More than twelve years after the start of the global financial crisis, one may be under the impression that the economy is back to normal and is even doing quite well: the United States has been growing uninterruptedly for more than ten years, thus experiencing its longest expansionary phase since at least 1854; the euro area, which was on the verge of exploding in 2012, seems to have recovered some degree of stability and cohesion; and China is successfully pursuing its own development path, having become a key part of the global economic system and its main growth engine.

However, if we take a long-term perspective and analyze the factors underpinning this apparent success, the picture looks radically different and there are many signs of fragility.

The lost growth

In the background of all recent economic development lies a deep and far-reaching structural shift: the downward trend of growth in advanced economies since the 1970s.

Among all the economic indicators, growth is unquestionably the one that attracts most attention. It measures the increase in the volume of goods and services produced in the economy. In more technical terms, it is defined as the annual percentage change in gross domestic product (GDP). The mainstream view is that an economy is healthy when it grows quickly, while it is sick when it has a low or even negative growth rate.

By that standard, there is indeed a malaise in advanced economies: while their growth was on average 5 per cent per year in the 1960s, it dropped to 3 per cent in the 1980s, 2.5 per cent in the 2000s, down to a meagre 1.5 per cent in the 2010s. [1] In particular, the recovery after the 2007-2008 global financial crisis and the recession that ensued has been surprisingly weak by historical standards.

There is no consensus among economists about the cause of this continuous slowdown of growth. One explanation, put forward by US economist Robert Gordon, is that the most welfare-improving discoveries have already been made (railroad, electricity, petrol engine, airplanes, telephone, vaccines and antibiotics) and that the innovations of the recent decades are much less far-reaching in comparison. Another possible explanation is that many recent innovations do not fit well into the private market economy: think of Wikipedia, the free software movement, and more generally the whole knowledge economy, whose potential materializes more easily in a sharing economy than under a restrictive intellectual property regime.

In any case, the conventional view is that economic growth is a desirable thing, because it leads to higher living standards for the population. There is of course some truth in this assertion, especially when applied to the poorest countries where basic material needs are not met for a large share of the population: some economic growth is sorely needed there. Nevertheless, growth should not be pursued at all costs, nor should it be mistaken for a well-being indicator. On one hand, various socially or ecologically destructive activities contribute to GDP growth (weapons manufacturing, advertising, deforestation, short-lived goods); on the other hand many creative and useful activities, because they take place outside the monetary sphere, are not included in GDP.

Beyond a certain level of development, growth can even become harmful. It is pretty obvious that continuing with our obsession for growth is ecologically unsustainable; we have already reached the point where our material demands exceed the resources of the planet, and thus far economic growth has always led to an increase of those demands. From that perspective, the gradual waning of growth that we are witnessing in advanced economies is positive news. The degrowth of some sectors (extractive industries, intensive farming, transportation) will even be necessary if the ecological balance of the planet is to be restored.

An unstable neoliberalism

If the disappearance of growth is a desirable thing from an ecological standpoint, what are its consequences in terms of social outcomes and economic stability? Put differently, can our current economic system accommodate a very slow growth rate, or even no growth at all? Is a stationary capitalism possible? There are many reasons to doubt it. The very logic of the system is “accumulation for the sake of accumulation”, as Karl Marx put it. [2] It is the prospect of expanding markets and profits that attracts productive investments under the form of equity or credit. Once the engine of accumulation loses steam, the inherent instability of the system can no longer be curbed and a structural crisis becomes unavoidable.

By the end of the 1970s, when growth began to decline rapidly, driving down profit rates, an ideological and political counter-offensive was launched by capital owners in order to restore their incomes. Wages were squeezed, labour rights were cut back, and regulations over finance were lifted, inaugurating the era of neoliberalism. Those policies met their goal, since profits rates were restored, but that came at a high social cost, with unemployment soaring, inequalities deepening and poverty spreading.

The new economic regime is also characterized by the growth in size and power of the financial sector—a process known as “financialization”. In a context of low growth, profitable investment opportunities in the real economy become increasingly rare, and most of generated profit therefore remains in the financial sphere, in search of higher returns through speculation. Financial bubbles are thus created, which must inevitably burst: in the last analysis, the financial sphere cannot grow faster than the real economy, and any attempt to disconnect the two must be short-lived. The neoliberal era has therefore seen an unprecedented succession of financial crises. In advanced economies alone, one can cite: the Black Monday of 1987; the savings and loan crisis in the US; the burst of the Japanese housing and stock market bubbles in the early 1990s; the dot-com bubble in 2000-2002; the global financial crisis of 2007-2008; and the eurozone debt crisis of 2009-2014.

Alongside low growth and financial instability, another structural trend of the current economic regime is the gradual mounting of deflationary tendencies. Those are characterized by subdued consumer price increases or even, in the case of outright deflation, by price decreases. They are the consequence of several factors: the weak investment demand; an intensification of competition on global markets; aging population; and the need for economic agents to cut back on their spending in order to service their debts in the aftermath of financial crises. Deflation can push the economy into a self-sustaining downward spiral: knowing that prices are going to decrease, consumers and firms postpone their purchases, which has the effect of aggravating the economic contraction, further fuelling deflationary tendencies.

The Japanese syndrome spreads worldwide

Over the years, in crisis after crisis, central banks have become the last line of defence of the system. Because they wield the power of creating money “out of thin air”, the US Federal Reserve, the European Central Bank and the Bank of Japan, among others, have been instrumental in avoiding an outright collapse. In Japan since the 1990s, and in Europe and the US since 2008, they have been pouring gigantic amounts of money into the financial system, lending to private banks for free (zero interest rate policy) and holding up the price of various categories of assets through massive purchases on the financial markets (the so-called “quantitative easing”).

To a large extent, those institutions have so far succeeded in keeping afloat the global financial architecture. But it is becoming increasingly clear that their power is now nearing its limits, and that their drastic actions have unwanted effects that in turn create new sources of instability.

Since its asset bubble burst, Japan has been fighting secular stagnation and deflation. The 1990s has thus been dubbed the “lost decade”. The Bank of Japan has taken energetic action, being the first to apply the zero interest rate policy in 2001 and then buying a significant share of the country’s debt and even of the stock market. More recently, Prime Minister Shinzo Abe has resorted to unorthodox economic policies, the so-called “Abenomics”. But the situation has hardly improved. None of these efforts were able to revive growth and pull the country out of deflation.

Since the 2007-2008 financial crisis, the problems that have been plaguing the Japanese economy for nearly three decades have now reached the euro area. In policy and economic circles, a name has even been given to this apparently inescapable combination of anemic growth, deflationary tendencies, and near or below zero interest rates, that seem to be spreading like a disease: “Japanification”.

In this context, the monetary stimulus delivered by central banks acts like a drug on financial markets; it brings immediate relief, but it feeds addiction. Like junkies, markets have come to depend on it, and they always need more. Central banks are thus trapped, having lost any room for manoeuvre; they cannot “pull the needle out” without triggering a financial crisis. Meanwhile, a host of undesirable side effects are becoming manifest.

The next crisis in the making

The profitability of commercial banks is now suffering, because they cannot pass ever-lower interest rates on to small savers, or they would risk upsetting and losing them. Easy and cheap money is fuelling various asset bubbles, leading to resource misallocation and excessive risk-taking. Huge amounts of debt are piling up as a consequence of ultra-low interest rates: in 2017, global debt (both public and private) has reached an all-time high of $184 trillion (more than two times the world GDP), and the most indebted economies in the world are actually the richer ones. [3]

But perhaps the most striking symptom of the widespread economic malaise is the situation of bond markets, large segments of which are now trading at negative interest rates. In August 2019, there were about $16 trillion worth of bonds displaying sub-zero yields, corresponding to more than 30 per cent of the global total. [4] This goes against economic common sense: it means that many investors are now lending, literally, for less than nothing. In other words, their expectations about the future are so low that they prefer to lose money for sure rather than to invest in the real economy for possible profit.

Policymakers and mainstream economists are increasingly worried about the situation and are baffled by their inability to take back control. Lawrence Summers, professor of economics, former Secretary of the Treasury for Bill Clinton and economic advisor to Barack Obama, recently said: “Black hole monetary economics—interest rates stuck at zero with no real prospect of escape—is now the confident market expectation in Europe and Japan, with essentially zero or negative yields over a generation. The United States is only one recession away from joining them.” [5]

In other words, the Japanification of the global economy is well under way. It will become a universal experience once the next cyclical downturn occurs. Between the US-China trade tensions, the German and Chinese slowdowns, the fallout from Brexit, the geopolitical tensions in the Middle East, and the record-high global indebtedness, there are many reasons to think that this downturn could happen soon. And, because central banks have already exhausted most of their ammunition, the crisis that will ensue will be even more severe than the previous one.

[1]Author’s calculations using data from the IMF World Economic Outlook, October 2019.
[2]Karl Marx, Capital: Volume 1, p. 742, New York: Vintage Books, 1977.
[3]New Data on Global Debt”, IMF blog, 2 January 2019.
[4]Japanification: investors fear malaise is spreading globally”, Financial Times, 27 August 2019.
[5]@LHSummers, Twitter, 22 August 2019.