Let me turn then to a remarkable story
about modern capitalism that sort of illustrates the idea that the problems
it has force solutions which then create more problems. Let me give you the
example that is urgent now. You all know that we had a crash of global capitalism
in 2008 and 9, and that were still, kind of, digging our way out. One of the ways
that governments around the world (the United States and other countries) tried
to cope with that crash was by dropping interest rates to historic lows. In a
number of countries, to this day, interest rates are actually below zero. They’re
negative. In other words, the bank pays you to loan you money or deposit
money in the bank, not the other way around etc. etc. So what happened with
these very low interest rates, designed to boost the economy in the face of that
crash, was that every corporation that had any kind of economic problem or need
suddenly had big help. It could borrow money for next to nothing, or literally
for nothing. Cheap money was a temptation very few corporations could resist. And
the end result has been, over the last 10 years, the growth of corporate borrowing
unprecedented in the history of capitalism. And it means we now have
basically what we call a “debt overhang:” corporations doing a lot of business but
owing more money than ever before. This has led one of the international
agencies charged with watching this situation, called the International
Monetary Fund (the IMF), to take a close look at the level of debt to come to
some assessment of what it means. And in the last few weeks they’ve issued a
number of reports that I want to highlight for you. First, 40% of the
corporate debt in eight leading country’s (led by the United States) (and
now I’m gonna almost read so you understand what’s at stake here),
those levels of debt in those eight countries would be impossible to service
if there were a downturn half as serious as the one we had in 2008. In other words,
they are so leveraged, they’re so indebted, that if we had a downturn only
half as bad as the last one we had they couldn’t pay their debts, those
corporations. And dot-dot-dot no one knows what the consequences could be. But
here’s a clear message: not good. Second implication: many corporations borrowed
for reasons, among others, of being able to repurchase their own stock in the
stock market. These things are called stock buybacks. The company is buying
back from the public that shares it issued at some earlier moment. Okay,
what this does, and why it’s done, is to boost the price of these stocks in the
stock market, because the companies are buying them and so the imbalance between
supply of these shares and a new buyer (the corporation itself) drives up the
price. This may be done because the bonuses that top executives get come
from the price of the shares which they are therefore raising for their own
reasons. But it suggests that had the cost of borrowing been less there would
have been less of this, which led the IMF to conclude that in the event of a
problem share prices could come down very fast, very far. Notice capitalism is
developing new problems (debt overhang, overvalued shares) because of the way it
solved its last crash, leading to the problem that the IMF warns about of an
impending other crash. Capitalism is a system that is fundamentally unstable,
always has been, and all that the IMF is telling
us is that it continues to be so and threatens everyone as a result.