Third phase of the global economic crisis

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On 18 September Andy Haldane, chief economist at the Bank of England, warned that the global financial crisis is entering a third phase of turmoil. Speaking to the Portadown Chamber of Commerce, he particularly highlighted the risks to the global economy from China, where an economic downturn and sudden currency devaluations have accompanied dramatic falls in the stock market. Together with the mounting crisis in many other large ‘emerging market’ economies, these developments have sent shockwaves through the world’s financial markets. David Yaffe reports.

Haldane is keen to point out that these developments in the global economy should not be seen as independent events, as lightning bolts from the blue, but are part of a connected sequence of events that have affected the global economy over the past decade. He argues that: ‘Recent events form the latest leg of what might be called a three-part crisis trilogy.  Part one of that trilogy was the “Anglo-Saxon” crisis of 2008/09. Part two was the “euro-area” crisis of 2011/12. And we may now be entering the early stages of part three of the trilogy, the “emerging market” crisis of 2015 onwards.’1

FRFI shares the view that recent developments in the global economy are just the latest expression of a continuing worldwide economic crisis. However, unlike Haldane, we argue that capitalism suffers from long-term structural contradictions that threaten its destruction. The ‘Anglo-Saxon’ crisis of 2008/09 itself was a necessary consequence of neo-liberal globalisation, a process that began more than three decades ago.2 We shall go on to look at the events which led up to the ‘emerging market’ crisis and point to some other important expressions of this unending global crisis.

The ‘emerging market’ crisis

In FRFI 242, we argued that six years on from the global financial crisis the deleveraging process to bring down the global debt to GDP ratio had not yet begun. The ‘emerging market’ economies, a term that now seems to cover most of the so-called developing economies, were next in line for a crisis, with China having the highest risk. China’s total debt had risen spectacularly in its attempt to offset the loss of export earnings after the financial crash in 2008-09.3 China launched a huge $586bn stimulus programme to increase domestic demand. The economy continued to grow at around 10% and its currency the renminbi steadily appreciated making its exports less competitive. While US GDP has grown by little over 10% since 2008, the Chinese economy increased by around 66%. This created acute problems of chronic overinvestment in infrastructure industries and excessive debt (The Guardian 15 September 2015). China’s total debt is now said to have reached 282% of GDP (Wall Street Journal 4 February 2015).

Stock markets saw a spectacular rise. The Shanghai exchange shot up by around 135% and the Shenzhen by 150% in less than a year. Price to earnings ratios for Chinese stocks averaged a staggering 70 to 1 against a worldwide average of 18.5 to 1. This could not last. The growth rate started to fall. 7% is now said to be the new normal. The stock market bubble burst. Some $3 trillion was wiped off the Shanghai stock exchange in a few weeks in June and early July 2015. Attempts by the Chinese government to manage the collapsing share prices were to little avail. The Shanghai market sank a further 8.5% and the Shenzhen fell 7%. The renminbi was devalued two days running on 11 and 12 August alarming international markets. The fall continued. On 24 August, the Chinese call it Black Monday, markets around the world suffered some of the biggest one-day falls so far this year. £74bn was wiped off London shares after a fall of 4.7%. The US Dow Jones fell by 3.4% and many European markets lost over 5%. By the end of the first week in September the Shanghai stock market had fallen more than 40% since June with some $5 trillion wiped off share prices.4

A net $2 trillion in capital flowed into 19 ‘emerging market’ countries from July 2009 to June 2014, enabling these developing economies to pull the global economy, after the 2008-09 financial crisis, back to positive growth. The slowdown in China, the growing economic crisis in some of the larger ‘emerging market’ economies such as Brazil and Russia, together with the continuing meagre growth in many of the world’s dominant capitalist economies, has reversed this trend. In the 13 months to the end of July 2015, total net capital outflows from the 19 largest ‘emerging market’ economies reached $940.2bn, almost twice the $480bn that flowed out during the 2008-09 financial crisis. As capital flows out a vicious circle is generated. Currencies fall against the dollar, reducing the demand for imports and further driving down economic growth (Financial Times 19 August 2015). The ‘emerging market’ economies account for 38% of global domestic product in nominal terms and 52% on the basis of purchasing power parity.  They are responsible for 43% of global trade and have accounted for 80% of global growth since 2010, with China alone contributing around half. They have now become a drag on the global economy.

Booming financial markets and stagnant economic growth

After the financial crisis of 2008-09, desperate efforts were made to stimulate growth in the recession-hit imperialist economies through quantitative easing (QE) – the money creation programme adopted by these countries’ central banks. Its aim was to encourage bank lending and increase investment in these stagnant economies. The resulting growth was derisory, but stock markets boomed awash with cheap available funding. In the UK in March 2009, when the eventual £375bn QE programme was initiated, the FTSE 100 stood at 3,542 points. It hit a peak in April this year of 7,103 points, an increase of 100.5%. A similar process was registered in the US with its three rounds of QE adding more than $3.6 trillion to the Federal Reserve’s balance sheet – nearly equivalent to the size of the German economy. The S&P 500 index rose by more than 200% over a similar period. In March this year the European Central Bank launched a €1.1 trillion QE programme to stimulate lending and investment with little impact so far on the eurozone’s stagnant economies.

Despite high corporate profits, the dominant corporations in the imperialist countries are not investing because of concerns about the global economic outlook. The largest non-financial multinational corporations were holding some $3.5 trillion in cash reserves in the third quarter of 2014, with the US corporations having around a half of this amount. European non-financial companies cash reserves have swelled to €1.1 trillion, 40% higher than 2008. The cheap cash is not being used for investment but for share buy-backs and dividend payments, increasing returns to company shareholders and directors. It has also helped to fuel a mergers and acquisitions (M&As) spending spree that is on track to beat the previous record of $4.6 trillion in 2007, just before the financial crash.

Globally, companies had already spent $3.1 trillion on M&As by the end of August this year, which is more than was spent in five of the last full six years. The high value of M&As is driven by developments in the US which is home to around $1.46 trillion buyouts. A key feature of this year’s deals so far is the high value of mega deals: the mean average value of each M&A is $125.4m, well above the average values in any year since 2000. The volume of megadeals has reached a record of $1.19 trillion so far, surpassing that of the dotcom boom in 2000 and the credit-fuelled M&As frenzy in the period before the financial crisis in 2008-09.

This development will not deliver much of an economic boost. Nor will it offer significant value for long-term shareholders as the experience of such developments in 20005 and 2007 shows. The capitalist system is awash with excess cash and cheap credit. The two previous M&As peaks in 2000 and 2007, which coincided with equity and credit bubbles, shortly afterwards saw those bubbles burst with serious economic consequences.

In mid-September the US Federal Reserve held off from raising interest rates after signalling the move for months. Given the fragile state of the global economy it is fearful of crushing a recovery.

Britain: global slowdown taking its toll

Britain’s unbalanced economy, its critical dependence on the earnings from its vast overseas assets and particularly those of its parasitic banking and financial services sector, makes it vulnerable to any external economic or political shocks. The third phase of the global economic crisis will inevitably take its toll.

The exposures of UK banks to China total $540bn, equivalent to 100% of the banks’ core capital.  Their exposures to the ‘emerging market’ economies total $820bn or 150% of their core capital. By comparison, their exposures to the United States are $655bn and to the euro-area $960bn. This shows Britain’s vulnerability to the latest phase of the global crisis.6

The employers’ organisation, the Confederation of British Industry, has warned that China’s economic slowdown, global stock market turmoil and the oil price slump have hit financial services industries in the UK and dented growth prospects for banks. Growth in business volumes across financial services companies rose at the slowest pace in two years in the three months to September, following a two-year period of robust expansion (Financial Times 25 September 2015).

Britain’s sham recovery has been driven by debt-fuelled consumer spending and inflated property prices. Claims of ‘rebalancing’ the British economy, away from consumption towards exports and productive investment, have no substance. It has been a ‘recovery’ for the ruling class elite, accompanied by low interest rates, near zero inflation, stagnant productivity, low wages and insecure jobs. Inequality and poverty are rising as savage welfare cuts shatter the lives of millions of working people.

In 2014 productivity measured by output per hour in the UK was 20 percentage points below the average for the rest of the major G7 capitalist countries, the widest productivity gap since comparable records began in 1991. Germany was 33% more productive than the UK, which also lagged behind France and the US by a similar percentage.

Recent statistics for the second quarter of this year indicate that the global slowdown is beginning to take its toll on the British economy with sharp falls in exports and manufacturing output. Britain’s overseas trade deficit in goods and services increased to £3.4bn in July from £2.6bn in June, with the exports of goods decreasing by £2.3bn to £22.8bn in July, the lowest export figure since September 2010. Manufacturing output fell by 0.8% in July, compared with the previous month. It is still 5.2% below its pre-financial crisis peak in the first quarter of 2008. Unemployment began to rise again in the second quarter of 2015. All of these data were taken prior to recent turbulence in the ‘emerging market’ economies.

In its Annual Report published at the end of June this year, the Bank of International Settlements, the organisation which represents the world’s central banks, warned that the need for abnormally low interest rates more than six years after the global financial crisis in early 2009 reflects a broader malaise: ‘the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for manoeuvre in macroeconomic policy too limited.’ It could be describing the state of the British economy.          

1. How low can you go? At 2015/840.aspx

2. See David Yaffe ‘Capitalism in crisis: stagnant, predatory and corrupt’ in FRFI 245 June/July 2015 on our website at for a discussion of globalisation and references to earlier articles on this topic.

3. See David Yaffe ‘Red warning lights for the global economy’ in FRFI 242 December 2014/January 2015 on our website at

4. See ‘China stumbles’ on p7 of this FRFI for discussion.

5. See David Yaffe ‘Globalisation: parasitic and decaying capitalism’ in FRFI 158 December 2000/January 2001 on our website at for a discussion of this issue.

6. How low can you go? op cit.


FRFI 247 October/November 2015