Why do bankruptcies and the global recession break out?
By Daniel Campos 24/10/22- La Marx International
In recent weeks, the pension and retirement system of Great Britain has been on the verge of bankruptcy, Credit Suisse, one of the 10 corporations that dominate the global economy, has gone bankrupt, and several of the the largest real estate bubbles in the world such as those in China, Europe, and Canada. Data from the world economy indicate that capitalism is headed for a new global recession while prices continue to soar, and inflation relentlessly hits millions of people in every country in the world. Both inflation and bankruptcies and recession are symptoms of the seriousness of the global crisis of capitalism that has been developing for years.
Inflation is a phenomenon that began to express itself strongly from the year 2021. And although there was already a recession, and bankruptcies, now a new and serious trend towards bankruptcies and falling economic indices is developing. Why is this new trend developing? What is causing this deadly combination of rising prices, recession and rising bankruptcies?
Inflation skyrocketed in Britain, Japan, the United States, and Europe
During the year 2021 inflation skyrocketed in the United States, Great Britain, Japan, and Europe. Source: Investing.com, Bank of Japan
A change in the policy of imperialism: From QE to QT
The new and serious trend towards bankruptcies and falling economic indices is the product of a change in the policy of the Heads of global capitalism. In the last 3 years, they put millions of dollars into the pockets of the millionaire oligarchy of 1% of the richest in the world, through the policy of bailouts and financial relief that we call QE4 (in English, Quantitative Easing 4). This economic operation consisted of the injection of monstrous masses of fictitious capital, plus 33 billion dollars (U$S) destined to rescue the corporations that dominate the global economy. We call it QE4 because there were previously several bailouts called QE1 (2008 to 2010), QE2 (2010 to 2011), and QE3 (2012-2015).
But this enormous printing, issuance, and injection of money and fictitious capital of more than 33 billion dollars (U$S) produced the skyrocketing of prices, and global inflation, plunging millions of dollars into misery and poverty in the world. whole world. Spokespeople and capitalist analysts say that this price escalation is the product of the war in Ukraine, but it is false, because the price increase began in 2021, when the war in Ukraine did not exist. What produced the jump in inflation global is the enormous printing of fictitious money that the central banks of the most important capitalist countries made from September 16, 2019, for more than 30 months, throughout 2020, 2021, and until March 2022, which constitutes Until today, the largest rescue operation in the history of capitalism.
The 2-minute video shows the huge masses of fictitious capital printed by the US Central Bank. Source: Demonocracy Info
Bailouts are inflationary because they go against the Law of Value which states that what creates value is human labor. Goods that do not have human labor have no value. That is why money must be backed by gold or precious metals, which are goods that have value, because human work is contained in them. W hen a central bank issues money outside of the gold it has in its vault, this movement generates a devaluation of the money, because the masses of banknotes issued are not backed by gold, that is, they are masses of capital that have no value. When the central bank of the United States (Fed) issues monstrous masses of money as bailouts, it does nothing but devalue the dollar, and all the currencies of the world that are referenced to the dollar.
This move appears to a humble worker as food prices rise. But it's just a physical illusion. In reality, bread, milk or meat did not increase, the problem is that the money we all have in our pockets is worth less, and it is less enough to buy products. This devaluation carried out by the central banks of the main capitalist countries plunges the people into hunger and desperation, which has triggered a global wave of revolutions, insurrections and uprisings against capitalism in the five continents. The capitalist governments are surrounded by the rise of the masses throughout the world, the mobilizations against hunger break out every day, without respecting borders, flags, languages, political regimes,
This global revolutionary wave against capitalism has led the Heads of world capitalism to try to end inflation to try to calm and stop the revolutions that are taking place in the world. To curb inflation, the Bosses of capitalism have changed their policy: They have stopped QE4, they have stopped bailouts, and instead of putting money in Global Corporations, they have started withdrawing money from circulation, and raising interest rates. interest. This policy of withdrawing the bailouts, withdrawing the money, and raising the interest rate is called Quantitative Tightening (QT ). In other words, world imperialism went from QE to QT since March 2022.
The chart shows the rise in interest rates by the US Federal Reserve (Fed). Between March and September 2022 it increases from 0 to 3.25 percentage points, a rise that expresses the beginning of the QT. Source: Trading Economics
QE unleashed a catastrophe, QT aggravates the catastrophe
We will call the QT that began in March 2022 QT2, because there was already a first QT1 between December 2015 and September 2019. This economic operation carried out by the US central bank (Federal Reserve, "Fed" ) has a mechanism applicable to all Central Banks, and when QT1 was implemented, the Fed assured that the transition was not going to cause any problems. However, the opposite happened, and QT1 led first to the "Repo" crisis in September 2019 when the main Corporations that dominate the global capitalist economy were on the verge of bankruptcy because they ran out of money.
And six months later QT1 then caused the crash of the government bond market in March 2020 when the $24 trillion US Treasury put its bonds up for sale, and for several days no buyers could be found for the government debt. Nobody wanted to buy US Treasury bonds, supposedly the safest financial asset in the world, and that put the US financial system on the brink of death, forcing the US Federal Reserve to a massive bailout.
QT2 causes the "easy money" of the bailouts to disappear, with which all the fraudulent operations of capitalism are exposed, and without support. On the other hand, when interest rates rise, people cannot access credit, because the prices of all credits and debts in the entire world skyrocket. This means that millions of people cannot pay their mortgage loans, cannot pay their credit cards, cannot pay their loans, and in this way, debts increase, transforming into a snowball that devastates people, companies, and state,
The first sign of collapse began with the Global Credit Suisse Corporation, one of the 10 Top Ten Corporations in the world, whose shares plunged, and could need up to 9,000 million Swiss francs to save itself. The Corporation's share price accumulates an annual fall of 50% and its fall could shake the world capitalist economy, in the purest Lehman Brothers style. Credit Suisse's derivatives, a financial product that hedges credit risk, CDS, soared to their highest level ever recorded.
Left: The collapse of Credt Suisse share prices. Right QE & QT. Source: Twitter. Trading Economics
In recent years, the Global Corporation has accumulated a series of financial scandals such as the bankruptcy of the hedge fund Archegos , which caused a hole of 5,000 million dollars, or the loans to the factoringfirm Greensill Capital. In 2019, Credit Suisse was involved in a corporate espionage case, while last year it was fined in the UK and the US over a bond scandal in Mozambique , which revealed that its funds were used to bribe officials . corrupt government of the country and to pay 'bribes' to various former Credit Suisse bankers and other intermediaries. The Swiss bank closed 2021 with losses of 1,572 million Swiss francs, about 1,489 million euros, and in the first half of 2022 it registered losses of 1,866 million francs, equivalent to 1,918 million euros.
Along with the Credit Suisse crisis, came the crisis in Britain's pension funds. The crash precipitated the intervention of the Bank of England (BoE), which had to come out to rescue the pension funds to stop the fall in billions of pounds, and cover a hole of 1.5 trillion pounds with exposure to the collapse of the British bonds, by which the Bank of England realized that it was sitting on top of a time bomb the size of 66% of UK GDP, and led to the fall of Prime Minister Liz Truss.
The QT brought to light a very risky speculative maneuver called LDI (Liability Driven Investing). or investment to boost assets, used by pension funds for fifteen years, which allowed investing in higher-risk assets that offered higher profits. The LDI scheme allows speculation by buying corporate credit, shares or properties, and everyone won: the participants, the managers and the financial firms. But now many pension funds have been left exposed to big losses, and the country's regulator, the Pensions Regulator, warned there was a risk of a chain reaction.
The headline of the Financial Times shows the image of Finance Minister Kwasi Kwarteng, and reads "Bank of England injects £65bn to avert crisis in debt markets"
But QT is also causing a worsening of the real estate crisis. The outlook is serious with the US and China in serious trouble. The rise in interest rates has an impact on mortgages and can cause one or more real estate bubbles to burst. We call "bubbles" the overaccumulation of capital in an asset, thousands of accumulated capital in a business that does not make a profit. T he fact that millions of families are in debt up to their necks can cause a collapse and that many households could be forced to declare insolvency, which drags down banks, corporations, and can generate a wave of global bankruptcies, as generated by the " sub prime real estate bubble" of 2008 in the US.
In short, a crisis process has already begun that QT2 is exacerbating. Home prices have spiraled up and up without anything justifying that rise. But now, if families become insolvent, the collapse can span entire countries and regions. A housing bubble can destroy portions of the world economy, as it did in Japan in 1990, and both Spain and the US in 2008, to name a few examples. The bursting of a real estate bubble is a serious event that has a global impact on capitalism and can burst in the big cities, where the demand is greater.
In red, those that are about to explode. Source: Visual Capitalist
QT2 and the fact that central banks around the world simultaneously increase interest rates to respond to inflation, leads the world economy towards a recession. The US grows weakly at 2%, China at 3.9% almost in depression, Europe, Germany, England, and Japan in recession. Global GDP growth would slow to 0.5% in 2023, a 0.4% contraction in per capita terms that would meet the definition of a global depression. "Global growth is slowing sharply, and a further slowdown is likely to come as more countries slip into recession... with lasting consequences that are devastating to people..." said David Malpass, President of the World Bank.
In short, the current crisis caused by QT2, as well as the previous one caused by QE4, are of historical, civilizational, epochal magnitude. All these serious symptoms such as the trend towards global recession or depression, the cut in the supply chain or "global jam", the growing inequality and growth of hunger, poverty, bubbles and speculative maneuvers, the "crack" of cryptocurrencies, the development of pandemics, wars, climate change, etc., are symptoms that express the collapse that the capitalist mode of production is currently experiencing.
These outbreaks and episodes of the crisis express the exhaustion of the capitalist mode of production. In that sense, it is not just another crisis, it is nothing like previous economic crises. All the previous crises expressed the path towards the collapse of the capitalist mode of production. But the current crisis expresses that the capitalist mode of production has reached the end of the road, it is collapsing. But the defenders of capitalism do not want the people of the world to know that capitalism is collapsing, even though the evidence of it is observable with the naked eye. We Marxists are the ones who must reveal what is happening.
We are living a world revolutionary situation, led by the most exploited and oppressed sectors of society, women, immigrants, oppressed races, youth, nations, original peoples, and now also by the workers and peoples of the capitalist nations. more advanced. The revolutionary wave that is coming is even more powerful and profound than all the previous ones. Hand in hand with the revolutionary process that is shaking the world, the material and objective conditions are more than ripe to impose socialism. What it is about is building a world Socialist International to carry out this task. This is the invitation that we make from La Marx Internacional, to regroup the revolutionaries,