Friday, July 03, 2020

How We Got Here: the Global Economy's 75-Year Stumble to the Precipice

Not only will there not be a recovery, but there can't be a recovery, as those brittle extremes have been lost for good.
How did the global economy end up teetering on a precarious financial precipice? To formulate a cogent answer, let's take a whirlwind tour of the history of the global economy 1946-2020.
Before we start the tour, I want to return briefly to my first Musings of the year, which was posted on January 4, 2020, before Covid-19 was officially announced on January 23, 2020. (The Musings Reports are sent weekly to patrons and subscribers at the $5/month or higher level.)
Instability Rising: Why 2020 Will Be Different:
"Economically, the 11 years since the Global Financial Crisis of 2008-09 have been one relatively coherent era of modest growth, rising wealth/income inequality and coordinated central bank stimulus every time a crisis threatened to disrupt the domestic or global economy.
This era will draw to a close in 2020 and a new era of destabilization and uncertainty begins."
The long-term trends set up a row of dominoes that the pandemic has toppled. But any puff of air that toppled the first domino would have toppled all the dominoes of fragility, instability and unsustainable extremes that characterize the global economy.
The whirlwind tour of the global economy's history must include these essential dynamics: energy, currencies, globalization, debt and financialization, which broadly speaking refers to everything that renders finance (borrowing, leverage, speculation) more profitable than actually generating goods and services.
The "glorious thirty" (Les Trente Glorieuses) years from 1946 to 1975 were decades of rising prosperity in the developed world (Europe, Japan, North America) and rapid development in the first tier of developing countries in Southeast Asia and elsewhere. (Decolonized nations and China struggled with political, social and economic turmoil.)
Costs were low for fuel, housing, food, healthcare, education, etc. as rebuilt industrial bases produced lower cost goods and oil/natural gas were cheap. The global currency market was stable as the U.S. dollar was pre-eminent, enabling Japan and Western Europe to sell their goods to America at discounted prices due to the strong dollar. This policy was explicitly designed to strengthen the economies of allies faced with the threat of the Soviet Union's global ambitions.
The "glorious thirty" were also decades of rising wages and affordable, modestly growing credit and low inflation as the money supply expanded more or less in tandem with the expansion of goods and services and credit.
The wheels fell off in the 1970s as the oil-exporting nations muscled energy prices higher to gain a share of the profits, the gold-backed US dollar regime fell to pieces and inflation skyrocketed, generating a previously unknown economic malaise known as stagflation: high inflation plus stagnant growth.
At this same juncture, the external costs of industrial pollution finally came due, and global competition from lower-cost nations (helped by currencies that traded at deep discounts to the US dollar) crushed inefficient industries in the U.S. and Europe.
The 1980s saw a resurgence of growth, but with a different mix of sources. Demographically, the global postwar Baby Boom generation entered their highest productivity and spending years, boosting global demand, the supermassive new oil fields discovered in the early 1970s finally came online (Alaska, North Sea, West Africa), dramatically lowered the price of oil while soaring interest rates crushed inflation and wrung bad debt out of the developed economies, Developing nations that had struggled in the 1970s finally found their footing (India, China, South America, etc.)
The steep investment in reducing pollution began paying off and the first wave of financialization boosted mergers, buyouts and asset prices.
The 1980s was capped by the decline and fall of the Soviet Union, eliminating the costly military rivalry of the Cold War, and the collapse of Japan's massive credit/asset bubble in 1989-90--a warning sign that was ignored as a one-off.
The 1990s continued the trend of global growth, aided by low inflation, cheap energy, expanding globalization and the mass commercialization of the Internet and computing, as technologies that were once expensive and difficult to use became affordable and accessible.
The Neoliberal ideology --that the way to solve virtually any problem, from poverty on up, is to turn everything into a global market of freely traded labor, capital, goods and services-- became the default global economic faith, with some variations (a market economy with Chinese characteristics, etc.)
The 1990s was capped by the emergence of China as the manufacturing hub of the global economy, a role that was institutionalized by China's acceptance into the WTO, and the bursting of the Dot-Com bubble in March 2000.
As globalization and financialization became dominant forces (the natural result of Neoliberalism), instabilities appeared in currency markets (the Thai baht / Asian contagion of the late 1990s) and asset markets (the Dot-Com stock market bubble). Japan's recovery from the credit bubble collapse faltered, ushering in 30+ years of stagnation, leading to an overlooked social decay with extraordinary demographic and economic consequences that are still playing out.
As the global economy reeled from these instabilities in 1998-2000, central banks flooded asset markets with newly created currency, the goal being to stave off a recession, which burns off bad debt, marginal investments and companies, reducing credit expansion and consumption.
Rather than accept the risks of a conventional business-cycle recession, central banks pushed financialization to new heights--heights which quickly distorted markets.
As a result, the growth of the 2000s was different: in effect, central banks had created a credit/asset-bubble dependent economy, with growth coming not from lowering costs, improving productivity and rising wages, but from speculations in financialized markets.
This was simply the logical extension of Neoliberalism: if existing markets weren't profitable enough, then create new markets for new exotic financial instruments and lower the cost of borrowing to spur consumption and investment.
The benefits of these financial instruments were asymmetric: those originating these instruments made billions, while the borrowers taking on the subprime mortgages, etc. were accepting risks they didn't understand. This dynamic fueled soaring wealth/income inequality.
Apparently unbeknownst to central bankers, super-low interest rates and abundant liquidity didn't spur investments in increasing productivity, it incentivized highly leveraged speculative bets. This manifested in subprime mortgages funding house-flipping by the masses and the origination of exotic financial instruments such as CDOs and CLOs.
Ultimately, the central banks' no-holds-barred Neoliberalism led to the Global Financial Crisis (GFC) of 2008-09, as the risks that were supposedly hedged blew up and the markets froze up (i.e. markets became illiquid as buyers vanished).
As former Fed Chair Alan Greenspan admitted, the central banks failed to see that markets are not as self-regulating as the Neoliberal faithful believed: when bubbles pop, buyers vanish and markets go bidless/illiquid: sellers are desperate to sell but there are no buyers at any price.
This was the inevitable end-game of financialized, globalized Neoliberalism, and rather than face that reality, central banks and policy-makers double-downed on the same policies that created the 2008 bubble that was destined to pop with horrific consequences to everyone who had a stake in any of the casino's games.
We now come to the 2010s, in which financialization and globalization essentially conquered the global economy, leading to the brittle fragilities that are now unraveling.
With the cost of living rising and wages stagnating, the "solution" was to borrow $10 to get $1 of growth. Since global markets were saturated with debt and risk, lenders cannibalized domestic markets, loading college students with $2 trillion in student loans and enabling a fracking "miracle" that was less an energy miracle and more a financial miracle as companies that lost billions continued to get cheap loans and sell bonds.
The global economy is now teetering on a precipice in every sector: energy extraction costs have risen, requiring higher prices for oil, but consumers whose wages have stagnated for 20 years can no longer afford higher prices for oil or anything else.
Globalization has optimized profits at the expense of everything else: ecological sustainability, the security of food and energy sources, etc., while financialization has gutted the real economy in an extraction process that concentrates all the gains into the hands of the few at the top of the financialization/globalization pyramid: a winners-take-most economy that has corrupted and distorted the political and social orders.
All the critical dynamics--energy, currencies, globalization, debt and financialization--have reached extremes that made destabilization--i.e. a tumble into collapse--inevitable.
What happens when the naive hope that the brittle, fragile extremes of the global economy could be completely restored to mid-2019 levels dissipates and is replaced by the sober realization there not only will there not be a recovery, but there can't be a recovery, as those brittle extremes have been lost for good?
Since the authorities have no Plan B, uncertainty, risk and volatility could reach extremes few anticipate as Plan A--push extremes to even riskier extremes--generates increasingly consequential unintended consequences.
The unstable, brittle edge of the precipice is giving way, and there is nothing but air below.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
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Thursday, July 02, 2020

Dancing Through the Geopolitical Minefield

The elites dancing through the minefield all have plans, but how many are prepared for the punch in the mouth?
Open any newspaper from the past 100 years and you will soon find a newsworthy geopolitical hotspot or conflict. Geopolitical conflict is the default setting for humanity, it seems, but it does feel as if the minefield of geopolitical rivalries and flashpoints has been thickly sown and many of the players are dancing through the minefield with a worrisomely cavalier confidence that they won't step on mine, i.e. bad stuff only happens to the other players.
The global minefield includes these dynamics:
1. The grinding collision of geopolitical tectonic plates: spheres of influence, soft and hard power projection, border conflicts, etc.
2. The urgency sparked by the pandemic to take advantage of rival's vulnerabilities and the countering urgency to defend one's key borders/interests.
3. The destabilizing forces of elite dominance and wealth inequality within nation-states encourage elites to seek external distractions.
In this context, it's interesting to review Edward Luttwak's three stages of Empire. Luttwak's The Grand Strategy of the Roman Empire sketches out three stages of Empire that apply equally well to elites within nation-states. In other words, elites can be said to have conquered their domestic masses politically, socially and economically, much as imperial elites conquer other nation-states.
Luttwak describes the first stage of expansion thusly:
"With brutal simplicity, it might be said that with the first system the Romans of the republic conquered much to serve the interests of the few, those living in the city--and in fact still fewer, those best placed to control policy."
The second stage spread the benefits of Empire much more broadly:
"During the first century A.D., Roman ideas evolved toward a much broader and altogether more benevolent conception of empire... men born in lands far from Rome could call themselves Roman and have their claim fully allowed, and the frontiers were efficiently defended to defend the growing prosperity of all, and not merely the privileged."
The third stage is one of rising inequality:
"In the wake of the great crisis of the third century, the provision of security became an increasingly heavy charge on society, a charge unevenly distributed, which could enrich the wealthy and ruin the poor. The machinery of empire now became increasingly self-serving, with its tax collectors, administrators and soldiers of much greater use to one another than to society at large."
That line describes the global situation rather neatly. Geopolitical blocs, alliances, nation-states with imperial pretensions and nation-states with regional power ambitions are all in a land-rush frenzy to extend and consolidate their influence and power by any means available: financial, trade, diplomatic, soft power (cultural imperialism, etc.) and hard power (military forces) before the inherent internal instability of their elites' dominance catches up with them.
Understood in this way, we can understand the geopolitical minefield as the conflict ground of various national and regional elites. What better way to distract restive, exploited and increasingly impoverished home populaces than to whip up a conflict with neighboring rivals / "enemies"?
In the run-up to events that unexpectedly spiral out of control, elites are over-confident about their ability to control the situation and "naturally" come out on top of any conflict. Hence they are dancing through the minefield, confident that they will magically miss all the mines, even the ones that cannot be detected.
Recall that the elites at the outbreak of the American Civil War and World War I were confident the war would be over in a few months. An overweening confidence in one's ability to manage fast-moving crises is the ultimate hubris, and elites are prone to this hubris due to the apparent ease of extending their power and wealth in their domestic economies and political orders.
The odds of miscalculation increase exponentially as the number of players dancing through the minefield increases. As Mike Tyson so sagely observed, "Everyone has a plan until they get punched in the mouth." The elites dancing through the minefield all have plans, but how many are prepared for the punch in the mouth?
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, William R. ($20), for your most generous contribution to this site -- I am greatly honored by your support and readership.
 
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Wednesday, July 01, 2020

An Interesting Juncture in History

Just as the rewards of central-bank bubbles have not been evenly distributed, the pain created by the collapse of the bubbles won't be evenly distributed, either.
We've reached an interesting juncture in history, and I don't mean the pandemic. I'm referring to the normalization of extremes in the economy, in social decay and in political dysfunction and polarization.
Let's ask a very simple question. The S&P 500 stock index went up five-fold from its 2009 low at 667 to a recent high around 3,400. Did your income rise five-fold since 2009? Probably not.
Houses that sold for $150,000 in 2000 are now valued at $900,000, a six-fold increase since 2000. Did your income rise six-fold since 2000? Probably not.
State university tuition has risen about 2.5 times from 2004 to 2019. Did your income rise 2.5-fold since 2004? Probably not.
Even burritos from the local taco truck have tripled in price in the past 15 years. Did your income triple? Probably not.
The average household income in 2000 was about $42,000. To match the six-fold increase in urban housing valuations, that household would have to earn $252,000 this year. How many households saw their income soar from $42,000 to $252,000? Not many.
The average household income in 2009 was about $50,000. To match the five-fold increase in stock market valuations, that household would have to earn $250,000 this year. How many households saw their income soar from $50,000 to $250,000? Not many.
To keep up with tuition (never mind healthcare insurance), the household earning $45,000 in 2004 would have to bring home $112,000 this year.
The household earning $100,000 in 2004 would need to boost its income to $250,000 to keep up with college tuition. How many households boosted their income from $100,000 to $250,000 in the past 15 years? Not many.
In other words, what's been normalized over the past 20 years is the total subjugation of labor by central-bank inflated asset bubbles that benefit the top 0.1%. Labor has lost ground while assets have soared, leaving those whose income is earned less able to buy over-valued assets and more prone to borrowing money to maintain their lifestyle-- a situation I call debt serfdom.
Two generations ago, nobody knew the name of the Federal Reserve's chairperson. Now that chairperson is in the news virtually daily. The media exposure of the Fed chair far exceeds that of elected officials such as the Speaker of the House of Representatives or the Senate Majority Leader, or the Chief Justice of the Supreme Court.
In effect, the nation has become dependent on its central bankers and their limited agenda (expand the wealth and power of the financial sector). The elected government and the real-world production of goods and services both have taken a back seat to conjured "wealth."
The ascendance of finance and the decay of labor's value is the result of the ascendance of monetary stimulus as the core driver of "wealth" and thus "growth." It was once expected that consumption would be funded by wages earned by labor, and investment would be funded by savings set aside from earnings. That era is long past. What's been normalized is a systemic reliance on debt to fund consumption and on the euphoric "animal spirits" of the wealth effect generated by soaring assets such as homes and stocks.
History offers a number of parallels to the ascendance of borrowed capital over labor and central bank money-printing over the creation of productive value. History suggests eras that have normalized economic and financial extremes--extremes of inequality, policy, and decay--haven't ended well for anyone.
Just as the rewards of central-bank bubbles have not been evenly distributed, the pain created by the collapse of the bubbles won't be evenly distributed, either.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Betty W. ($50), for your splendidly generous contribution to this site -- I am greatly honored by your steadfast support and readership.
 
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