PART 2 - Rescuing TINA with COVIDNOMICS
Warning Signs – An explosive mix of financial and political instability
“Without a supportive state, capitalism would not last a day.” – Robert Heilbroner
BEFORE COVID-19 WAS DECLARED A PANDEMIC, elite policymakers were warning of a looming global financial crisis worse than 2007-’09 that was easily as threatening as the political volatility so clearly on display since at least 2016. Although the twin political and economic crises are inextricably linked, the scale of pre-COVID financial problems was unprecedented.
As always in an economy so heavily dependent on speculation, the problems emerge first in the form of a potential debt crisis. In Q3 of 2019, for example, both the Institute of International Finance (IIF) and the Bank of International Settlements (BIS) reported that global debt was the highest in history.
A May 1, 2020 report from the Congressional Research Service offered the following summary (p 41):
In Q3 2019—before the outbreak of COVID-19—global debt levels reached an all-time high of nearly $253 trillion, about 320% of global GDP. About 70% of global debt is held by advanced economies and about 30% is held by emerging markets. Globally, most debt is held by non-financial corporations (29%), governments (27%) and financial corporations (24%), followed by households (19%). Debt in emerging markets has nearly doubled since 2010, primarily driven by borrowing from state- owned enterprises.
In sum, 81% of this historic debt has been incurred by corporations, banks and the governments that now act as their service organizations. But even this historic debt level understates how fragile and out of control the modern globalized economic order has become, having morphed into a kind of international casino for financial speculators in the absence of meaningful regulation.
For example, the BIS calculated the value of Over the Counter (OTC) derivatives as $559 trillion at the end of December 2019. The gross value of these derivatives, which provides a measure of the amounts at risk, had declined to $11.6 trillion by year-end 2019.
In October 2019, the IMF issued a report on global debt that was full of warnings about potential trouble. The report was festooned with headlines about elevated “debt vulnerabilities” and excess “financial risk taking.” The overview stated.
“In a material economic slowdown scenario, half as severe as the global financial crisis [of 2007-’09], corporate debt-at-risk (debt owed by firms that cannot cover their interest expenses with their earnings) could rise to $19 trillion—or nearly 40 percent of total corporate debt in major economies, and above postcrisis levels.”
The report warns ” …that corporate vulnerabilities should be addressed urgently” to deal with “liquidity risks,” adding that a “…particular concern is the rapid growth in the risky leveraged loan and private credit segments.” Their conclusion also drives home the point that “Corporate sector vulnerabilities are elevated across countries.”
In Chapter 2, it is estimated that total speculative corporate debt by 2021, in China, Japan, the UK, the US, France, Germany, Italy and Spain will reach $48 trillion, and as noted above, 40% of this debt is considered at-risk. The IMF refers to potential “GDP shock” from excess debt to production ratios, noting that a crisis could be triggered by a number of risk factors, “…including escalating trade tensions.”
There were also warning signs in other sectors, such as a December 16, 2019, analysis of global currency trading by Money & Banking, which pegged average daily foreign exchange turnover at a historic high $6.6 trillion per day based on data from the Bank of International Settlements (BIS). The fact that nearly 8% of global GDP is changing hands via currency speculation every day signals underlying market instability. The analysis concludes ominously for the US.
“[C]onfidence in U.S. policymakers is eroding, while the U.S. economy continues to decline in global importance. Consequently, a rising ability of other governments to deliver liquidity and financial stability poses a real threat to the dollar’s exorbitant privilege.”
Adding to the economic volatility, the market for oil, which is the most traded commodity in the world with total volume of about $1.7 trillion per year, has been thrown into chaos because oil is bought and sold in the form of derivatives. As the COVID lockdown began, demand for oil plunged, and prices dropped below zero, exposing the fact that outstanding oil derivatives total between 25 and 50 times the value of the oil upon which they are (increasingly only tangentially) based.
This makes forecasting future oil prices nearly impossible, yet almost every sector of the global economy depends on oil – as a source of fuel and petrochemicals, for use in the production of textiles, fertilizers, medicines, plastics, steel and other durable consumer goods. An April 21 report by analysts at Visual Capitalist characterized the situation.
“Oil is a geopolitical game, and big price swings always come with a geopolitical undercurrent. In a post-COVID-19 world, the outlook for all oil producers is grim. The continued fallout will not only affect the industry, but also the countries that rely on oil exports to balance their budgets.”
The infrastructure of major financial institutions that facilitate large global payments and transfers such as the Federal Reserve Bank’s Fedwire or the European Central Bank’s Eurosystem and privately held CHIPS (Clearing House Payments Company LLC), processes quadrillions of dollars in transactions yearly.
At the same time, the major investment banks that triggered the 2007-’09 financial crisis (Goldman Sachs, Barclay’s, JP Morgan Chase, Morgan Stanley, et. al.) manage trillions of dollars in assets, while global investment powerhouse Blackrock alone manages a portfolio valued at $7.4 trillion. With high speed trading capabilities, the World Bank reports that these firms and their counterparts in Europe and Asia managed stock trades valued at nearly $100 trillion in 2015 versus annual GDP of $75.1 trillion the same year.
The technical sophistication of this globalized financial system is one of the world’s great wonders, but with Ultra High Frequency Trading (UHFT) driven by algorithms accounting for as much as 60% of all stock trades, it is also inherently unstable.
Further, speculative bank loans are still alive and well. A recent Atlantic report written by a former Wall Street trader sounds a warning about the possibility of large scale bank failures worse than 2007-’09. Large banks in the US currently hold trillions of dollars in CLO’s, (collateralized loan obligations) and VIE’s (variable interest entities) on their books that are barely “collateralized” at all. The report warns:
“The financial sector isn’t like other sectors. If it fails, fundamental aspects of modern life could fail with it. We could lose the ability to get loans to buy a house or a car, or to pay for college. Without reliable credit, many Americans might struggle to pay for their daily needs. This is why, in 2008, then–Treasury Secretary Henry Paulson went so far as to get down on one knee to beg Nancy Pelosi for her help sparing the system. He understood the alternative.”
How to respond?
Although it is very early in the process, the outlines of a radically reconfigured post-COVID world economic order are beginning to emerge, and it looks a lot like a program for putting the pre-COVID model of TINA style inevitability on steroids.
The most visible elements of nascent COVIDNOMICS are:
LIQUIDITY – Fiscal and monetary engineering to flood the deeply indebted financial and corporate sectors with liquidity, i.e., money and credit.
LABOR FLEXIBILTY – Taming post-lockdown labor markets via large scale unemployment to suppress wage demands.
PRIVATIZATION – Privatization of public utilities and services as states and municipalities face shrinking tax revenues.
RETURNING LOST POWER TO THE IMF – Reviving the fortunes of the sagging International Monetary Fund to once again create leverage and control by the world’s developed nations over emerging economies in the Global South.
NOTE: The outline for the Covidnomics series, subject to revision:
Part 1 - Breaking up with TINA
Part 2 - Rescuing TINA with COVIDNOMICS
Part 3 - How COVIDNOMICS works - Liquidity
Part 4 - How COVIDNOMICS works - Labor Flexibility, Privatization & IMF Revival
Part 5 - How COVIDNOMICS works - Dramatis Personae & China’s Role
Part 6 - Revisiting Polanyi and Other Alternatives
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