Capital in the time of Covid-19

Having insisted for decades on the sanctity of the markets, austerity-driven world leaders are now coming up with billions to bail out a capitalist system which, as Brian O’Boyle explains, was already in ill-health. 

The S&P 500 is an American stock market that follows the fortunes of 500 major US corporations. It is one of the world’s most important equity indices, with many considering it the best representative of the US stock markets currently available. On March 16, the S&P 500 fell by 12 percentage points in its worst days trading since 1987. The mainly tech-based NASDEQ index had its worst ever result, falling 12.3% in a single session. Since the end of February, US stock markets have fallen by an incredible 35%, wiping out all of the gains associated with President Trump’s Tax Cuts and Jobs Act (2017). Trump had hoped his unprecedented support for US companies would keep stock markets buoyant enough for him to stroll back into the White House later in the year. This now looks increasingly unlikely, however, as the coronavirus lays waste to all of the major US equity exchanges. In London, Paris and Frankfurt similar carnage has been unfolding as speculators worry that Covid-19 will shatter the financial gains they have made in recent years. The table below gives a visual guide of their panic.

 

Trump has now been reduced to heralding a market bounce-back later in the year, but even this seems unlikely given the crisis unfolding in the real economy. Reflecting the scale of the impending disaster, JP Morgan predicts that US growth from April to June will fall by 14% when benchmarked against the 2019 numbers. In the Eurozone they expect a 22% decline, and as much as a 40% reduction in China for the period just finishing. Goldman Sachs is similarly pessimistic, forecasting a drop of 24% in quarterly US growth, with up to 5 million people losing their jobs in April alone. These numbers are completely unheard of and scarcely believable. To put them in context, the worst US performance during the Great Recession was January to March 2009 when the economy declined by 8.4%. The worst month was March 2009, when 800,000 people lost their employment. This makes the Coronavirus unlike any challenge in living memory. Take a look at the Chinese Services Sector to see what is likely to happen to the rest of the system in the coming months – particularly as services account for a much bigger share of the Western economies.

Having initially hoped to convince their populations to carry on in the face of the coronavirus, both Trump and UK Prime Minister, Boris Johnson, have now taken to using war time analogies to describe their responses. This helps to convince their populations to make the sacrifices necessary to contain the virus and gives them cover when the ‘casualties of war’ start to wrack-up. Trump and Johnson also want to project themselves as modern-day Churchillian leaders, but when it comes to the nature of the global economy, wartime analogies couldn’t be further from the truth.

Capitalist economies normally roar into life during large scale wars, as the whole society and all available resources are thrown into winning. In the build up to the Second World War for example, the Nazis created 6 million jobs in armaments factories and other heavy industries. The US economy actually doubled in size during the six years of the conflict, accounting for 50% of global production by 1945. Recent conflicts have not led to the same level of economic growth, but they have been incredibly profitable for the many global corporations supplying their respective armies.

Contrast this with a coronavirus that demands the biggest de-escalation of economic activity in human history. To beat Covid-19, public health officials recommend the closure of all non-essential shops and offices, and, as the virus increasingly takes hold, the closure of all non-essential factories – as happened in both China and Italy recently. State officials also ban all non-essential travel and put in place large scale social distancing measures that simultaneously choke off economic production and household consumer demand. There are nearly a billion people in lockdown already and this is likely to increase dramatically over the coming weeks as the virus proliferates. Such people are far less able to produce the goods and services of a capitalist economy, particularly as many of their normal outlets have also closed for business. Online shopping and working from home will take up some of the slack, but with a projected 20 – 30% of the global workforce completely demobilised, this might prove to be the biggest crisis to ever hit the capitalist economy. 

How capitalism ‘functions’

Writing 150 years ago, Karl Marx was the first political economist to truly understand how damaging this break in the flow of the system is likely to be. In his time, as in our own, ‘capital’ was largely viewed as the physical objects – money, machines, factories etc – owned by employers. Marx disagreed, however, arguing that this was a reactionary view pushed by those who wanted to credit machines with making profits rather than living human beings. Instead of seeing ‘capital’ as a physical thing, Marx therefore defined it as a social relationship that was based on hiring workers and exploiting them to make a profit. 

He also insisted that capital accumulation is a process – based on its own laws of motion – that must keep moving if capitalism is to grow and stay out of crisis. The flow of capital is like the flow of blood around the human body with any interruption likely to cause major trouble for the wider system. Capitalists start with a sum of money (M) which they use to hire workers and buy machinery. These commodities are then put to use producing other commodities for the capitalist market. If they manage to sell these commodities for more than they cost to produce, the capitalist can start over again with a greater amount of money (M’) than before. 

Acting in this way turns their money into capital and explains how the system can grow continuously through many rounds of capitalist production. On the other hand, money that is left unspent, workers who can’t find employment, machinery that isn’t being used and/or goods and services left on shelves are all interruptions to this flow of capital that destroy the process and drive the system into crisis. 

Understood in this way we can begin to realise the dangers that coronavirus holds for capitalism today. Although the world’s major central banks have already promised trillions of dollars in corporate welfare, this free money cannot reduce interest rates much lower than they are already or get a real economy moving that has been shut down for a health emergency. This partly explains why a number of right-wing leaders initially tested the idea of allowing the virus to take its course – using the bogus logic of ‘herd immunity’. 

With people dying in increasing numbers, however, the dominant response has been to restrict economic activity in ways that destroy capital at every stage of the above-mentioned cycle. This moves us into relatively uncharted territory with capitalist governments deliberately shutting down their own economies in a bid to prevent their health care systems from collapsing. This would be a major problem if the underlying health of the system was robust, but like the coronavirus exploiting the weakest and most vulnerable, this crisis comes after a long period of stagnation in which many of the normal policy tools have already been exhausted.

Underlying Health Conditions

In the aftermath of the Great Recession (2008-2013), capitalist states managed to stave-off a 1930’s style depression with aggressive use of monetary policy and years of austerity. This involved slashing wages, public services, and social welfare on the one hand, and making it virtually free for firms to borrow money off the other. For nearly a decade, the world’s central banks printed limitless cash and pumped it into their respective financial systems. 

Prior to the crisis, neoliberal governments championed the benefits of strict control of the money supply, but in the face of a major global crisis, this orthodoxy was thrown out the window, as quantitative easing (printing money) created the longest period of cheap money in history. This succeeded in stabilising capitalism, but at the cost of keeping interest rates so low that they can’t be reduced to cope with the crisis this time. The global response also created the longest period of unbroken economic growth since World War Two, but despite having historically low labour costs, free money and a strongly pro-business environment, firms have not moved the system into a strong accumulation cycle with high levels of investment. Indeed, just as the latest recovery was the longest since World War Two it was also the weakest – with growth rates less than half those seen in the recovery from the Great Depression. The graph below illustrates this visually.  

The key reason for this anomaly has been a tendency for profit rates to decline over many decades. When capitalists expect a healthy return on investment, they use their money to hire workers to produce surplus value that can be turned into profit. This increases the capacity of the global economy and leads to a general cycle of accumulation. When profit rates in the real economy are lower, however, firms are tempted to use their money to try to capture already existing value in the system through all manner of financial engineering.

After World War Two, profit rates were high enough to drive a cycle of investment and accumulation, even as interest rates increased to their normal levels. Yet this time around, anaemic profit rates have meant that most of the money sloshing around the system has been used to buy shares and engage in other forms of speculation.  To give just one example of this process, America’s major airplane manufacturer, The Boeing Company, has just put in a claim to the US government for $60 billion to help them cope with the downturn in the airline industry. Yet over the last 10 years the company has already received $58 billion in free money, all of which was used either to buy back its own shares ($43 billion) or to give shareholder returns ($17 billion). Thus, instead of investing in extra workers or the latest technologies, the firm has inflated its stock market value and made sure wealthy American shareholders got a pay day. 

This general lack of profitability has had effects at the other end of the spectrum too, as many companies have been using historically low interest rates just to stay afloat. These so-called zombie companies earn too little to make even the interest payments on their debt and there are a lot of them. Figures released by the Bank for International Settlements estimate that zombie companies now account for 16% of all publicly traded US companies and more than 10% in Europe. 

To make matters worse, the level of debt in America’s corporate sector is at a record-breaking 75 percent of gross domestic product and among large American companies, debt burdens are precariously high in the auto, hospitality and transportation sectors — industries taking a direct hit from the coronavirus. In monetary terms, US corporate debt now stands at $16 trillion, meaning €2.5 trillion worth of debt tied up in companies that currently can’t pay their way. 

The Chinese figures are similarly alarming, with corporate debt up 400% to $20 trillion since the Great Recession, one tenth of which is in zombie firms which rely on government-directed lending to stay afloat. These zombie firms would have been forced out of business in previous recessions, but this time around they have been allowed to survive thanks to the risks to the financial system of forcing them under. This had been able to stabilise the system in the short term, but it also left a lot of unproductive capital clogging up the system, increasing the likelihood of widespread bankruptcies in the next few months. 

An economy firing on all cylinders would find it difficult to cope with a shock like the coronavirus, but with debt piling up and zombie companies already proliferating, this could cause the entire system to go into lockdown. The graph below gives visual illustration of the debt that is increasingly being used to paper over the cracks in the system.

A World to Win

In her book ‘The Shock Doctrine’, Naomi Klein usefully reminds her readers that in moments of ‘Disaster Capitalism’, the world’s rulers always look to force their costs onto working people in order to secure the conditions for their power to continue. The crisis associated with the coronavirus has forced the global elite into actions that they never agree to in normal times, but this doesn’t mean that the calculations that they normally make have gone away. 

Indeed, the scale of their upcoming challenges means that capitalist states will be even more determined to make the rest of us pay with austerity once the worst of the healthcare crisis has subsided. Even as they shut down workplaces and plough resources into public health, our leaders are busy working out ways of returning to capitalist normality in the coming period. This will mean using the authoritarian measures implemented during the crisis to their own advantage, whipping up the fear of ‘the other’ associated with the pandemic and, most importantly, convincing people that they must pay the costs of the crisis and get back into the individualistic groove of working, consuming and forgetting about the plight of others. Yet this crisis is also a moment of great danger for the world’s elites and they know it. 

Having insisted for decades on the sanctity of the market, our rulers have suddenly had to admit that private solutions are a barrier to the universal healthcare strategies needed to tackle this virus; having insisted repeatedly that there is no money for crises in housing and healthcare, they have suddenly found billions to support businesses crippled by the virus; having insisted for decades that there is no such thing as society, they are now extolling the virtues of social solidarity and selflessness for others; having glorified the wealthy as the heroes of society, they have suddenly had to rely on healthcare workers, warehouse operatives, retail workers and other members of the working classes to solve this crisis when the rich and powerful have suddenly become impotent. 

Although our leaders would never admit it, the coronavirus has necessitated a quintessentially socialist response with ‘each according to their ability expected to help each according to their need’. Socialists everywhere must work to make sure that there is no going back to the horrors of neoliberal capitalism once the phase of the crisis has abated.