• First, without China’s contribution to the global growth dynamic, worldwide GDP in 2016 would reach about 1.9% and thus be clearly below the 2.5% threshold classified by the IMF and the World Bank as stagnation.
  
  
• Second, a possible but not likely hard landing of China’s economy would have a disastrous effect on large parts of the global economy. Every 1% drop in China’s GDP directly reduces global GDP by about 0.2%. Including the spillover effects of foreign trade, the negative impact on worldwide growth would be about 0.3%. A massive weakening of China’s growth would trigger a sharp recession in the world.
  
  
• Third, the global effects of a successful structural change of the Chinese economy remain positive. The tendency would be towards a stronger rise of imports than of exports. The reason is that rising wages countrywide make it increasingly difficult to be the ‘world’s workbench’. With many incentive and promotional measures, the Chinese authorities are therefore trying to stimulate the development and establishment of upmarket (and clean) production. At the same time, the consumption of the Chinese is itself to become a stronger growth motor. The unavoidable structural change in China continues to make possible a strong counterweight to an otherwise stagnating worldwide economy.

China must carry out a structural transformation, for the time is over in which the world’s second biggest national economy expanded for years, sometimes by much more than 10%. This boom phase has left a legacy of macroeconomic imbalances, a wide social gap, and increased political risks. But in stark contrast to the important national economies of the highly- developed world, in which there is very limited scope for this, the Chinese authorities have control capabilities for loosening monetary policy to spur economic activity. To the extent that the Chinese leadership is in a position to maintain this multi-dimensional policy and its reform focus, the weak and still vulnerable world economy can only benefit from this.

The reconstruction of the Chinese economy is proceeding. In the last year the share of service workers in economic output totaled to 50.5%, which corresponds to a 2.4% growth relative to the previous year. In so doing the tertiary sector is slowly outstripping industry – whose share of GDP last year was 40.5%. Thus in 2015 the tertiary sector, with 8.3%, rose more sharply than industry, with a growth of 6.0%. These emerging changes in economic structure show that structural transformation is indeed advancing. In view of the growth slowdown the government has laid great stress on regulating loans and controlling debt.

The debt burden makes up more than 250% of GDP, which is now too high. Structural change must therefore be tied to a weakening of credit expansion. Reassuring comparisons with the similarly high liabilities of the US or Japan are misleading because in the long run rich countries have less problems with financing their loans than do emerging countries, which are at a lower level of development. The decision-makers in China are thus engaged in a risky re-orientation process: they want to decrease the debt burden, stabilise growth, not depress the market with debt default, and at the same time avoid price bubbles. To stabilise growth the state is keeping up investments. On the other hand, the enterprises are hardly still investing.

The rapidly growing debt burden was the price paid for the high growth dynamic with its positive effects on the global economy, since economic output grows thanks to higher debts. In the recent period lending has clearly grown more than the economy. As a result the debt burden rises in comparison to economic output, and the debt ratio has accelerated even more. In order to reduce the ratio of debt to GDP the debt level must be lowered. The present high rate of growth in loans is based on government- directed investments in infrastructure and on an expansion of the real-estate market.

Global economy – between secular stagnation and credit expansion

Years after the Great Crisis, the capitalist global economy is still in a dangerously unstable mode. It is unstable because the expansion of the credit system included constraints. No corrective is emerging in either extreme of disequilibrium – neither in a speculative boom nor in deflationary debt liquidation. The boom is feeding on itself just as the economy spirals ever deeper into depression. This process can only be stopped through state intervention. In depression this means fiscal and monetary policy support to stop the self-destructive, deflationary debt liquidation.

Since the outbreak of the Great Crisis almost ten years ago now (2007/2008) we are passing through a cascade of various phenomenal forms. Between phases of the intensification of contradictions the financial markets cool down and the social process of reproduction recovers, although not evenly in all countries. The point of departure for the structural crisis in contrast to a normal business-cycle crisis was a drastic price correction in the real-estate sectors and after ailing mortgage loans in many capitalist countries, out of which a bank crisis and later a public debt and banking crisis developed.

The following years will probably be characterised by attempts to deal with the accumulated mountain of debt, that is, to clear them. Private households would have to reduce their debts and states consolidate their budgets. If private consumption and investment expenditures still decline aggregate demand will be suppressed. Debt reduction is a protracted process; in all historic cases it requires years. It began with the outbreak of the financial crisis in 2007, and there are no signs of a return to accelerated capital accumulation. We are once again seeing symptoms of a possible financial crisis.

Contrary to conventional wisdom, financial crises are inevitable phenomena of the basic instability of the capitalist economy. In longer phases of accelerated capital accumulation (with economic growth), banks, enterprises, and consumers lose their aversion to risk and, driven by the desire to valorise their assets, begin to expose themselves to ever more adventurous financing – stimulated by the merciless competition between the banks, which contributes to the invention of new financial products and to attempts by banks to circumvent the prevailing regulations. The financial markets begin to overheat, and the number of alternative options are constantly diminished. In the end, enterprises, financial institutions, or private individuals pin their hopes on expected price rises of assets that they have bought on credit. The end of the party is normally triggered by an actually minor event, which throws the whole financial branch into crisis.

The capitalist economies are now in a liquidity trap. That is, the tendency to ‘secular stagnation’ means strongly flattened growth rates for the economy, meagre rates of price increase (which is called deflation), and at the same time the central banks have recourse to the lowest extremes of their prime rates, which cannot be much lower than zero. At the same time a decided uncertainty prevails in the international financial markets vis-à-vis the incontrovertible instability. In view of frictions in the global credit cycle, the present situation is assessed as extraordinarily fragile. It is acknowledged that since the beginning of the financial crisis there has been no global debt reduction, and that, instead, debt has sharply risen, that derivative products have lost nothing of their complexity, and that their enormous number has grown still further. It is seen that politicians and central bankers have shirked their responsibility to citizens through their policy of high debt and the risky, untested measures not directed towards reinforced growth and greater financial stability but to more inflation.

Once again the policy of life on credit is facing the danger of tipping over and coming to an abrupt end. The world financial system and world economy are in turn caught in the logic of an uncontrollable expansion of credit. There is the threat of a new great depression with bank collapses, state bankruptcies, mass unemployment, and social and political conflicts within and between countries. Policy has stuck to the supposedly tried and true means, that is, still cheaper money and still more debt. This only means continuing to fight the symptoms and not the actual causes.

The leading central banks have now once again transformed the traditional business-cycle and financial cycle of the last decades into a dangerous ‘asset- price cycle’. Today, in view of the incredibly long low-interest-rate phase, and in terms of the booming bond, stock, and real-estate markets, the world economy ought to find itself in an analogously strong upswing – but this is not the case. Even below-zero interest rates are not enough to get a world with a shrinking or stagnating labour force and without advances in productivity back onto a growth course.

In the last 30 years this economic policy not only covered up the increasing crippling of the economic driving force; it also further aggravated the problems. Continually rising debt has only served to finance consumption and speculation. The value of assets resulting from this debt has risen sharply everywhere. The interest on it, however, must as always be financed from income, which in the end leads to decreased demand. At the same time investments have been made that on closer analysis have not paid off. Overcapacity, bad investments, and nonperforming loans are depressing the market and reinforcing deflationary forces. It is becoming continually clearer that debts enable advance consumption. The growing gap between productive capacities and stagnating mass income is threatening development.

A (state-accompanied) drastic remedy or a ‘New Deal’

What could the solution be? Aside from a crash triggered by a secondary event there is an alternative. The central banks, supported by government policy, can bring the economy back on a path of growth after an induced ‘creative destruction’, a cleansing shakeup, for instance through a decisive prime rate increase. Tottering enterprises and banks are swept out of the market so that something new can emerge from the ruins. Or a bridging subsidy can be established through which private households and companies can be rehabilitated, banks recovered, and the economy made self-sustaining again. A severe financial crisis is defused and its distortions cleaned up by state intervention, be it in the form of the central bank, the oversight authorities, or the ministry of finance.

A drastic remedy to clean up worthless asset titles would not be a popular one. The property and conditions of reproduction of all population groups, however diverse, would be touched. The owners of assets would have to make their contribution to the removal of the non-performing loans and to the financing of the urgently needed investments. Companies, if they want to avoid higher taxation, would have to invest more. The state would have to invest more in public infrastructure. The future ensuring of prosperity would be purchased by a longer lean period with higher unemployment. A collapse into a longer crisis phase cannot be excluded.

The alternative to a state-accompanied cleansing and accommodation process is an extraordinarily concerted reform effort, a kind of New Deal consisting of monetary, fiscal, and structural policy, with which the important national economies and consequently the world economy could be manoeuvred back onto a development path. Monetary policy alone could never accomplish this. It is still not too late to involve the central banks in a reform option. State investments in infrastructure financed through the bond market could be efficiently and successfully implemented in the USA, Germany, Great Britain, and thus in the EU and euro area. The accumulated needs in all these national economies is enormous. Loan capital at low interest rates is available, and investments in infrastructure would improve the conditions of life and production.

An effective social reform policy is tied to a radical change of direction and a socio-political overall concept. Full employment can be achieved with the extension of state expenditures on public investments or for a qualitative change in mass consumption. By contrast with the approaches to macroeconomic global management implemented up to recent years, these measures need to be rooted in a long-term planned structural policy, both in terms of taxation and in the expansion of public investments and mass consumption. Without an expansive wage policy no lasting domestic economic growth can be created. It is not a matter of more economic growth within the traditional income and consumption structures but of the formation of a socially and ecologically more sustainable mode of life. A fundamental reform of the capitalist economy has to be planned such that a long-term structural policy is pursued through combatting the existing inequality in income distribution.

Such a restructuring has to centrally focus on four dimensions. First, the big disparities in income and assets have to be reduced. In the first place, the ‘accumulated claims upon production’³ have to be cut back through taxation. Second, the extent of flexibilisation – both on the factory level and throughout the society – have to be regulated. Third, in every reform of the social security systems account has to be taken of the actual precarisation of sections of wage labour and the increased significance of interest and asset income. We have to expand the financial basis of social security from work income to other forms of income or revenue (interest, rent) if we want to realise a universal security system for all members of society. And, fourth, we need a new regime of controls on capital movement and of the control and taxation of international financial flows.

The debts that have been created in order to uphold the illusion of growth and prosperity have become unbearable and are increasingly smothering the economy. The mountain of debt has so far been prevented from collapsing only through low interest rates. Therefore an important first step is the cleansing of bad debt within an orderly process.

Part of this orderly clean-up is the reduction of the unsecured liabilities funding pension and healthcare benefits in an aging society. For years, experts from the Bank for International Settlements have been calculating the actual debt of western industrialised countries – that is, including the hidden burdens on future benefit entitlements – at several hundred percent of GDP and have called for drastic countermeasures.

The world’s leading politicians and central bankers have set out on a bridging operation, when they did not allow the economy in winter of 2008/2009 to collapse but instead intervened. The road map reads: the central banks make liquidity available and buy time so that government policy can create demand through investment programmes and tax cuts and at the same time implement a sustainable economy through structural reforms.

The central banks were left in the lurch. With growing desperation they have repeatedly bought time, but the politicians have let this tick away unused. The signs are now increasing that the central banks have come to the end of their road. The collateral effects of their extreme policy, for example the negative rates of interest, are becoming increasingly painful, while the danger of new, potentially disastrous speculative bubbles is growing in the financial markets.

Literature

Admati, Anat and Martin Hellwig, Des Bankers neue Kleider: Was bei Banken wirklich schief läuft und was sich ändern muss, Munich: FinanzBuch Verlag, 2013.

Arrighi, Giovanni, The Long Twentieth Century – Money, Powers and the Origins of our Times, London: Verso, 2010.

Aglietta, Michel and Antoine Rebériou, ‘Vom Finanzkapitalismus zur Widerbelebung der sozialen Demokratie’, Supplement der Zeitschrift Sozialismus 3, Hamburg, 2005.

Altvater, Elmar, ‘Was passiert, wenn öffentliche Güter privatisiert werden?’, Peripherie. Zeitschrift für Politik und Ökonomie in der Dritten Welt (Summer 2003).

Bank for International Settlements (BIS), 86th Annual Report, 26 June 2016.

Behrens, Fritz,  ‘Zum  Problem  der  Ausnutzung  ökonomischer  Gesetze  in  der Übergangsperiode’, Wirtschaftswissenschaft, 3. Sonderheft, Berlin, 1957.

Bernanke, Ben S., The Global Saving Glut and the U.S. Current Account Deficit, Remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, 10 March 2005.

– ‘Why are interest rates so low?’, 30 March 2015, blog brooking.

Bischoff, Joachim, Die Herrschaft der Finanzmärkte. Politische Ökonomie der Schuldenkrise, Hamburg: VSA, 2012.

– Finanzgetriebener Kapitalismus. Entstehung – Krise – Entwicklungstendenzen, Hamburg: VSA, 2014.

– ‘Die Finanzwelt gerät aus den Fugen’, Sozialismus, vol. 7/8 (2016).

– and Christoph Lieber, Die ‘große Transformation’ des 21. Jahrhunderts. Politische Ökonomie des Überflusses versus Marktversagen, Hamburg: VSA, 2013.

– and Bernhard Müller, Bernhard, Piketty kurz & kritisch. Eine Flugschrift zum Kapitalismus im 21. Jahrhundert, Hamburg: VSA, 2015.

Bontrup, Heinz-Josef, Arbeit, Kapital und Staat. Plädoyer für eine demokratische Wirtschaft, fifth edition, Cologne: Papyrossa, 2013.

– Krisenkapitalismus und EU-Verfall, Cologne: Papyrossa, 2013.

Bourdieu, Pierre, Counterfire: Against the Tyranny of the Market, London: Verso, 2003.

– Practical Reason: On the Theory of Action, Stanford: Stanford University Press, 1998.

Brand, Ulrich, ‘Lateinamerika: Ende des progressiven Zyklus?’, Ulrich Brand (ed.), Lateinamerikas Linke, Hamburg: VSA, 2016.

Brie, Michael, Polanyi neu entdecken. Das hellblaue Bändchen zu einem möglichen Dialog von Nancy Fraser und Karl Polanyi, Hamburg: VSA, 2015.

Corneo, Giacomo, ‘Kapitalismus: Alternative in Sicht?’, Das Parlament, Beilage aus Politik und Zeitgeschichte, 35-37/2015.

Crouch, Colin, Post-democracy, Malden, MA: Polity, 2004.

– The Strange Non-death of Neoliberalism, Malden MA: Polity, 2011.

Despain, Hans G., ‘Secular Stagnation – Mainstream Versus Marxian Traditions’, Monthly Review, September 2015.

Dörre, Klaus, ‘Landnahme und die Grenzen kapitalistischer Dynamik. Eine Ideenskizze’, Berliner Debatte Initial, 4/2011.

– ‘Grenzen der Landnahme: Der Kapitalismus stirbt nicht von allein, doch wir können ihn überwinden’, Aaron Tauss (ed.), Sozial-ökologische Transformationen. Das Ende des Kapitalismus denken, Hamburg: VSA, 2016.

European Systemic Risk Board (ESRB), Is Europe Overbanked?, Reports of the Advisory Scientific Committee, No. 4, June 2014.

Funke, Manuel, Moritz Schularick and Christoph Trebesch, Going to Extremes: Politics after Financial Crisis, 1870-2014, CESIFO WORKING PAPER No. 5553, 11 October. 2015.

Hobsbawm, Eric, The Age of Extremes: The Short Twentieth Century, London: Michael Joseph, 1994.

Kalecki, Michał, ‘Political Aspects of Full Employment’, Political Quarterly 1943, reproduced at https://mrzine.monthlyreview.org/2010/kalecki220510.html.

Keynes, John Maynard, ‘Poverty in Plenty’, Donald Edward Moggridge (ed.), Keynes On the Wireless, New York: Palgrave Macmillan, 2010.

– The General Theory of Employment, Interest and Money, New York: Harcourt Brace, 1936.

– ‘Proposals for an International Clearing Union’, Herbert G. Grubel (ed.), World Monetary Reform. Plans and Issues, Stanford: Stanford University Press, 1963.

Kindleberger, Charles P., Manias, Panics, and Crashes: A History of Financial Crises, New York: Basic Books, 1978.

– The World in Depression 1929-1939, Berkeley: University of California Press, 1986 (1973).

Kocka, Jürgen, Geschichte des Kapitalismus, Munich: Beck, 2013.

– and Wolfgang Merkel, ‘Neue Balance gesucht. Gefährdet der Finanzkapitalismus die Demokratie?’, WZB Mitteilungen, 144 (2014).

Koo, Richard, ‘Die Europäer lassen ihre Wirtschaft abstürzen’, Finanz und Wirtschaft, 2 March 2015.

Krüger, Stephan, Keynes & Marx, Hamburg: VSA, 2012.

Krüger, Stephan, Entwicklung des deutschen Kapitalismus 1950-2013, Hamburg: VSA, 2015.

Krugman, Paul, The Return of Depression Economics and the Crisis of 2008, New York: W. W. Norton, 2009.

Lapavitsas, Costas, State and finance in financialised capitalism, London: Class – Centre for Labour and Social Studies, 2014.

Marx, Karl, (1962), Das Kapital vols 1-3, Marx-Engels-Werke 23-25, Berlin: Dietz, 1962.

Merkel, Wolfgang, ‘Schluss: Ist die Krise der Demokratie eine Erfindung?’, Wolfgang Merkel (ed.), Demokratie und Krise. Zum schwierigen Verhältnis von Theorie und Empirie, Wiesbaden: Springer, 2015.

Minsky, Hyman P., ‘The Financial Instability Hypothesis: An Interpretation of Keynes and Alternative to Standard Theory’, Challenge (March/April 1977).

Minsky, Hyman, Financial Instability  and Economic Insecurity  After the Great Depression, Cheltenham: Edward Elgar, 2011.

O’Connor, James,The Fiscal Crisis of the State, New York: Saint Martin’s Press, 1973.

Piketty, Thomas, Capital in the Twenty-First Century, Cambridge MA: Harvard University Press, 2014.

Piketty, Thomas/Zucman, Gabriel (2014): Capital is back: Wealth-Income Ratios in rich Countries 1700-2010, February 18.

Polanyi, Karl, ‘Demokratie und Währung in England’ [1931], Karl Polanyi, Chronik der großen Transformation, vol. 1, Marburg: Metropolis, 2002.

– The Great Transformation, Boston: Beacon Press, 1944.

Pollock, Friedrich, Stadien des Kapitalismus, edited and introduced by Helmut Dubiel, Munich: Beck, 1975.

Poulantzas, Nicos, Staatstheorie. Politischer Überbau, Ideologie, Autoritärer Etatismus, Hamburg: VSA, 2002.

Reinhart, Carmen M. and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton: Princeton University Press, 2009.

Robinson, Joan, Die fatale politische Ökonomie (1968), Cologne: Bund Verlag, 1979.

Rogoff, Kenneth S., ‘Die Ära der Niedrigzinsen ist endlich’, Financial TimesDeutschland, 15 August 2012.

– ‘Innovation Crisis or Financial Crisis’ (2012).

Roubini, Nouriel, ‘Die grosse Globalisierungs-Revolte’, Handelszeitung, 2 June 2014.

Schularick, Moritz and Alan M. Taylor, Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008, Davis CA: University of California Press, 2010.

Schulmeister, Stephan, ‚Die große Krise. Beginn der Talsohle des langen Zyklus‘, Walter Ötsch, Katrin Hirte, and Jürgen Nordmann (eds), Krise! Welche Krise?, Marburg: Metropolis, 2010.

– Mitten in der großen Krise – ein “New Deal” für Europa, Vienna: Picus, 2010.

Streeck, Wolfgang, ‘Die Krisen des demokratischen Kapitalismus’, lettre international 095, (winter 2011).

– Buying Time: The Delayed Crisis of Democratic Capitalism, London: Verso, 2014.

Teulings, Coen and Richard Baldwin, Secular Stagnation: Facts, Causes and Cures, London 2014.

Wacquant, Loic, ‘Der neoliberale Leviathan. Eine historische Anthropologie des gegenwärtigen Gesellschaftsregimes’, Prokla, 112 (2012).

Wagenknecht, Sahra, Reichtum ohne Gier. Wie wir uns vor dem Kapitalismus retten, Frankfurt am Main: Campus, 2016.

Wallerstein, Immanuel, ‘Die strukturelle Krise oder warum der Kapitalismus sich nicht mehr rentieren könnte’, Immanuel Wallerstein, Randall Collins, Michael Mann, Georgi Derluguian, Craig Calhoun eds), Stirbt der Kapitalismus?, Frankfurt a.M.: Campus, 2015.

White, William R., ‘Is Price Stability Enough?’, BIS Working Papers, no. 205 (2006).

Windolf, Paul (ed.), Finanzmarkt-Kapitalismus: Analysen zum Wandel von Produktionsregimen (Kölner Zeitschrift für Soziologie und Sozialpsychologie Sonderhefte), Cologne: Springer, 2005.

Zinn, Karl-Georg, Vom Kapitalismus ohne Wachstum zur Marktwirtschaft ohne Kapitalismus, Hamburg: VSA, 2015.

Notes

1. World Economic Outlook (WEO), Subdued Demand: Symptoms and Remedies, October 2016.

2. WEO, Subdued Demand.

3. Marx, MEGA II/4.2 (Ökonomische Manuskripte 1863-1867. Teil 2. (Manuskript 1863/65 zum 3. Buch des ‘Kapital’)), p. 524.