Reports presented by the International Monetary Fund (IMF) at its annual spring meeting in Washington this week suggest that a major crisis is brewing in the global economy and financial system, to which the ruling classes will respond with an attack on the working class .
It will be far more serious than the attacks on jobs, wages and social conditions that followed the global financial crisis of 2008, as debts have risen enormously since then. This is the result of a speculative frenzy fueled by the supply of ultra-cheap money from the world's major central banks and the escalation of national debt to historically unprecedented levels.
Annual Meeting of the International Monetary Fund in Washington, October 2022. [` Photo/Patrick Semansky]
The unfolding crisis has its roots in the heart of the global economy, the United States, and was addressed on Tuesday by IMF chief economist Pierre-Olivier Gourinchas when he said the U.S. fiscal position was “particularly worrying.”
The enormous US debt increased risks to the disinflation process “as well as longer-term fiscal and stability risks to the global economy. Something has to give.”
The deteriorating debt situation not only in the US but also in other major economies – the IMF named Italy, Britain and China – was further detailed in its Fiscal Monitor report released yesterday.
The report said the U.S. will run a budget deficit of 7.1 percent of GDP next year, more than three times the 2 percent average for other economies. In 2023, the US would have experienced “remarkably large fiscal deficits,” with the deficit reaching 8.8 percent of GDP, up from 4.1 percent in 2022.
The four countries named there “need to take urgent policy action to address fundamental imbalances between spending and revenue.” Failure to do so could have “profound implications for the global economy and pose significant risks to fundamental fiscal forecasts in other economies.”
The report said loose fiscal policy and tighter monetary policy in the U.S. “contributed to the rise in long-term Treasury yields.” [higher interest rates on bonds] and their increased volatility in the United States, creating interest rate transfer risks elsewhere.”
The question the report raises is: Where will the money come from to pay off the debt?
Not through increased global economic growth, because as the World Economic Outlook report shows, growth has been steadily declining since 2008 and the forecast for the next five years assumes that it will remain well below the historical average.
Policy must be focused on the expenditure side. The report's summary states: “Given medium-term growth prospects and high real interest rates, sustained fiscal consolidation efforts are needed to protect public finances and rebuild buffers.”
However, the actual content of this language, which is typical of such reports, which always aim to obscure rather than reveal their social and class content, was mentioned in the main body of the report.
“Many advanced economies with aging populations should focus on containing pressures on health and pensions through entitlement reforms and other measures.”
This means that in the United States the long-standing goal of undermining social security is being reinforced, along with further dismantling of already weakened health services. The same applies to other countries too.
In the United States, interest payments to government debt holders, banks and other financial institutions, which account for an increasingly larger share of the annual deficit, will rise to over $1 trillion in the next two years, according to the Congressional Budget Office.
The IMF said a delay in efforts to strengthen public finances – that is, restraining attacks on pensions, health and other vital services – “could increase vulnerability and limit fiscal space to deal with future crises, potentially leading to more painful fiscal adjustments and could lead to unfavorable financial consequences.” Consequences.”
This means that if debt is not reduced now, governments in the UK, US and elsewhere may not have enough money to bail out companies and financial institutions when another crisis breaks out, as it inevitably will , as they have done in the past.
Governments also need to reduce debt to finance rapidly increasing military spending.
Another key component of the IMF analysis, but one that has been little reported, is the growth of private credit as a source of financing for both businesses and financial institutions. The Global Financial Stability Report devoted an entire chapter to this area of the financial system.
She estimated the size of this sector at $2 trillion, with most of that based in the United States. However, according to a study by JP Morgan, the results of which were published in the Financial Times, it is much larger, amounting to $3.14 trillion.
One of the reasons for the divergence is that this area is “opaque,” meaning that tax authorities know little about how it works.
While the IMF analysis ignored any immediate problems, it did highlight a number of factors that could cause the situation to change quickly.
It said borrowers' vulnerabilities could “lead to large, unexpected losses in a downturn.” These losses could result in significant losses for investors, including “insurance and pension funds” that have “significantly increased their investments in retail loans and other illiquid assets.”
An illiquid asset is an asset that cannot be easily converted into cash during a crisis or even a downturn. “Without greater insight into the performance of underlying loans, these companies and their regulators could be caught off guard by a dramatic reassessment of credit risks across asset classes.”
The IMF also warned that risks to financial stability could also arise from the interconnectedness of private credit with other parts of the financial system, under conditions where “data limitations” made it “challenging” for regulators to “examine exposures across segments of the financial sector “to evaluate.” Evaluate possible spillover effects.”
It is clear from the IMF's various reports that despite all the talk of a so-called “soft landing” – a fall in inflation, sustained economic growth, albeit at a much slower pace, and the avoidance of a recession, at least so far – the global capitalist system is facing a systemic crisis and collapse.
The reaction of the ruling classes and their agencies such as the IMF is to make workers and their families, the elderly, the sick and children in need of education pay the price through a comprehensive attack on their social status.
This objective situation requires that the working class respond with its own independent systemic solution, fighting for a revolutionary program aimed at seizing political power as the first step towards establishing a socialist economy. Nothing else offers workers a solution to the crisis of the profit system, which is worsening every day.
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