“Has it already started?” I asked on 8 July (in Finnish), referring to the possibility of a major new crash anticipated at least since 2009. If this is “it”, we should be seeing the biggest crash ever, accompanied by a deep global depression.
In July 2015 over 40% of Chinese companies suspended share trading, apparently on the ground that they have used their own shares as collateral for loans. The fear is that when the value of shares plummet, their loans will turn out bad. A significant part of these loans is probably subprime anyway. Decline in the value of stocks can thus lead to a banking crisis.
At first the triggering factor of the downturn may have been Greece and the Euro crisis, but the trigger does not really matter. The mechanisms of finance are in line with Hyman Minsky’s and his followers’ theories. Capitalist market economy is liable to financialization and thereby to financial crises.
Increase in speculative activities and acceleration of financial multiplication generate a build-up of private debt. Equity or debt leveraging tends to affect the underlying financial valuations and thus enable further leveraging through the wealth-effect, increasing value of collateral and sustained optimism. Over time the increasing involvement in debt makes the financial system more chaotic, i.e. sensitive to small disturbances. As the quality of debt gradually deteriorates and risks are getting bigger (however well-hidden they may be), the system becomes more vulnerable. Finally something happens, generating rounds of panic, resulting in collapse.
After decades of financial globalization crises spread quickly. Evidence indicates that the way in which financial markets in different parts of the globe now react to changes has been synchronized to a remarkable degree. What this means is that the positive feedback loops – both upward and downward – are worldwide. Therefore no country or continent is immune from major financial crises and their effects.
In 2009 I wrote that “if the ‘recovery followed by neoliberal businessas-usual’ scenario proves right, the underlying super-bubble that has already lasted for three decades will then continue to grow, gradually assembling conditions for an even bigger crash probably in the late 2010s”. I also argued that a new global financial crisis implies further dialectics between the two opposing tendencies: (i) a general tendency towards a repetition of the mistakes of the eras 1871–1914 and the 1920s and early 1930s; and (ii) a tendency towards a rise of global ethico-political imaginary – both through elite learning and activities of movements – enabling the creation of new global-Keynesian institutions. In other words, the dialectics between the opposing tendencies of pathological and progressive learning will intensify. The most immediate outcome is deeply uncertain.
As the signs of panic are now gripping global markets, it seems that history is speeding up. This may be partly because the 2010-15 “recovery” has been even more fragile than expected, especially due to the Euro crisis, but it may also be related to the specific timing of Chinese developments. If this is “it”, we should be seeing the biggest crash ever, accompanied by a deep global depression.
Particularly the European and American states are now weakened through their involvement in public debt. Thus they are unwilling to repeat the fragile success of 2008-2009 and subsequent “quantitative easing” and will try to impose even more austerity – as Heinrich Brüning did in Germany in 1930-32. The collective outcome can be outright catastrophic.
The future is real but not yet fully determined. Our anticipations and normative assessments of possible and likely futures form a part of the process of world history. The future depends also on what ‘we’ do, but only in the context of a complex plurality of actors and processes.
Politics matter, but no ‘we’ can control world history.
Heikki Patomäki
