Jul 05, 2022
"Global yields lowest in 500 years of recorded history. $10 trillion of negative rate bonds. This is a supernova that will explode one day," -- tweet from Bill Gross, the 'bond king', in 2016.
Global debt - of households, private firms and governments - reached a staggering $305tn (PS254tn) in 2021, up from $83tn in 2000.
Furthermore, global debt now equals 355% of global GDP, up from 120% in 1980 and 230% in 2000.
The events we are witnessing mirror the dynamic that kicked off our current phase of capitalism in the first place.
In 2021, debtors of all types handed $10.2trn - 12% of global GDP - in interest payments to their creditors. In comparison, the annual income of the poorest 50% of humanity is just 8.5% of GDP.
Global debt has grown twice as fast as global GDP since 1980 and is accelerating, while global GDP growth is slowing and threatening to go into reverse.
While global debt has rocketed, global interest rates have been in almost continual decline since 1980. So low have interest rates fallen since the global financial crisis of 2008 that, by 2021, $17trn of bonds were trading at negative interest rates, even before inflation is taken into account. That's $7trn more than the figure that astounded Bill Gross in 2016, referenced at the beginning of this article.
As a result, interest on debt, as a share of GDP, is well below its peak at the beginning of the neoliberal era. The Economist calculates, for instance, that 27% of US GDP was swallowed by interest payments in 1989, but 'only' 12% of it in 2021, despite the massive growth in US debt.
But the world of ever-low interest rates has now come to an end. The decision of the US Federal Reserve on 15 June to hike interest rates by 0.75% - the sharpest increase in nearly three decades, with the promise of more to come - sent shockwaves around the world and has wiped trillions of dollars off the values of stock and bond markets.
Any rise in interest rates means a huge shift of purchasing power from indebted households, firms and governments to their creditors. The Economist calculates that a 2% increase in US interest rates in 2021 would, by 2026, double the share of global GDP absorbed by interest payments.
Decades of ever-lower interest rates have inflated what Nouriel Roubini, one of the few economists to predict the 2007-8 financial crash, famously called "the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession."
However, a bubble is insubstantial and delicate, and bursts with barely a sound. A far more appropriate and useful metaphor is that of a star, which is immense, and dies in a stupendous explosion. As Bill Gross, the 'bond king', tweeted in 2016, "Global yields lowest in 500 years of recorded history. $10 trillion of negative rate bonds. This is a supernova that will explode one day."
The dance of death: inflation, interest rates and debt
What has forced the Fed to aggressively raise its interest rate is the dramatic reappearance of a most feared monster: inflation. The events we are witnessing mirror the dynamic that kicked off our current phase of capitalism in the first place.
The neoliberal era was inaugurated in October 1979 by a huge hike in US interest rates aimed at quelling entrenched and rampant inflation. The "Volcker shock", as it became known (after Paul Volcker, then head of the US Federal Reserve), was likened by journalist Naomi Klein to "a giant Taser gun fired from Washington, sending the developing world into convulsions... Higher interest payments on foreign debts... could only be met by taking on more loans. The debt spiral was born."
This hike in interest rates succeeded in killing the inflation monster, but at the cost of a sharp recession in imperialist countries and a devastating debt crisis throughout Africa, Asia and Latin America. The debt crisis immiserated millions and forced these notionally independent countries to submit to the dictates of the 'Washington Consensus': wholesale privatisation, austerity and removal of obstacles to cross-border flows of capital and commodities (but not of people!).
Now the inflation monster has risen from the dead, prompting the Fed and other central banks to attempt to kill it again before it has had a chance to gain in strength. Thus the Bank for International Settlements, which provides banking services for the world's central banks, has called on them to "not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world."
As a result, the debate has moved on from whether there will be a global recession to how severe it will be - and whether central banks really have the guts to carry out their threats and risk a global economic crash. Over the next 18 months we will find out.
Are we heading towards a capitalist supernova?
Why did Bill Gross liken global bond markets to a star about to explode? What are the chances that his prediction may come to pass? What would such a cataclysmic event actually mean in practice?
A star is a production process, in which heavier elements are fused out of lighter elements, releasing huge amounts of energy. When the energy released by the fusion of lighter elements is insufficient to counter the gravity exerted by the growing mass of heavier elements, the star dies.
It either ends its life as a burned-out cinder or, if it is big enough, in a supernova, an extremely violent implosion that incinerates anything in its vicinity and scatters debris throughout space.
Will the coming crash take the form of a brief recession, or a long and deep depression (as in the 1930s) or something many magnitudes worse?
Capitalism is also a production process, and the energy that fires it is living labour, performed by workers and farmers who produce more wealth than they consume. The surplus is converted into capital - that is, self-expanding wealth, wealth that must either make profits or shrivel and die. Capital, whether in the form of stocks and shares, bonds, real estate or fine wines, is, in the words of Karl Marx, "dead labour which, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks".
As with a star, when the mass of accumulated capital exceeds the capacity of living labour to breathe life into it, the moment of crisis has arrived, and swathes of capital are destroyed in a financial crash.
With the interest rate hikes, our moment of crisis has arrived. But will the coming crash take the form of a brief recession, or a long and deep depression (as in the 1930s), or something many magnitudes worse - a capitalist supernova?
To understand why this is a real question, we need to introduce a crucial feature of capitalism that has no solar analogy. The accumulated mass of capitalist wealth is an enormous dead weight that long ago exceeded the capacity of current living labour to breathe life into it.
It has avoided meltdown until now thanks to the exponential growth of debt, which is nothing else than borrowing from the future, or more precisely, using the promise of future flows of surplus value to convert today's dead labour into capital. In contrast, our dumb sun lives entirely in the present.
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Ever-falling interest rates is a major reason why capitalist wealth - in the form of financial assets such as bonds - has grown so vertiginously during the neoliberal era. Thomas Piketty famously reported that billionaires' wealth rose by 1,800% between 1987 and 2013. Their wealth doubled between 2014 and 2022 and during the COVID-19 pandemic, it grew faster than ever, as trillions of dollars of debt-financed stimulus flowed, in the words of the Financial Times, "into financial markets, and from there into the net worth of the ultra-rich".
Central banks have repeatedly cut interest rates and created more and more debt precisely because they feared that a recession, and the ensuing waves of bankruptcies and debt defaults, could quickly develop an unstoppable momentum and crash the global economy. But each cut in interest rates, each new twist in the debt spiral, not only postpones the inevitable day of judgement, it ensures that it will be all the more terrible when it comes.
So much debt has been accumulated in the global economy that we cannot assume that the coming global depression, triggered by the interest rate hikes, will merely be a repeat of the Great Depression of the 1930s.
Scientists tell us that our sun is not massive enough to die in a supernova. We can't say the same of our capitalist death star.
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