The United Nations has added its voice to the growing list of international organizations, including the World Bank and the World Trade Organization, warning that the Federal Reserve’s mandated rate hikes are setting the stage for a financial crisis and a global recession.
In its annual report released earlier this week, the United Nations Conference on Trade and Development (UNCTAD) said the global economy is “amid cascading and multiplying crises” after a “recovery” in 2021.
With incomes still below 2019 levels in many major economies, “growth is slowing everywhere,” it said.
Rising interest rates and highly volatile bond markets meant that “indebted countries, including more than half of low-income countries and about a third of middle-income countries, are moving closer to default.”
With an eye firmly on the class struggle, she spoke of the economic hardship arising from a cost-of-living crisis in both developed and developing countries, compounded by the threat of new outbreaks of COVID-19, the impact of climate change and cutbacks in the Government spending “is already triggering social unrest that can quickly escalate into political instability and conflict.”
Noting the impact of interest rates on the economy, the report said that each percentage point increase in the Fed’s interest rate cut economic output by 0.5 percent in rich countries and 0.8 percent in poor countries over the next three years; and more drastic hikes of 2 and 3 percentage points (such hikes are already being implemented) would further dampen the “already faltering economic recovery” in emerging markets.
UNCTAD Secretary General Rebeca Grynspan (CC Attrib 1.0) [Photo / CC BY 1.0]
Commenting on the report, UNCTAD Secretary-General Rebeca Grynspan said: “There is still time to leave the recession brink.” But the current approach hurts the most vulnerable, particularly in developing countries, and “risks turning the world into a global one overthrow recession”.
The rate hikes led by the Fed and carried out by central banks around the world have been initiated in the name of fighting inflation. But they will do nothing to lower prices, which are the result of supply restraints, speculation and profit squeezing by big corporations, details of which are included in the report.
In an interview on the report, Richard Kozul-Wright, leader of the UNCTAD team that produced it, said: “Are you trying to solve a supply-side problem with a demand-side solution? We think this is a very dangerous approach.”
This is an inappropriate analysis. The aim of central bank policy is not to reduce inflation per se.
It aims to induce a significant slowdown, if necessary a recession, to stifle workers’ wage demands as they seek to reclaim the cuts in their living standards they have already suffered – and the more cuts to come – through the biggest price hikes in four decades.
In other words, the policy directed by the Fed is not the result of a misdiagnosis of the state of the economy. Rather, they spring from a deliberately crafted class struggle agenda that emerges from the policies implemented by governments and central banks since at least the 2008 global financial crisis.
The report gave short shrift to claims that the price spike was simply the result of the war in Ukraine, noting that while this “added to economic fears,” the “most critical problems facing the world economy emerged before the war be”.
The evidence suggests that the surge in inflation is not due to fiscal easing or wage pressures, “but instead is largely due to cost increases, particularly for energy, and a sluggish supply response due to a long history of weak investment growth.”
This is a direct result of the Fed’s and other central banks’ quantitative easing policies following the 2008 crisis, which accelerated after the financial markets collapsed in March 2020, which meant that speculation and financial parasitism erupted due to the trillions of dollars made available to Ultra Steroids were -cheap money.
In a so-called “high-profit environment”, financial engineering has become an instrument of rent-seeking behavior, especially in larger international companies. Thanks to their market power, they have often generated income from creating scarcity rather than from producing goods or providing services.”
This was combined with profit exploitation. In mid-2022, the ratio of corporate earnings to US GDP was 7 percent, up from 6.25 percent before the pandemic. With US GDP somewhere over $20 trillion, that means at least an extra $350 billion going into corporate coffers.
According to the report, between 2020 and 2022, “an estimated 54 percent of average nonfinancial sector price increases in the United States were due to higher profit margins, compared to just 11 percent over the previous 40 years.”
Another key factor in the rise in prices, especially for energy and food, was the increase in speculation, funded by low interest rates. “The quantitative easing of 2020 and 2021 led to more speculation and inflation in asset markets, from cryptocurrencies to oil, food and minerals.”
Because of their volatility, hedging has long been part of the commercial operation of commodity markets. However, this has been completely overshadowed by speculation that it is “an important factor in raising energy, food and commodity prices”.
Before 2002, non-commercial speculators made up 20 percent of US oil futures markets. By 2009, this proportion had risen to 50 percent; more recent estimates assume 70 to 80 percent.
The report noted that since the 2008 financial crisis, financial entanglements have become increasingly global, with the finding that “complex shocks, including outbreaks of financial panic or extreme price volatility, or a combination of external triggers, pose a current threat.”
It was prepared before the UK financial crisis, but there is no question that had it not been averted, at least temporarily, by the Bank of England’s £65 billion bond market intervention, it would have ripped through the global financial system , which this analysis confirms.
“A tightening of monetary policy,” she continued, “poses an additional risk for the real economy and the financial sector: given the high level of indebtedness of non-financial corporations, rising borrowing costs could lead to a steep rise in non-performing loans and trigger a cascade of bankruptcies.”
If regulations were considered politically unacceptable [that is, by the financial markets] and monetary authorities proved unable to quickly stabilize inflation, government authorities could “recourse to additional fiscal tightening” which “would only help create a deeper global recession.”
The financial situation has been made even more unstable by what UNCTAD calls the “universe of non-bank financial institutions and lenders,” known as the largely unregulated shadow banking system, which despite some efforts to contain it, “has increased in size, geography and diversity.”
The proportion of global financial assets held by shadow banks has increased from 42 percent in 2008 to almost 50 percent at the end of 2019. In the US, shadow banking accounts for more than two-thirds of mortgages, and almost as much credit comes from corporate credit as from banks. In 2021, shadow banks controlled $226.6 trillion in assets out of a total of $468.7 trillion.
The report rightly stated: “The world faces a systemic crisis and only systemic action can resolve it.”
But the limited reforms UNCTAD proposes based on greater regulation and oversight fall far short of that. Moreover, recent history, and as set out in the report itself, shows that even these measures are not being taken.
Looking back at that history, the report states: “In the decade after the global financial crisis [global financial crisis]an opportunity was missed to put the world on a more sustainable and inclusive growth path.” But once the panic passed, it continued, central banks pumped in more money, non-bank financial institutions expanded their portfolios sharply, governments cut spending, wages stagnated and wealth and income inequality increased.
The “missed opportunity” was not due to a lack of knowledge. Reports, for example from the US Senate in 2011, pointed to the enormous dangers in the operation of the financial system and its often open criminality.
There was also no political problem in the electorate. After the GFC, which devastated the lives of millions of people in the US and around the world, there would have been massive public support for bringing the entire financial system into public ownership. But even where blatant criminal activity was uncovered, no charges were brought. Banks were declared too big to fail and criminals too powerful to go to jail.
Because of the enormous power of finance capital over the political system that determines the actions of governments, nothing was done. Since then, that power has only increased. The systemic crisis can only be overcome if it is tackled at its source, the profit system itself, through the struggle of the working class for a socialist program under which the financial and corporate giants will be publicly owned under democratic control.
The authors of the UNCTAD report certainly did not intend this, but the data they provide speaks in favor of this program.
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