The deepening crisis hitting China and other ‘emerging market’ economies continues to send shockwaves through world markets.1 In the first week of January, measures taken by the Chinese government to support share prices and the renminbi only reinforced fears over the global impact of the slowdown in China’s economic growth. Share trading in China had to be halted for the second time in four days, within 30 minutes of opening, when the size of the losses triggered ‘circuit-breakers’ in place to prevent panic selling. This new sell-off came after the offshore renminbi fell to its lowest level against the dollar since it was established in 2010. Oil prices dropped to an 11-year low and more than $3.2 trillion was wiped off global stock markets. The prospects for the global economy in 2016 are deteriorating. David Yaffe reports.

Total foreign and local currency company debt in ‘emerging market’ economies increased more than four-and-a-half times over the decade to mid-2015, from $5.4 trillion to $24.4 trillion, equivalent to 90% of ‘emerging market’ GDP (Institute for International Finance). Foreign currency debt rose from $900bn to $4.4 trillion over the same period. These debts are vulnerable to a falling renminbi and other ‘emerging market’ currencies as banks find it more difficult to raise funding abroad and are less able to roll over company loans. Exporters in ‘emerging market’ countries have also been hit hard by the global fall in commodity prices brought about by the slowdown in Chinese economic growth.

The net outflow of capital from ‘emerging market’ economies in 2015, at $759bn, was much worse than estimated. The level of stressed foreign currency debt – trading at more than 7 percentage points above the yield on comparable US bonds – reached $221bn on 15 January, passing the previous peak of $213bn reached at the height of the global financial crisis in December 2008.

Investors take fright

‘Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,’ the Royal Bank of Scotland said in a note to its investment clients in January. It warned that investors face a ‘cataclysmic year’ in which stock markets could fall by up to 20% and oil could slump to $16 a barrel. Andrew Roberts, the bank’s credit chief, expects Wall Street and European stocks to fall by 10%–20%, with an even deeper slide for the FTSE 100, given its high weighting of energy and commodities companies. The bank’s credit team said markets are flashing stress alerts comparable to the turbulent months before the Lehman Brothers crisis in 2008.

Albert Edwards, a strategist at the Swiss bank Societe Generale, said to be the City of London’s most vocal ‘bear’ (pessimist), believes the situation will get worse. ‘Emerging market currencies’ he argues, ‘are still in freefall. The US corporate sector is being crushed by the appreciation of the dollar.’ He warned that the world is heading for a financial crisis as severe as the crash of 2008/09, arguing that the oil price plunge and deflation from ‘emerging markets’ will overwhelm central banks, tip the markets and collapse the eurozone.

William White, the former chief economist of the Bank of International Settlements, the organisation which represents the world’s central banks, and now working for the OECD, shares this outlook: ‘The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.’ Debts have continued to build up over the last eight years, many of which will never be serviced or repaid. He believes that the global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability.

Clearly such a scenario was not in the minds of the US Federal Reserve in mid-December 2015 when it raised interest rates for the first time since December 2008, from 0.25% to 0.5%, confident that the US economy was on the mend. It is a gamble that the US Fed could regret, as recent events begin to demonstrate.

Knee jerk responses

So acute is the crisis and so edgy are investors that every new statistic, every rumour, and every significant statement by ‘expert’ economists and politicians leads to knee-jerk responses from the markets.

The first week in January saw the worst start to a year for world stock markets in at least 20 years, following China’s falling stock market and currency depreciations. A larger than expected rise in US jobs of 290,000 in December 2015 led to an initial climb in the US S&P 500 index, but as reality hit home it fell again, registering a loss of around 5% over the week, the second worst start to a year since at least 1929. The FTSE All-world index lost 5.6%, the worst 5-day start to a new year since at least 1994.

At the end of the second week of January, the prospect that the US could be forced to reverse its interest rate rise was mentioned by Bill Dudley, President of the New York Federal Reserve, sending markets in the US and Europe dropping again. The oil price fell below $30 a barrel for the second time in a week. On 19 January China announced its slowest rate of growth for 25 years – 6.9% in 2015. At the end of the third week in January the fall in global markets accelerated and the FTSE All-world index entered ‘bear’ territory – more than 20% below its 2015 high. Fear spread through global markets as the UK, French and Japanese stock markets also fell by more than 20%. This was the worst start to a year on record. The main US stock markets, S&P 500, the Dow and the Nasdaq, fell again and were now down more than 10% below their peaks.

On 21 January, at a gathering of the rich and powerful at Davos in Switzerland, the President of the European Central Bank (ECB), Mario Draghi, said that the ECB was prepared to launch a fresh round of monetary stimulus as soon as March. The hope of an imminent stimulus in the eurozone, together with a slight rise in oil prices above $30 a barrel, led to a recovery in US and European stock markets, with the FTSE All-world index leaving ‘bear’ territory.

This is clutching at straws as the fundamental problems driving this crisis will not change. The deepening crisis in China, the slowing global economic growth, the dramatic fall in oil and other commodity prices and questions over central banks’ ability to support markets remain.

Stagnant, crisis-ridden and unequal

In October 2015 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. As we have argued for many years, the structural crisis of the capitalist system is grounded in an overaccumulation of capital in the heartlands of imperialism. Surplus capital and limited opportunities for profitable investment severely diminish the potential for economic growth. Crisis-hit global banks are pulling back from what they see as risky cross-border lending, undermining international financial stability. Flows of speculative capital, searching for rapid and high returns, are creating asset bubbles in different parts of the global economy that quickly turn to bust as investors pull out their money to speculate elsewhere. The crisis in the ‘emerging market’ economies is the latest phase of this unending crisis of capitalism.

The largest non-financial multinational corporations were holding some $3.5 trillion in cash reserves towards the end of 2014 (latest figures). The cheap cash is not being used for investment but for share buyouts and dividend payments, increasing returns to company shareholders and directors. It helps to fuel a mergers and acquisitions (M&As) spending spree that has seen global M&As increase for the third consecutive year to an all-time record high of $5.03 trillion in 2015. There were 69 $10bn+ M&A deals totalling $1.9 trillion, the highest amount on record, and ten $50bn+ transactions totalling $798.9bn. These developments will not deliver much of an economic boost nor even offer long-term value for shareholders as previous experience in 20002 and 2007 has shown.

In this crisis-ridden period of low growth, low productivity and lack of productive investment, multinational corporations, banks and financial institutions organise and manoeuvre to ensure the greatest shares of profits and wealth worldwide are captured by their owners and shareholders, by the rich and powerful, irrespective of the social consequences. Underdeveloped nations are ruthlessly plundered and looted. The use of offshore tax havens to pay little or no tax, the manipulation and rigging of markets, and speculation through hedge funds and other parasitic financial instruments ensure a minority rakes in millions while the vast majority of humanity is increasingly impoverished.

Little wonder that under these conditions inequality has reached obscene levels. In its latest report Oxfam tells us that 62 individuals now control as much wealth as the poorest half of the world’s population – 3.5 billion people. Between 2010 and 2015, as the great recession tightened its grip, the wealth of the poorest 50% has fallen 41% and that of the richest 62 people increased by half a trillion dollars, almost 40%, to $1.76 trillion (£1.23 trillion). In addition, recent estimates show that rich individuals have placed a total of $7.6 trillion in offshore tax havens. The fraud perpetuated by unreported foreign accounts each year costs around $200bn to governments throughout the world.3

Britain knocked off course

In his Autumn Statement on 25 November 2015 (see FRFI 248), George Osborne, Chancellor of the Exchequer, brazenly announced that, ‘our long-term economic plan is working’. Barely a month and a half later his emphasis had dramatically changed. In a speech to business leaders in Cardiff on 7 January he warned: ‘Anyone who thinks it’s mission accomplished with the British economy is making a grave mistake.’ This most arrogant and complacent Chancellor warned against, yes, ‘complacency’. His excuse: ‘Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world.’ He warned about the ‘slowdown in China’, ‘deep problems in Brazil and in Russia’, significantly falling commodity prices, and political developments in the Middle East. He ignored the fundamental structural imbalances in the British economy that have considerably deteriorated under his direction4 and he failed to mention the economic hazards associated with the forthcoming EU referendum, which his bungling party has been forced to place on the political agenda. Finally the deficit reduction plan, Osborne’s primary political objective, is not on track. Government borrowing has already reached £72.9bn, slightly below his latest and constantly readjusted target of £73.5bn for the whole financial year, with still another three months to go.

Britain is an obscenely unequal society. UK household wealth has reached £11.1 trillion. The richest 1% own 13.5% of that wealth. Between 2012 and 2014, the wealthiest 20% of households had 117 times more wealth than the poorest 20%. This gap has grown as the recession took hold. In the previous two year period it was 97 times.

The recent cosy tax deal with Google, a derisory £130m in back taxes over a 10-year period (its UK revenues were some £5.6bn in 2013 alone) was described by Osborne as ‘a major success of our tax policy’. The rich and powerful minority are able to buy and gain political influence like never before. Google executive chairman, Eric Schmidt, was on Prime Minister Cameron’s exclusive business advisory board until July last year. Every department of government has ‘representatives’ of global corporations embedded in its ranks. Political and corporate life is a revolving door.

In his Cardiff speech, Osborne warned that for Britain the only antidote to the new threats around the world is to confront complacency and deliver ‘the plan we’ve set out’. In other words, this unending crisis of global capitalism will be resolved in the interests of the rich and powerful corporations and at the expense of the vast majority of working people. Our response must be even greater determination to organise and fight back.

Fight Racism! Fight Imperialism! 249 February/March 2016

1  See David Yaffe ‘Third phase of the global economic crisis’ FRFI 247 October/ November 2015 at

2  See David Yaffe ‘Globalisation: parasitic and decaying capitalism’ in FRFI 158 December 2000/January 2001 on our website at for a discussion of this issue.

3  See Gabriel Zucman The Hidden Wealth of Nations University of Chicago Press 2015 pp35 and 47.

4  See David Yaffe ‘British economy: a weak link in the imperialist chain’ in FRFI 248 December 2015/January 2016 at on our website.