The now considerable collapse literature deals with several important elements in the accelerating multi-factorial global predicament, but the most urgent one is not gaining sufficient attention. Most of the elements will take decades to impact heavily, such as climate change, loss of biodiversity, sea level rise, resource scarcity. But there is one that could wipe us out more or less overnight. It is the coming inevitable collapse of the global financial system.
Few, including me, understand the system at all well. But some essentials are clear, and seem to show that it is heading for a sudden and catastrophic collapse that is likely to destroy the economy. Here is my attempt to explain the situation.
Economic activity requires access to money, by shoppers and by firms seeking to acquire inputs to production or funds to invest in new operations. To get money you must go to a bank, to draw it out, to get a loan from it, or to organise a transfer to someone you want to pay for something. If the banks didn’t open economic activity would quickly stop. The core issue therefore is what might cause the banks to suddenly shut, and what is happening in the global economy that seems to be leading to that.
It is necessary to look at the recent history of the global system. The capitalist system is driven by the quest by the few who own most of the capital to find the most profitable Investment outlets for it (... as distinct from finding what most needs to be developed, or what is best for people or the environment or social cohesion or what is just or morally desirable.)
After the damage caused by WW2 there were abundant opportunities for profitable investment. This produced the greatest boom ever, but by the 1970’s the system was running out of puff. The neoliberal con-trick solved the problem; just free the corporations and banks to invest in whatever they like wherever they like and hey-presto, the economy would thrive. But thirty years later the system was struggling again.
Normal profits could no longer be made by investing in the “real” economy, producing stuff for people to buy, (...because most of them couldn’t afford to buy much) so capital turned to other options, notably getting hold of assets to lend or rent. Governments thought it was a great idea to sell them freeways and ports and just about everything else, because it got these tasks off their backs, brought in budget-boosting income and delighted the capitalist class ... and everybody knows that private enterprise is more efficient than public enterprise. In the US the biggest bonanza was found in the housing “sub-prime” field (...the term really means lending to people with no hope of ever paying it off) and trading these packages of mortgages in what was for a while a lucrative tulip bubble... until the GFC hit.
Collins (2018) and others saw that capitalism had entered a cannibalistic stage. It could no longer make good profits producing what people want to buy so it has begun to get hold of assets enabling it to bleed off existing wealth in the form of rents and interest. Buying the freeway and putting a toll on it produces nothing new but gets hold of an income stream. Student loans provide massive income to banks and lenders but actually do social damage. Some estimate that now over 40% of what we pay for things goes in interest and rent to the owners of capital. Varufarkis (2024) argues that it’s now gone beyond renting to a kind of feudalism in which tribute must be paid to IT tycoons for just about everything.
Global growth and profit rates have fallen for many decades. Basu et al., (2022) find that the 1960-2020 profit rate has fallen .5% p.a. And in that period debt has grown enormously. In 1970 it was, equal to 100% of GDP but now it’s over 355%, and over $300 trillion). And the real debt figure is far higher than these official figures. For instance, pension obligations are not included in them. When a government undertakes to pay you a pension someday it is taking on a debt, a commitment to pay out money to you. For the US this represents a debt of $230 Trillion. (Macleod, 2021.) (And the figure does not include derivatives, which Macleod estimates would treble the above figure.) The debt has more than doubled in the fifteen years since the GFC. (McCarthy, 2015.) Most alarming is the accelerating rate of increase. In the 2000-2014 period it was $7 trillion p.a (McCarthy, 2015), but in the 2014-2023 period it was $21 trillion p.a. In Australia it increased by over 7% in 2021. (ABS. 2022.)
This means that economic growth is largely and increasingly due to the input of money in the form of loans, not due to increased production and sale of things. More loans mean more money to spend, and many people are going into debt to meet expenses. But the economic stimulus effect is diminishing. It now takes about 3.5 times as much lending to generate a dollar of GDP as it did a few decades ago. (Macleod, 2021.)
The crucial point here is that debt plus interest can only be paid back if the economy grows. If there is a lot of debt there must be a lot of growth to generate the additional income to pay the debt plus interest. But the GDP growth rate has been falling for decades.
The situation cannot be resolved. Try finding someone who believes the debt can be paid. As Hudson says, “Debts that cannot be paid will not be paid”. (2015, 2020.) His detailed historical studies show how debt has destroyed many societies, indeed whole empires including Greece and Rome. Lending requiring interest payments enabled elites to gradually acquire land, assets and slaves as borrowers defaulted, for instance in poor seasons. Many ancient kings saw that this would weaken their realms, undermining their capacity to collect taxes and raise armies, and therefore imposed the periodic ”Jubilee” cancellation of debt. The Christian Church regarded interest as sinful. But now we have an economic system that enshrines limitless lending for interest, and accumulation of wealth.
The situation is generally recognised to be at least highly insecure and deteriorating. Macleod says, “A banking failure almost anywhere, must be bailed out for fear of triggering a global banking collapse the likes of which have never been seen before.” Bloomberg (2024) says, “We have never seen anything like this before.”
Why is growth slowing, despite miraculous technical advances in capacity to produce? It is because the capacity of the masses to purchase and consume and thus create opportunities for profitable production investment opportunities is declining. Why? Mainly because the capitalist class is taking ever-increasing proportions of the wealth being generated. People are decreasingly able to purchase; that’s one major reason why household debt is rising. The numbers now struggling, living in poverty, excluded” and stuck in “the precariat”, homeless and dependent on alcohol and drug abuse are increasing. Some Australians are reported to be going without enough food now. The US middle class is being eliminated. The opiate crisis afflicting millions in the US is “a crisis of despair”. No surprise that they vote for Trump rather than the establishment that has done this to them. Obviously the higher interest payments on debt rises the less people have to spend. Meanwhile inequality is increasing. In Australia since 1990 the wage share of national income increased only 6% but the profit share rose 65%. (Giani, 2019). Basu finds that over 50 years the profit share of global GDP has increased .25% p.a. and in recent years the amount being creamed off by the rich has skyrocketed; 1% of the world’s people now own half its assets while about three billion have no wealth at all. (Roberts, 2021.) Elon’s wealth is about 15 million times the world average.
Corporate greed is fuelling the process. As supermarket prices rise, profits hit record levels but buyers are having to pay out more for the same amount of goods, again depleting the capacity to purchase more. This added to rising production costs means more business failures and thus more defaulting on bank loans, moving banks closer to failing.
Adding to the shrinking ability to purchase more is the rising cost of production and therefore price of goods caused by increasing resource scarcity and ecological difficulties. Resources are dwindling, mineral grades are falling, and drought, fire and floods are impacting on costs. Energy is getting dearer and therefore the cost of doing everything is rising. So an increasing proportion of the household budget is going into paying more for the same amount of goods, leaving less to be spent on increasing demand, that is, on growing the GDP.
Do the rich realise they’re killing the goose that has been laying golden eggs for them? Their success in siphoning off the purchasing power of the masses is leaving people unable to grow demand for more stuff. No good investing there now; better to buy assets to rent. At least Henry Ford had the sense to pay his workers well so they could buy his cars. When AT automates the last of the factories and no workers need to be employed in them, to whom are they going to sell their products? Marx saw that the contradictions built into capitalism would in time destroy it.
The system will grind on up the increasingly fragile slope until it finally sinks in to lenders that their loans can never be paid back. What then? It is difficult to see how catastrophic breakdown of the entire financial system could be avoided. The GFC will be no comparison. That only required bailing out a few US banks (and letting one go). This time several times as much debt is at stake globally; the European banks are even more fragile than those in the US. (Macleod.) The crash will probably only take a few days, maybe hours. There will be panic to get assets out, to enforce loan repayments, to grab the collateral, to sell off their debt which no one wants to buy.
Should we care? Will it just be that the greedy lending class will lose their investments? No it won’t just be that. It will probably be an instant seizing up of the global economy, because the banks will close. There will be a massive “run on the banks”. As happened in the Great Depression, people will race to get their loans back and to withdraw their savings for safety, but the banks will not be able to meet this demand because they only keep less than 10% of the deposits they receive in their vaults. They will shut and you won’t ever see your savings again.
That would mean production, buying, trade and sales woull freeze. Nothing can be produced or purchased without going to banks to get some money to spend, on goods or inputs or transport. But the banks will be shut. Not only will they (be unable to) give you any money, but they will also come after your house which you put up as collateral when you took out your son’s student loan. The firm that tries to transfer money from its account to the mill supplying the timber it needs to produce furniture will find that it can’t, because the bank has shut. Your supermarket won’t be able to pay for another consignment of baked beans. Given the just-in-time delivery system now, in a day or two there won’t be any beans on the shelf. Even Elon will not be safe, on his $270 million Hawaiian island bunker. Sooner or later he’ll need to buy a replacement spanner, but won’t be able to pay for it. Doesn’t matter how much money you have you won’t be able to buy anything involving dealing with a bank account.
But won’t they just do a mega-QE to save the banks, again.? Even if this could save the banks, it won’t save the economy. The last multi-trillion QE didn’t “get the economy going again”; it made little difference to the real economy of production of goods and services, ... and it greatly increased the debt.
It’s difficult to see how the huge and rising debt situation could end in other than global economic collapse.
Notes
Australian Bureau of Statistics, (2022), Average household debt grows by 7.3 per cent. Media Release, 13th December.
Basu, D., J. Huato, J. Jauregui, and E. Wasner, World Profit Rates, 1960-2019 (2022), Scholar Works, UMass Amherst, Economics Department Working Paper Series, 318.
Bloomberg, (2024), Game of Trades.
Collins, C., (2018), Catabolism: Capitalism's Frightening Future, Resilience, 3 December 2019.
Hudson, M., (2015), Killing The Host, Nation Books, New York.
Hudson, M., (2022), The Destiny of Civilisation, New York, Islet Press.
Macleod, A., (2021), The global debt problem. Goldmoney, 8 April.
Varoufakis Y, (2024), Technofeudalism, Australia, Penguin.
Roberts, M., (2021), 1% own 45% of the world’s personal wealth while nearly 3bn people have little or no wealth at all. Committee for the Abolition of Illigitimate Debt., 24 June.
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ABOUT THE AUTHOR
Ted Trainer is a Conjoint Lecturer in the School of Social Sciences, University of New South Wales. He has taught and written about sustainability and justice issues for many years. He is also developing Pigface Point, an alternative lifestyle educational site near Sydney. Many of his writings are available free at his website, The Simpler Way.
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