction of inflation per se.
It aims to induce a major slowdown, a recession, if necessary, to suppress workers’ wage demands as they seek to recoup the declines in living standards they have already suffered – and further cuts to come – resulting from the higher price increases. in four decades.
In other words, the policies directed by the Fed are not the product of a misdiagnosis of the economic situation. Rather, they stem from a consciously crafted class war agenda resulting from the policies implemented by governments and central banks, at least since the 2008 global financial crisis.
The report dismissed claims that the price spike is simply a product of the war in Ukraine, noting that while it has “added to economic concerns”, the “most critical issues facing the global economy confronted are prior to the war”.
Evidence suggests that the surge in inflation is not stemming from easing fiscal policy or pressure on wages “but rather stems largely from rising costs, particularly for energy, and slow supply response due to a long history of low investment growth”.
This is a direct result of the quantitative easing policies of the Fed and other central banks after the 2008 crisis, accelerated after the March 2020 financial market crash, which meant that speculation and financial parasitism were under steroids due to the supply of trillions of dollars of ultra-cheap money.
In what she called a “high profit environment, financial engineering has become an instrument of rent-seeking behavior, especially among large international corporations. Thanks to their market power, they have often generated income from the manufacture of scarce goods rather than from the production of goods or the provision of services.
This was combined with profiteering. In mid-2022, the ratio of US corporate profits to GDP was 7%, compared to 6.25% before the pandemic. With US GDP somewhere north of $20 trillion, that means at least another $350 billion is flowing into corporate coffers.
According to the report, between 2020 and 2022, “an estimated 54% of the average price increase in the U.S. non-financial sector was attributable to higher profit margins, compared to just 11% over the previous 40 years. “.
Another key driver of rising prices, particularly for energy and food, has been increased speculation, financed by low interest rates. “Quantitative easing in 2020 and 2021 has led to more speculation and inflation in asset markets, from cryptocurrencies to oil, food and minerals.”
Due to their volatile nature, hedging has long been a part of the trading operation of commodity markets. But this has been completely overshadowed by speculation which is “a major factor in rising energy, food and commodity prices”.
Prior to 2002, non-commercial speculators accounted for 20% of US oil futures markets. By 2009, this figure had risen to 50%, with more recent estimates placing it between 70 and 80%.
The report notes that since the 2008 financial crisis, financial entanglements have become increasingly global, with the result that “complex shocks, including outbreaks of financial panic or extreme price volatility, or a combination of triggers external, constitute a current danger”.
It was prepared before the UK financial crisis, but there is no doubt that had it not been averted, at least temporarily thanks to the Bank of England’s £65 billion intervention in the market bond, it would have torn the global financial market. system, confirming this analysis.
“Monetary tightening”, he continued, “poses an additional risk for the real economy and the financial sector: given the high indebtedness of non-financial companies, the increase in borrowing costs could lead to a sharp increase in non-performing loans and triggering a cascade of bankruptcies.”
If the regulations were considered politically unacceptable [that is, by the financial markets] and monetary authorities have proven unable to stabilize inflation quickly, government authorities “could resort to further fiscal tightening” which “would only help precipitate a deeper global recession.”
The financial situation has been made more unstable by what UNCTAD calls “the universe of non-banking financial institutions and credit providers”, known as the largely unregulated shadow banking system, which, despite some efforts to contain, has “grown in size, geography and diversity.
The share of global financial assets held by shadow banking institutions rose from 42% in 2008 to almost 50% at the end of 2019. In the United States, shadow banking organizations account for more than two-thirds of mortgages and the share of business loans is almost equal to that held by banks. In 2021, shadow banks controlled $226.6 trillion in assets out of a total of $468.7 trillion.
The report rightly noted that: “The world faces a systemic crisis and only systemic action can resolve it.”
But the limited reforms proposed by UNCTAD, based on increased regulation and control, are far from achieving this. Moreover, recent history shows, and as the report itself indicates, even these measures will not be taken.
Reviewing this history, the report stated: “In the decade since the GFC [global financial crisis], a missed opportunity to set the world on a path of more sustainable and inclusive growth. But once the panic subsided, it continued, central banks pumped in more money, non-bank financial institutions dramatically expanded their portfolios, governments cut spending, wages stagnated, and wealth and income inequality income increased.
The “missed opportunity” was not due to a lack of knowledge. Reports, for example by the US Senate in 2011, highlighted the enormous dangers in the operations of the financial system and its often outright criminality.
Nor was there a political problem in the electorate. In the aftermath of the GFC, which devastated the lives of millions across the United States and around the world, there would have been massive public support for the entire financial system to become public property. But even when egregious criminal activity was exposed, no charges were brought. Banks were declared too big to fail and criminals too powerful to jail.
No action was taken due to the enormous power of finance capital over the political system, determining the actions of governments. Since then, this power has only increased. The systemic crisis can only be overcome if it is addressed at its source, the profit system itself, through the struggle of the working class for a socialist program under which financial and corporate giants become public property under democratic control. .
The authors of the UNCTAD report certainly did not want this, but the data they provided argue in favor of this program.