International economic crises are a recurring feature of the capitalist system. Over the last 35 years FRFI has reported on the Latin American debt crises of the 1980s, the Mexican debt crisis and IMF bailout of 1984/85, the global stock market crash of 1987, the Japanese stock market crash and recession of the 1990s, the 1997 Asian crisis, the 1998 Russian debt default and the Brazilian bail out, the 2001 Argentinian debt default, and the stock market crash (dot com collapse) of 2001/02. Finally we are still in the throes of the ‘great recession’ precipitated by the financial crisis of 2008/09, and which, after seven years, is said to be entering its third phase of turmoil, that of the crisis in the ‘emerging market’ economies.1 David Yaffe writes.

Britain faced stagflation in the mid-1970s, a recession in the early 1980s, with three million unemployed and the loss of 25% of manufacturing industry, and a recession and housing bust in the early 1990s. The 2007-08 financial crisis led to Britain’s sharpest economic downturn and the slowest recovery on record.

These economic crises have been accompanied by imperialist instigated wars and occupations. The break-up of Yugoslavia in the 1990s, the invasion and occupation of Afghanistan in 2001, the continuing war and occupation of Iraq since 2003, the bombing of Libya in 2011, Yemen in 2015, and the funding and arming of terrorist forces in Syria over recent years. The imperialist states, with Britain playing a central role, are directly responsible for destabilising entire regions of the world so that millions are forced to flee in order to survive. The so-called ‘migrant crisis’ is the direct consequence of a crisis-ridden, war-driven capitalist system. This is also the backdrop to the widespread terrorist attacks on civilian populations.

New financial crisis threat

In early October the IMF’s Global Financial Stability report warned that the next financial crisis is already threatening before the flaws in the global capitalist system exposed by the 2008-09 financial crash have been fixed. Rises in global interest rates, the IMF argues, could lead to a new credit crunch in ‘emerging market’ economies,2 as corporations which have taken advantage of cheap money to build up debt, much of it in dollars, are driven into crisis. Corporate debt of non-financial companies in the larger ‘emerging market’ economies has more than quadrupled from $4 trillion in 2004 to well over $18 trillion in 2014. Over the same period the average ratio of ‘emerging market’ corporate debt to GDP rose by 26 percentage points from less than half to nearly 75% of GDP. The IMF estimates there is around $3.3 trillion ‘over borrowing’ by companies and banks in ‘emerging market’ economies. While China led the charge, other countries such as Turkey, Chile and Brazil, have built up their corporate debts and are very vulnerable to global interest rate rises. The Institute of International Finance said it expected net capital outflows from ‘emerging market’ economies of $540bn in 2015, the first time net outflows have occurred since 1988. With the Federal Reserve likely to raise US interest rates in the near future, the IMF warns that ‘emerging market’ governments should ready themselves for an increase in corporate failures, as firms struggle to meet higher borrowing costs.

Eurozone GDP is still below its pre-crisis levels. The latest statistics show the eurozone economy grew by only 0.3% between the second and third quarter of 2015, down from growth of 0.4% in the previous quarter, frustrating hopes of a stronger recovery. The IMF points to the growing threat of the ‘legacy of debt and disharmony’ in Europe. With Japan back in recession and its economy falling by a worse than expected annualised rate of 0.8% in the third quarter of 2015, the outlook for the global economy is deteriorating. The IMF has cut its global growth forecast for 2015 to 3.1%, from 3.5% in April. The OECD, representing 34 capitalist nations, expects a dramatic slowdown in world trade growth to only 2% in 2015, down from 3.4% in 2014, and has lowered its predictions for world economic growth to 2.9% this year and 3.3% in 2016. The ‘migrant crisis’ and widespread terrorist attacks on civilian populations will only add to this economic instability.

Britain: a parasitic and decaying capitalism

Britain’s unbalanced economy – its critical dependence on the earnings from its vast overseas assets and particularly those of its parasitic banking and financial services sector – makes it extremely vulnerable to any external economic or political shocks. As we pointed out in FRFI 247,3 the exposures of UK banks4 to the ‘emerging market’ economies now total $820bn or 150% of their core capital, with that to China alone at $540bn. Of the top five British banks, HSBC and Standard Chartered are especially vulnerable due to their loans and investments in Asia. In addition, the exposures of UK banks to the United States at $655bn and to the euro-area at $960bn show Britain’s increasing vulnerability to the latest phase of the global crisis.

For more than 35 years the RCG has been monitoring the nature and size of the UK’s external assets and their impact on the character of British capitalism. In particular we pointed to the increasingly dominant role of banking and commercial capital in sustaining and advancing British imperialism’s interests throughout the world. Britain’s relative industrial decline has been accompanied by a dynamic, aggressive expansion of British banking and commercial capital to every corner of the globe. In 1962, UK external assets were around half Britain’s GNP, with UK banking and commercial assets 18% of the total. By 1977, UK external assets had expanded to 107% of GNP, and banking and commercial claims had become the dominant component of these assets, 70% of the total and equivalent in size to 75% of GNP.5

These developments have now reached unprecedented levels. In 1997 UK external assets were 244% of GDP, in 2005 they reached 395% of GDP, and as the financial crisis of 2008/09 broke out they had grown to five times Britain’s GDP. A few years later, when the financial derivatives of UK banks were added to UK external assets by the Office of National Statistics (ONS), and they were reconfigured to take this into account, those external assets at the end of 2008 were £10.98 trillion, nearly 7.5 times Britain’s GDP. These are the dominant features of a parasitic and decaying capitalism. They demonstrate how the banking corporations and the financial services industry concentrated in the City of London have become the financial arm of British imperialism.6

These dramatic changes were in the main ignored by economic commentators until very recently, when a serious deterioration in the balance of payments current account needed to be confronted and explained. That deterioration in the current account was due to negative earnings on the UK investment account – the difference between what the UK earns on its overseas assets and what the rest of the world earns on its assets in the UK. The investment account had contributed on average a positive 1.4% of GDP a year to the current account throughout the pre-financial crisis 2000s (Financial Times 28 October 2015). After 2011 those net earnings on the UK investment account fell rapidly, and in 2012 were barely positive. In 2013 and 2014 they turned increasingly negative, registering a deficit of 1.96% of GDP in the second quarter of 2015.

Britain’s overseas assets, seven years after the financial crash, are rising again, reaching £10.17 trillion pounds at the end of 2014 – equivalent to nearly 6 times Britain’s GDP. Of these assets, loans and deposits abroad by UK banks (called ‘other investments’) were £3.54 trillion, that is 1.95 times GDP and financial derivatives were £2.83 trillion, that is 1.6 times GDP – together they make up 62.6% of total overseas assets – what we have called a gigantic usury capital. 12.1% of these overseas assets, £1.23 trillion, were direct investments (an investment in an enterprise abroad with 10% or more shares or voting stock), and 24.7%, £2.51 trillion, were portfolio investments (investment in shares, bonds and money market instruments).

These foreign assets were matched by even greater foreign liabilities of £10.63 trillion leaving a net external debt of –£454.1bn, or 25% of GDP. This is 86.1% higher than the net external debt of the previous year. In 2014 Britain’s net earnings on its investment account were negative, at –£32.0bn, following negative net earnings of –£16.0bn in 2013, and barely positive net earnings of £0.9bn in 2012. This should be compared with net earnings of £20.0bn on the investment account in 2011 and significant net earnings in previous years. This is a serious development for the balance of payments current account, which had a record deficit of £92.9bn in 2014, equivalent to 5.1% of GDP. This threatens a run on the pound, forcing its devaluation, and is a serious threat to the standard of living of people living in Britain.7 This decline in earnings on the international investment account stems from the impact of the imperialist crisis throughout the world.

Britain has had a current account deficit for over three decades. As we pointed out in FRFI 194 Britain borrows cheaply to invest in overseas assets that earn a higher rate of return. In particular it has been accumulating mainly low-risk, and low-yield net banking liabilities and has been increasing net assets in higher yielding foreign direct investment (FDI). For a long period of time this proved profitable with net investment income being positive and significantly contributing to the reduction of the trade deficit. The unending global crisis has changed these parameters. With the eurozone recovery largely stalled, Japan in recession, and the ‘emerging market’ economies in turmoil, the returns on the UK’s FDI assets overseas are no longer adequately covering their funding costs. As a recent ONS publication shows, the dramatic deterioration in the current account deficit can be largely explained by the decline in net FDI earnings. FDI accounted for 79% of the £66bn decline in net investment income between 2011 and 2014. This decline is mainly due to a fall in the rate of return received on UK FDI assets from 8.1% in 2011 to 5.9% in 2014. The remainder is accounted for by a 5.4% reduction in the stock of those assets. In contrast to the assets, the stock of UK FDI liabilities have increased by 39%, with the rate of return falling by a negligible 0.1 percentage points to 5.1% between 2011 and 2014.

The sheer size of the UK gross external assets and liabilities at around six times Britain’s GDP accentuates this crisis and allows for no immediate solution. It shows the vulnerability of the parasitic British economy to any external economic or political shocks. It demonstrates how the British economy has become a weak link in the imperialist chain.

  1. For a discussion see David Yaffe ‘Third phase of the global economic crisis’ FRFI 247 October/November 2015 at
  2. The term ‘emerging market’ economies is currently used to cover most of the so-called developing economies by bourgeois commentaries, hence my use of inverted commas.
  3. See David Yaffe ‘Third phase of the global economic crisis’ op cit.
  4. Banks based in the UK.
  5. See David Yaffe ‘Imperialism, National Oppression and the New Petit Bourgeoisie’ in Revolutionary Communist 9 June 1979 on – Marxism, Political Economy. These statistics compared the UK external assets to UK GNP. Later articles used UK GDP. Over the years the statistics are continually revised as more data is collected. Here they are presented in the form they were in at the time the articles were written. The essential developments that these statistics illustrate do not significantly change as a result of these revisions.
  6. See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January 2007 on our website at for a full discussion on the parasitic character of British capitalism and the importance of the City of London for the British economy. Statistics for years 2008, 2012, and 2013 can be found in articles by David Yaffe in FRFI 210, 233 and 240.
  7. These statistics are taken from the Pink Book 2015 and the latest statistical bulletin from the ONS on the Balance of Payments Quarter 2 (April to June) 2015. They show changes to previous years’ statistics.

Fight Racism! Fight Imperialism! 248 December 2015/January 2016