Global Economy and Financial System: A Fractured World
The Bank for International Settlements (BIS), the umbrella organization for central banks, has released its annual report, painting a picture of a world economy and financial system that is increasingly fractured, full of contradictions, conflicts, and vulnerabilities, amid a long-term global slowdown.
A Departure from Optimism
The report contrasts markedly with the relatively upbeat report presented last year. According to this year’s assessment, the prospects for the global economy have become much more uncertain and unpredictable in recent months. Trade disruptions now threaten to reshape the global landscape, as long-standing political and economic relations are being questioned.
US Trade Policy and its Impact
The immediate focus is on US trade policy and the disruption caused by the Trump tariffs, with their "unknown eventual scope and impact." These have "elevated measures of economic uncertainty to levels typically associated with crises and sparked high volatility in financial markets." Even before the Trump economic war, however, the world was "already grappling with significant vulnerabilities."
Root Causes of Vulnerabilities
These vulnerabilities are rooted in the very foundations of the global economy, which the report noted is facing long-standing and emerging challenges. Productivity growth has been trending down in many advanced economies for decades and more recently in several emerging market economies, acting as a drag on overall economic growth. Economies have become more vulnerable to inflation because of aging populations and emerging labor shortages, with trade fragmentation which "could further reduce supply flexibility."
Debt Crisis
On top of this, "high public debt in several jurisdictions makes the financial system vulnerable to interest rate rises, while reducing governments’ ability to respond to adverse developments." The use of the word "several" represents a significant underestimation of the situation, as the growing debt crisis is concentrated in the major economies. The US has a debt of $36 trillion, rising at what is universally characterized as an "unsustainable" rate.
Financial Markets and Risks
These mounting problems are compounded by major changes in financial markets flowing from the rise of private credit—so-called non-bank financial institutions (NBFIs). Their increased use in the financing of public debt "has heightened liquidity risks in bond markets, raising the potential for financial stability risks to emerge outside the traditional banking systems." Elaborating on these risks, the report noted that "a growing share of long-term credit to small or medium-sized and highly indebted companies is provided by private credit funds," which are in turn funded by pension funds and insurance companies.
Inflation and the Response of the Working Class
The issue of inflation raises before the BIS and all central banks—the guardians of the interests of finance capital—one of the issues of greatest concern, namely the response of the working class. The report itself used carefully guarded language, saying that "households … may show less tolerance for real wage declines following the sharp rise in living costs after the pandemic." In his remarks on the report, BIS managing director Agustin Carstens was a little more direct, stating that "if evidence of de-anchoring emerges, central banks must respond forcefully to inflationary shocks."
Class Dynamics and Solutions
The BIS also bared its class teeth when it came to dealing with the general slowdown and the growing fiscal crisis, reflected in the escalation of government debt. It insisted that so-called "structural reforms" were the key to addressing the persistent challenges of low economic and productivity growth experienced by many economies in recent decades. "Neither expansionary monetary policy nor expansionary fiscal policy can act as a lasting driver of long-term growth." In the capitalist economy, where "productivity" is ultimately based on the rate at which surplus value, the basis of profit, can be extracted from the working class, "structural reform" comes down to the reduction of the labor share of national income and the worsening of working conditions.
Conclusion
The BIS report is a warning both as to the depth and growing intensity of the crisis of the global capitalist economy and the response of the ruling class and its state agencies to it. The report’s prescriptions for the reduction of government debt, which it identified as the source of financial instability, involve "fiscal consolidation" through deepening attacks on social services such as health, education, and pensions, which in turn impacts the working class, well beyond the levels already carried out. As the global economy continues to fracture, it is clear that the ruling class will stop at nothing to maintain its power and profits, even if it means plunging the world into deeper crisis and instability.
