For reasons largely outside my control, there’s been a bit of a hiatus here in recent weeks. This said, I’m working on a paper that I think could be very interesting indeed, examining how we measure prosperity, something which reported GDP data conspicuously (and increasingly) fails to do. That paper is work in progress. Meanwhile, what is the state of play?
As it happens, not a lot has changed during my absence. Fundamentally, the world financial system continues to look bizarre, with ultra-low rates destroying both returns on capital and pension provision whilst failing conspicuously to deliver the much-vaunted “stimulus”.
So abnormal have things become that I’m waiting on “the great reset”, and the turbulence that will necessarily accompany it. An essentially stagnant global economy simply cannot go on accumulating ever more debt without the system toppling over.
Finance – waking up to reality?
There does seem to be a dawning comprehension, amongst supra-national organisations at least, that a point may rapidly be approaching when we can no longer live on an endless tide of cheap credit. Though there remains much talk of growth, “secular stagnation” is probably the best gloss we can put on the underlying economy.
Western central bankers, I suspect, may waking be up to the fact that, if you wanted to go somewhere progressive, you wouldn’t start from here. I’m pretty certain that, had they access to a time-machine, central bankers would go back and make some significant changes.
Slashing interest rates in 2008 and 2009 did make sense, as did using QE to – as I see it – depress yields by driving bond markets upwards. But these were emergency measures, and should have been temporary. The central bankers’ big mistake, influenced no doubt by Wall Street, was to allow ZIRP to become permanent. With hindsight, they should have started to push rates back upwards pretty soon, starting no later than 2010.
A policy of normalisation, had it been pursued, might have driven GDP lower, but an immediate, one-off hit could have been a lot better than allowing denial to push us into a tunnel of the surreal. A policy of interest rate normalisation would, no doubt, have triggered some big losses – but this, too, would have been manageable, and a “back to normal” approach would have staved off an escalation in debt which is now looking very dangerous indeed.
Thanks to the prolonging of ultra-loose monetary policy, debt has escalated. Back in 2008, debt of $140 trillion was enough to frighten the system. Now, debt has soared beyond $200 trillion, where I suspect that fear has been replaced by outright paralysis.
Politics – left behind by change
Politicians and most commentators, meanwhile, remain way off the pace, not just of economic fundamentals, but of public feeling as well. The same experts who told us that Donald Trump was a “joke candidate” with no chance of winning the Republican nomination, and that the “out” campaigners couldn’t possibly win Britain’s “Brexit” referendum on EU membership, continue to misunderstand how rapidly the political landscape is changing.
These experts now think that revelations about Mr Trump’s deplorable attitudes to women will kill off his campaign, and that Jeremy Corbyn’s only chance of winning power in Britain is to shift to the centre-ground. They are wrong on both counts, and wrong, too, if they underestimate the pivotal, pan-EU importance of the Italian referendum on constitutional reform set for 4th December.
What, then, is the reality that politicians, pollsters and pundits are missing? In a word, that reality is anger. In America, surveys show a rapidly rising tide of consumer discontent which increasingly merits the label “rage”. This is directed against utilities, cell-phone providers, airlines and other sectors in which the market dominance of a handful of players enables them to ignore consumer anger. Rather than helping customers – who in reality have nowhere else to go – these corporates concentrate instead on influencing Washington, to ensure the maintenance of barriers to entry.
Voters and consumers are the same people, and consumer anger against corporate arrogance feeds into a mood of rebellion against the establishment. This, for many, makes Mr Trump, whatever his faults, an attractive proposition. It also makes voting for the quintessentially-establishment Hillary Clinton almost unthinkable.
Likewise, the anti-establishment anger which delivered “Brexit” also informs strong support for Labour’s Jeremy Corbyn. What pollsters and pundits seem unable to grasp is that this support does not come from the comfortable, those people who are satisfied with “politics as usual”, and whose voting intentions can be measured.
It comes instead from the ranks of the insecure, generally younger and often non-voting millions who are the victims of depressed incomes, employment insecurity (the “gig economy”), the high cost of housing and, above all, the sense that nothing is ever going to get any better for them unless society changes drastically.
Because these people do not respond to telephone surveys, and have better things to do with their time than take part in focus groups, they tend to fall beneath the pollsters’ radar. But they are numerous enough, and motivated enough, to swing an election – provided that Mr Corbyn does not try to become another centrist in the Blair mould.
At the moment, the Western governing establishment relies on the votes of the so-called “baby boomer” generation, people who seem to be sitting pretty on hugely inflated property values. This, though, is likely to change when the boomers – or the market on their behalf – starts to ask two very awkward questions.
First, what’s happened to your pension? (answer: thanks to ZIRP, its value has cratered).
Second, to whom do you think you’re going to sell your highly valued property, when you need to monetise it? (hint: not to a younger generation that has been deeply impoverished by demographic imbalances).
The irony here is that Theresa May is shaping up to be the first British leader in a very long time who really understands the issues of isolation and sheer unfairness which are bubbling beneath the surface of formal politics. It is her misfortune that her premiership seems to have coincided – if the exchange rate is any guide – with the fundamental flaws in the British economy being rumbled.
Those who blame the slump in sterling (along with pretty much everything else) on “Brexit” seem to have overlooked Britain’s horrendous current account deficit, which long pre-dates the EU referendum. Anyone who believes that “Brexit” is alone responsible for the slump in GBP has to believe something else, which strains credulity to the limit – which is that, in or out of the EU, Britain could have gone on living beyond its means to an extent sustainable only on the basis of foreign capital injections of £100bn annually, and rising.
Those who lent to or invested in the UK during 2015 are sitting on losses averaging about 20%. They must now be running their slide-rules over the British economy, and not liking what they see. If they decide that advancing further capital would amount to throwing good money after bad, the game really is up.
Looking ahead – regime-change and bad numbers
Events in Britain and America – even without bringing the Eurozone, China and Japan into the equation – make the economic and political outlook fascinating, albeit rather frightening. What we are witnessing in the West is the start of regime-change, with the neoliberal orthodoxy, which has ruled the roost for three decades and more, destined for the shredder.
The global economy has become unsustainably addicted to borrowing, and has created a mountain of debt that would imperil even a strong economy, let alone one that is flat-lining. But where and how are we going to see the economic implications of this mess feed through into data?
Well, SEEDS – the Surplus Energy Economics Data System – can supply some answers, by distinguishing between the “financial” and the “real” economies. The current SEEDS projection is that the global “real” economy, expressed at constant 2015 values, will grow very gradually, from $67 trillion last year to $69 trillion in 2019, before commencing a decline that will reduce it to $66 trillion in 2025 and $64 trillion by 2030. This does not amount to a crash, but it does mean that growth is over.
This looks rather worse when you take some other issues into account. First, the global population continues to increase, so growth at the per-capita level is poised to reverse significantly. This seems certain to feed into the politics of insurgency, because inequalities of wealth and income become very much harder to defend when per-capita average prosperity is shrinking.
Second, “excess claims” – that is, claims created by the financial economy that cannot be met by the real one – have already climbed to $80 trillion, from $55 trillion as recently as 2010, and look set to top $100 trillion by 2019.
If you’re familiar with surplus energy economics, you’ll know exactly why all of this is happening. However, GDP, as we measure it, is unlikely to capture the plateauing of real economic output, whilst the accumulation of “excess claims” – effectively, the proportion of global debt that is incapable of repayment – cannot be measured using conventional methodologies.
For those of us familiar with surplus energy economics, this isn’t entirely disadvantageous, as it should give us an edge in terms of anticipation.
What we do need, however, is a way of reconciling the SEE-based measurement of the real economy with data in common usage – and this is my current work-in-progress.