Last month's UK bond market collapse, which led to the ouster of Prime Minister Liz Truss, and last week's collapse of crypto firm FTX were the result of several immediate factors.
But these two shockwave events had a common ground. the profound changes in conditions in the global financial system over the past eight months.
After injecting trillions of dollars after the 2008 crisis and the outbreak of COVID-19 in early 2020 (quantitative easing), it is the turn of the Fed and other central banks to set interest rates higher. Promoting speculative financing of securities and capital markets.
Not only has the Fed raised interest rates rapidly since March, it has embarked on a program of quantitative easing, reducing its assets by $95 trillion a month.
A recent blog post by economic historian Adam Tooze illustrates the importance of this shift.
"We must not underestimate the historical novelty of this situation," he wrote. "[Debt] leverage levels, commitment levels, interest rate hikes, commitments from central banks around the world, commitments to new geopolitical tensions, all mark this transcendent moment of historical departure.".
The speed with which these forces were unleashed is reflected in the collapse of the UK and the FTX.
In Britain, financial markets reacted negatively to the Trudeau government's small budget on September 23, which cut taxes on corporations and the super-rich without major cuts in public spending to increase the public debt. An unprecedented decline in bond prices and a rise in their yields.
Almost overnight, pension funds that were buying financial derivatives to try to hedge their investments in long-term government bonds (gilts) faced a major crisis. Its asset reserves, due to the significant drop in bond prices (yields and prices move in opposite directions), amount to 1.5 billion euros.
The pattern of the FTX meltdown is very different, but it happened at the same lightning speed as the CoinDesk article two weeks ago. This shows that the FTX crypto exchange created by Sam Bankman-Fried and Alameda, his trading company, which is considered a separate entity, is indeed connected.
He noted that Alameda "is made up of coins invented by companies [FTX], and not individual assets like fiat currency or other cryptos."
The article cites comments from other crypto traders that "the majority of Alameda's net worth is centrally managed FTX tokens, which were manufactured out of thin air."
These comments have a broader meaning because most other financial systems and their unusual mechanisms are built on similar foundations.
The revelations about FTX prompted Changpeng Zhao, head of rival crypto exchange Binance, to pull his money out of the exchange, prompting others to pull out.
FTX, which was worth $32 billion, filed for bankruptcy last Friday. The total financial loss has not been measured, but preliminary estimates suggest a gap of at least $8 trillion between the value of its assets and liabilities.
Speed is not the only similarity to the British crisis. Investment based on the passive strategy of UK pension funds is not considered a risky venture. Instead, it was guaranteed by the UK Pension Funds Regulator.
FTX is backed by some of the biggest names in the financial world, including venture capital firm Sequoia. He has received money from BlackRock, Japanese financial firm SoftBank and even a Canadian pension fund. This caused quite an uproar in the Financial Times newsroom, recalling the scene in the war movie Casablanca where police chief Louis Renault is "surprised" to find games in Ricky's cafe.
But the FT declined to explain why such an incident occurred, as this is the second time a Canadian pension fund has been involved in a crypto crash, the first being the loss of the Celsius network.
The LDI strategy implemented by UK pension funds, which almost led to their collapse, requiring the intervention of the Bank of England, was due to their inability to raise sufficient funds from their traditional source, gold, as their yields were so low. Similarly, the involvement of Canadian pension funds in crypto is for the same reasons.
They and other high-profile investors were attracted by the hype surrounding FTX, the naming rights to major basketball arenas and celebrity endorsements such as legendary NFL quarterback Tom Brady.
Less than two months ago, Sequoia published a 13,800-word profile of Bankman-Fried after the firm dumped its investment in FTX after announcing it was worth zero, saying it had achieved "legendary status" and dealt with "legends." This is the future of money."
In reporting the FTX crash, the financial press has generally argued that cryptocurrencies are not a major component of the financial system and will not have an immediate impact.
The full story of the relationship between FTX and its sister company Alameda remains to be seen.
But in view of the potential consequences, it is worth noting that in 2007, then Fed Chairman Ben Bernanke made it clear that the emerging crisis in the subprime market would not go away, because there was too much of it. Lower overall market share.
A year and a half later, in September 2008, a full-blown crisis broke out, when the corruption of the subprime market caused by cheap money speculation permeated the entire financial system.
Any exclusive focus on the direct FTX link ignores that the ongoing financial storms have the same underlying cause: the changing functioning of the global financial system.
The meaning and significance of these changes can only be understood by examining the underlying social and class relations that take mysterious forms in the world of money.
The role of the Fed and other central banks is not to try to promote economic expansion or the welfare of the population. Above all, they are defenders of the interests of financial capital.
What is clearer, after the stock market crisis of October 1987, his main priority has been to promote corporate wealth and the financial elite. As a result, the financial system has become an institutionalized mechanism for channeling and capturing the wealth created by the world's labor at the highest levels of society, as evidenced by growing data on social inequality.
In recent decades, this goal has been achieved by pouring more money into the financial markets, particularly in response to the 2008 crisis and the onset of the 2020 Covid-19 pandemic.
The oppression of the working class by the trade unions and the constant decline of real wages were the main factors in favor of the financial parties.
But now class relations have changed dramatically.
The need for capitalistic governments to eradicate the virus through public health measures, fears of its devastating impact on stock markets, the still cheap money supply and now the US war against Russia in Ukraine have led to the top four. inflation decades .
As inflationary pressures begin to build in 2021, the Fed and other central banks see them as "temporary," hoping past policies will continue.
But the persistence of inflation has led to the development of the greatest fear of finance capital and its central bank protector: the rise of class struggle, as the working class continues to struggle against an ever-decreasing standard of living.
As a result, the Fed and its international counterparts have argued since March that monetary policy must be ready to "fight inflation" by raising interest rates first.
But rising interest rates will not reduce the price of fuel, food or other basic goods. Instead, their goal is to slow down the economy, if necessary through a recession, by reducing the wage demands of workers around the world. Meanwhile, the trade union apparatus, materially and politically tied to capital by a thousand threads, works to enforce this agenda.
But this class warfare has serious financial consequences, as rising interest rates threaten to collapse into piles of debt backed by fictitious capital and cheap money.
The storm in the UK bond market, the death of FTX and the deepening crypto crisis, the sharp decline in high-tech stocks on Wall Street are just some of the signs. .
Late last week, the New York Times published an article warning that with interest rates rising, "the corporate bond market, which lends money to many companies, has taken a big hit."
The Financial Times published an article titled "Property Markets Head for Brutal Fall".
There have been persistent reports in the financial press that liquidity in the $24 trillion US Treasury market, the bedrock of the global financial system, is at its lowest point since it was frozen in March 2020 at the start of the pandemic.
The working class must understand the impact of a deep financial crisis, the consequences of which will be much greater than in 2008, however significant.
The need for a socialist program is embedded in the economic and financial realities of life. No reformist can solve the existential crisis.
The key to the development of any right struggle is the progressive struggle for the victory of the political forces of the working class, to end forever the dominance of finance capital in all spheres of everyday life and to establish the foundations of the economy. Human needs and not dictated by the profit system.