A house of cards: how the Ukraine war has exposed faultlines in the global economy

Russia’s escalation of its war in Ukraine appears to be taking the world into new and more dangerous territory in geopolitical terms.

Vladimir Putin has called up hundreds of thousands of reservists and raised the possibility of the use of tactical nuclear weapons in the field. His justification is the massive amount of arms, money, loan extensions and new credit flowing into Ukraine from the West, which is turning the conflict into one between Russia and a Western proxy state.

The victory of Ukrainian forces in pushing the Russians out of 6000 square kilometres of territory had the same effect such events have had in the West: it was slotted into a narrative of David v Goliath, and of a plucky little nation that over the decades has become a symbolic hero of Western hopes and need for meaning.

That does not change the fact that Russia’s invasion cannot be justified, despite immense NATO-Ukraine provocations, or that Russian forces seem likely to have committed atrocities. (Though one should retain a critical mindset on video evidence of bodies dug out of the ground. From where? From when?) Then Russia cleared its throat and we were reminded that the conflict to date was a war on the cheap. If the conflict is now taken to the next level, the Russian effort may well be doubly inefficient, bloody and chaotic, and may destabilise Putin’s power. But it may also eventually prevail.

But even if there is no great geopolitical stabilisation outside the region, the war’s disruption of the global economic system is turning stagnation into the beginnings of a new recession/depression. The conflict has shown just how fragile the global set-up really is, and how 40 years of neoliberal transformation has left countries and regions — stripped by their rulers from the mainstream of both right and “left” — without a skerrick of self-sufficiency, energy self-reliance, industrial capacity or back-up of production in the basics.

This appears to have hit the UK hardest, since its decline has been the most sustained. Productivity and investment have been falling for decades. Economic dependence on the finance and services sector has risen. The state has impoverished itself and lacks infrastructure development funds. Brexit has lowered investment still further. The result has been that the slightest squeeze — global heightened demand for gas, raising wholesale prices — has sent the country into crisis, exposing the limits of capitalism’s prosperity. The crisis has, beneath more lurid causes, destroyed Boris Johnson and installed Liz Truss as prime minister.

As last week’s UK budget has shown, that has been far more than a cosmetic change. Boris was both a Manchester liberal and a believer in production-side transformative development, a product, as I’ve suggested, of his duchessing by the Spiked/Revolutionary Communist Party group over a few years. Truss and her chancellor Kwasi Kwarteng are, by contrast, neo-Thatcherites pure and simple, co-authors of a 2012 manifesto called Britannia Unchained, which advocates for tax cuts, smaller government, etc, to raise productivity and investment.

This small group now has control of government — no one else remained – and it has put into practice a mini-budget that recalls not only early Thatcher but also the “dash to growth” budget under Edward Heath in 1972. The highest personal tax rate has been cut, the corporate tax rate has remained at 19% (a return to 25% abandoned), stamp duty has been cut, a proposed NHS upgrade levy has been cancelled, benefits eligibility has been tightened, planning laws have been relaxed, and 38 special enterprise zones have been set up.

There is still one big crowd-pleaser: a cap on retail energy prices, which will cost the taxpayer £60 billion (A$99.6 billion) in compensation for the private energy retailers. So even the spending is right wing, because it’s designed to forestall nationalisation, which would have become necessary.

The reaction of the markets has been negative, with the pound falling to near parity with the US dollar, its lowest level for decades, and bond yields heading towards national junk levels. That is as much the recursive effect of the markets as an assessment of the move itself, but reaction everywhere has been negative. The financial world chatter has been that this is an ideological budget, not one cutting with the grain of the global economy. Politically it has been disastrous, with Labour rising to 45% in the opinion polls as the Tories sink to 28%.

When everyone says something is stupid, blinkered and insane, it’s always worth looking for the rationality that might be guiding it. The first is to simply credit right-wingers with actual beliefs and world views. Kwarteng has written half a dozen books, including a sprightly account of Thatcher’s terrible year of 1981, when it looked like mass unemployment might kill her government.

The “Britannia” group believes that only the release of capital’s “animal spirits” will get the economy back into a growth circle. It may be hoping that will deliver a resounding boom sufficient to get it reelected, or a messy hung Parliament, in 2024. It may also believe that if it loses, Labour under Keir Starmer and his team from the right will leave much of the apparatus it establishes in place, and it will happen anyway.

But a more cynical electoral calculus is the same as the stage three tax cuts here; they benefit sections of the prosperous working class (less in the UK than here) and a wobbly middle class, and with first-past-the-post voting ensuring narrow victories in the 150 or so “shire”-type seats.

The third calculus is that the Tory party is perpetually broke and always in need of donor top-ups to fight elections, and that shonky franchise businesses — who want low taxes, a pliable workforce, and tax-free enterprise zones — will cough up for it.

The British solution is striking because it expresses a faith in capitalism’s ability to right itself, which is nowhere else in evidence. Despite the conclusion of open-slather quantitive easing, the International Monetary Fund is handing out open-ended bailouts, a quarter of a trillion committed so far, especially to peripheral nations it fears may do a “Lebanon” or “Sri Lanka”: just simply come apart at the base, default, and be without essential imports. Argentina, Pakistan, Egypt, Ghana… these are the next big “middle” economies in serious trouble.

This is ahead of what everyone believes will now be a world recession, based not only on the Ukraine shocks but on China’s weakening performance. It is difficult to get a picture of what sort of trouble China is in that is not skewed by ideology from both sides, but the picture seems to be that while the fundamentals of its manufacturing economy are sound, the backwash effect of its collapsing property boom/Ponzi economy is not yet knowable.

China’s enemies are making much of it, but property can fall over as quickly as it can be put up. Both look impressive — rising cities, then demolished cities — but only because we still believe construction to be far more expensive than it really is. Really, they’re nothing compared with the cost of one complexly tooled factory. It’s a measure of the world’s dependency on China’s bustle that the nation’s forecast of 3.3% growth is being seen as a world disaster, while the UK is popping its rivets to get to 2.5% growth.

Boy, oh, boy, global capitalism is in trouble, isn’t it? Since the Thatcher-Reagan revolution, it has been blowing a vast bubble, bubble multiples to use the physics term, bubbles in bubbles. Vast sections of the world have had no money coming to them at all, whole cities in Africa the same mix of concrete slab and tin-sheet slums, India a core of neoliberal energy in a vast population still living in pre-capitalist forms.

The West has been, until recently, the only major source of consumption and demand expansion, and that has occurred at the same time as global private firms have been permitted to destroy its real productive capacity. The huge private debt to the future run-up in 2008 was then patched over by a decade of quantitative easing to blow the bubble even wider.

That patch is now coming off, having done very little to grow the global economy, and much to inflate asset prices and steer investment from the productive economy to finance-to-finance investment. What has been invested has been de facto trickle down. Without China, and three decades of Deng Xiaoping’s thoroughly Marxist managed-capitalist economy, the world would have been slumped in a depression so long that the military coups would have already started.

Now China is re-Stalinising, curbing inequality and reviving national pride as a socialist value, to rebuild solidarity against the world. In Italy, in Sweden, and elsewhere to come, the voters are following suit, demanding a nationalist government; supporting traditional values against an elite who, largely drawn from the left, have ramrodded a cosmopolitan society; and given cover to neoliberalism through support for high immigration on cosmopolitan grounds.

The right is insurgent. The radical left is at zero, and may either be permanently concluded in its pre-existing form or in power in 18 months. All of this would have happened, but the Ukraine war has exposed how tenuous the whole system was. The just-in-time form of supply-chain global organisation, which made platform capitalism so profitable, has reshaped the whole global apparatus in its form. The shelves are emptying of political, social and cultural goods, in every sense of that latter term.

Here we are dodging the worst, with a stable government with a capital-centric core but a social market aspect, finding a way between traditional values and an over-reaching progressivism, a framework for rational political action. But for how long will we remain untouched in this new global conflict? You may not be interested in the war, the man said, but the war is interested in you…