In the face of intractable problems with the global economy, central bankers are turning sharply to class war as their solution, argues John Clarke

The leading thinkers of global capitalism have taken to using the word ‘agility’ a great deal these days. It describes their ongoing effort to contain inflation while trying to avoid a disastrous economic slump or a worsening banking crisis. The IMF’s recent ‘Global Financial Stability Report’ is peppered with the word and, a statement issued after a recent meeting of the agency stresses the need for ‘decisive, well-calibrated, and agile policies tailored to country-specific circumstances.’

Though the IMF enthusiastically promotes interest-rate hikes and austerity measures, it is very aware that failing banks and recessionary dangers may require abrupt changes of course. Central bankers are walking a tightrope in this regard as they proceed with their efforts to overcome stubborn inflationary pressure and to undermine working-class resistance in the face of it.

This month, both the US Federal Reserve and the European Central Bank (ECB) chose to push interest rates up by a further 0.25%, bringing the Fed’s rate to 5.25% and the ECB’s to 3.7% compared to 0.25% and 0% two years ago.

The sense of trepidation and uncertainty with which these steps were taken can be detected in the comments of Fed’s Chair, Jay Powell. ‘I mean there is a sense that, you know, we’re much closer to the end of this than to the beginning … if you add up all the tightening that’s going on … we feel like we’re getting close or even there.’ Powell’s wishful thinking aside, there is no reason to believe that the Fed’s interest-rate policies have been successful or that further price instability can be prevented. Inflationary pressure remains stubborn even as the supposed cure creates major dangers.

Shocks and impacts

Regardless of doubts and reservations, however, there is no doubt that the long period of low-interest rates and stimulatory focus has come to an end. That the higher interest-rate approach is continuing in the face of the most disturbing indications of its adverse impacts is highly significant. The banking crisis is clearly far from over, and initial assurances that the failure of Silicon Valley Bank was an ‘idiosyncratic’ event now ring hollow.

The collapse of First Republic Bank and the travails of PacWest Bancorp and Western Alliance Bank show, as Forbes put it, that the ‘banking turmoil has reached the point where the tide has gone out, and we are seeing which institutions have been swimming naked.’ Such troubled banks ‘are showing they severely underestimated the impact of high-interest rates’ and, even if the Fed leaves the rates where they are for the time being, ‘the recent bank turmoil is now headed to smaller banks than the ones that have failed … it is far from over.’

Michael Roberts has pointed out that Silicon Valley Bank ‘is not alone in having huge “unrealized losses” on its books. The total for all banks is currently $620 billion, or 2.7% of US GDP.’ Moreover, ‘10% of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10% of banks having lower capitalization than SVB.’ Roberts concludes that ‘if the Fed continues to raise interest rates, bond prices will fall further, and the unrealized losses will increase, and more banks will face a lack of liquidity.’

The banking crisis in the US is also being driven by a heavy involvement in commercial real estate. When interest rates were low, this could be sustained but, as they continue to rise, the problem is compounded by the fact that ‘commercial premises prices have been diving since the end of the pandemic, with many standing empty earning no rents.’ Astoundingly, small US banks presently hold 80% of commercial real-estate loans that are worth a staggering $2.3tn.

As the ECB pushes up rates, the fall of Credit Suisse continues to reverberate, and ‘investors have started to worry about other banks. In particular, their eyes have focused on the weakness of Germany’s largest bank, Deutsche Bank, which after the events of Credit Suisse, is no longer too big to fail.’ ECB President, Christine Lagarde, may assert that interest rates can be raised without risk to financial stability but, ‘as banks struggle to keep depositors and avoid defaults on loans,’ her assurances simply don’t hold up.

The driving up of interest rates has implications beyond the financial sector. It is now reported that the German economy experienced a decline of 3.4% in industrial production in March and is sinking into a recession. Retail sales slumped by 2.4% during the same month and exports were down by 5.2%, with particularly sharp declines in shipments to the US and China.

Immediate risks that the present course on interest rates might precipitate an economic downturn are playing out in the context of a dismal longer-term context. The World Bank has suggested that the ‘global economy’s “speed limit” – the maximum long-term rate at which it can grow without sparking inflation – is set to slump to a three-decade low by 2030.’ This is because ‘nearly all the economic forces that powered progress and prosperity over the last three decades are fading. As a result, between 2022 and 2030 average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century – to 2.2% a year.’

Class-war policies

In March, the IMF published an article by Markus K. Brunnermeier, an economics professor at Princeton University, that drives home the point that the decision to force up interest rates isn’t a short-term adaptation but represents a major shift in policy by central banks. The article stresses that ‘the global economy is entering a phase characterized by high inflation and high levels of both public and private debt.’

Brunnermeier suggests that the kind of shocks to the economy that fed the present inflationary surge are now an ongoing problem that threatens stability. Moreover: ‘It is difficult to identify the true nature of these shocks in time to respond.’ In this challenging situation, ‘Monetary policy requires a modified approach that is robust to sudden and unexpected changes in the macroeconomic scenario.’

The article insists that central banks must retain their independent decision-making powers and ‘not have to worry about whether higher rates will increase government indebtedness or default risk.’ In this way, ‘as the central bank hikes interest rates and the government has to pay more for its debt, the hope is that authorities will cut back on expenditures, thereby cooling the economy and lowering inflation pressure.’

What flows from this is that increased interest rates, in addition to slowing economic growth and reducing the bargaining power of workers, will make it harder for governments to fund public services, thus increasing the pressure for further rounds of austerity. Brunnermeier again makes it abundantly clear that he is supporting a decisive strategic change of course from the years that followed the 2008 financial crisis. In this regard, he is hardly swimming against the stream.

In the present context, ‘central banks should return to a monetary approach in which stabilizing inflation expectations is a central priority. Policy cannot tighten only after inflation occurs. Instead, central banks should take action as soon as warning signals flash.’ The increased decision-making powers that were provided to central banks during the neoliberal period greatly increased their ability to wage class war and it is clear that they are coming into their own in this period.

It is clear that the ‘agility’ of the policymakers will be used to prevent undue carnage in the banking sector and to try and avert a full-scale economic downturn. When it comes to protecting working-class living standards and the preservation of public services, however, there will be very little flexibility.

The growing level of resistance, the strike waves, and mass mobilisations that are taking place in a number of countries are absolutely necessary. Indeed, it is vital that these movements escalate and embrace more decisive forms of struggle. The present round of interest-rate increases is very much part of a developing strategy to impose the burden of the interwoven crises impacting global capitalism on working-class people.