#78. The fragility of the “new abnormal”

AN UPDATE

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.

American angst

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.

British disillusion

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.

Brexit blues?

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.

35 thoughts on “#78. The fragility of the “new abnormal”

  1. Tim, another superb piece. If I may coin a phrase you absolutely ‘nail it’. The clarity and logic of your analysis is a pleasure to read. Would that we could see such articles in the MSM! In saying this I must confess that my accolade should be treated with caution as I’m an idiot. Yes, indeed. According to a well-known journalist in the national press anyone that uses the term MSM – mainstream media – without irony is an idiot. It never seemed to occur to members of the national commentariat that in using the term MSM I was probably an idiot who has come to his senses and has finally realised that a good deal of material emanating from national journalists and paraded as sophisticated and knowledgeable comment is nothing more and nothing less than propaganda. In saying this you may detect a touch of anger, which I feel connects rather nicely with a key point that you make so eloquently in your commentary.

    • Thank you. I think the anger touches most of us, including me (and I’m not prone to it). My analogy is walking along a sea-shore and seeing someone drowning – naturally we would throw them a lifebelt. But I can think of several organisations of which, if their CEO was the person drowning, I would walk on by…..

  2. The soundbites from the PM are encouraging. However why is she allowing the BoE putting pressure on her by not supporting the pound? Surely she should step back on QE and push them to raise rates.
    Expect that inflation will rise again, same way it did after the crash. Will Essentials inflation go too high again?

    It is very scary that at the same time, Russia is testing the waters of Western democracy in Ukraine, Baltics and Syria..

    • Agreed. I’ve been encouraged by her stance on corporate responsibility, and on education. The cost of essentials is globally-driven – energy, food and so on are traded on world markets – so the logic is that essentials inflation will increase because of the slump in GBP.

      The BoE decision to cut rates post-Brexit was daft, both financially (n.b. pension schemes) and in sending exactly the wrong message to markets. It cannot deliver stimulus anyway – impaired pensions will cause people to save more, and costlier essentials will reduce spending on other things.

      As for Russia, this feels increasingly like a re-run of the 1930s – am I alone in seeing a correspondence between Aleppo and Guernica? – and appeasement didn’t work too well then…….

  3. Yes, Tim. Growth is over. But who wants to face up to it? Just a few of us. I have to say and say again we are ordained to crash. Our civilization is on track to achieve this catastrophe.
    It’s so simple. We cannot keep growing in a finite world. Already we consume 1.5 planet’s worth of resources and some think it’s 4 worlds;

    Perhaps surprisingly, our civilization is quite resistant to crashing. So it will be an event we cannot adjust to that will show us where we really are. Only the date is missing.

  4. Hi Tim

    Thanks again for another very thought provoking piece.

    You can argue that all sustainable regimes have to get the right balance between accumulation and distribution. The Soviet Union had the second without the first and the US has the first without the second.

    In the US the neoliberal approach tried “trickle down” economics to bridge the accumulation and distributional questions but of course it’s nonsense; it doesn’t work.

    It seems to me that we have two alternatives from where we are at the moment: change fundamentally or watch and see things get worse. The former begs the question and, in my view, is a non starter; the neoliberal, technologically driven world is too embedded in the psyche to change.

    But how viable is the second? At some point folk are going to realise that something is wrong; that things are not getting better and that, if anything, they are getting worse. But how do they respond? I think it partly depends where we are. If we’re at a place where technology controls our lives then we may be unable to do nothing and we are then trapped in a technological dystopia – 1984 on steroids.

    On the other hand if we haven’t reached that point then there will have to be some sort of step change to get us onto a different track.

    One of the usual ways out of the sort of difficulties that you rightly say are building up is war and some of the noises at present are tending towards the alarming. Maybe war as a distraction might be the event that precipitates the change that is doubtless necessary, a thought that is as depressing as it is probable.

    • In the cases of both the US and the USSR – as everywhere else – free and fair competition works best. State direction failed in the USSR, just as excess concentration is failing now in the US. This is why the state is essential to a genuine free market, not antithetical to it. The USSR is no longer with us, but the US is failing where big corporates use tame politicians to distort the market – barriers to entry being one example, bail-outs being another. Interesting research has been done in the UK on government payments of “corporate welfare” to big business – from recollection, upwards of £40bn annually, often from the same politicians who take “a tough line” on conventional welfare….

      A lot of this is cyclical. An elite, having gained power, sets out to enrich itself and its backers. Eventually it gets too greedy, arrogant and blatant, whereupon it gets thrown out. This is likelier to happen in hard economic times, when regimes have less scope to buy off opposition with the time-honoured recipe of “beer and circuses”. My former father-in-law saw TV as an instrument of social control, and called it “the idiot lantern”…..

      My conclusion is “the bigger the economic setback, the bigger the scope for regime-change”……….

  5. Great Britain isn’t so great when GDP out of the London financial centre shenanigans is cut off from real GDP. Indeed.

    But why, in the first place, should one distort the intermediate between goods and services, formerly known as money? The answer is obvious. As is the outcome.

    • Point taken about the UK – as you may know, when I was working in the City I authored a report about the British economy whose title sums it up – “Project Armageddon”.

      Not quite sure what you mean by the obvious, though?

    • Hi doc. To me it’s obvious that our current monetary system will not survive the implications of 10:1 oil eroei. Hell, former distorted currency systems didn’t survive 80:1.

      Worldwide Project Armageddon seems appropriate.

    • Well, houtskool, on my estimates, we’re very close to that level already – and some countries are already there, or beyond, most notably in Europe (in which I include the UK).

      The sheer scale of monetary manipulation – massive QE, ZIRP, NIRP, and wild talk about “helicopter money” and banning cash – reveal a system in outright panic. Destroying future returns – i.e. creating massive pension deficits – is akin to cannibalising the system.

      So in a word – yes.

  6. “A policy of interest rate normalisation would, no doubt, have triggered some big losses ”

    Like Iceland, we could have taken our losses then, and been mostly recovered now. But the PTB would prefer to push unpalatable actions into the future. Well, the future’s here now.

    The other unseen (yet) effect of the ultra low interest rate policy that’s been perused over the last eight years, is the impact on pensions.

    • On the Iceland point, I agree. But Iceland is a far more democratic country than, say, Britain or the US. Even there, as I understand it, the government planned to burden Icelanders for generations to come with the cost of paying for bankers’ mistakes. But the president called a referendum. Not only was paying back ruled out, but senior bankers were prosecuted. Wealthy people lost a lot of money – so you can see why the PTB elsewhere didn’t want to do what Iceland did…….

      As for pensions, I’ve certainly mentioned this a great deal. In the UK, for instance, the deficit in private pension provision is now £945bn, or 52% of GDP, on top of unfunded public sector pension liabilities (usually cited as £1,000bn, or 55% of GDP). When people discover the state of their pensions, they are likely to save more and spend less, which makes nonsense of claims (by the BoE and others) that slashing rates stimulates the economy – all logic says it does the opposite.

      Adding these quasi-debts (107% of GDP) to formal debt (267%) shows how deep in the hole Britain is, even before we include banking sector debt (about 180%).

    • Tim, This debt problem regarding pensions burdening our children is complete nonsense for any Monetarily Sovereign government. It’s just part of a political smokescreen to push money toward the top end of town and it has zero basis in reality. When a politician says the can’t afford something a] it’s directed towards benefits for the poor and b] they just don’t want to spend the money, which they think of as finite, on such things. Napoleon said, “In politics, stupidity is not a handicap”.

      Today all the pensions we pay are not burdening today’s economy. Equally, in future there will be no such unfunded liabilities just as there are none today, regardless of the rhetoric. The BoE will pay out as it always could. Even if taxes fell to zero, the BoE can still pay any time and any sum.

    • Doesn’t that break the link between money and goods/services, i.e. trigger massive inflation, if the central bank simply creates money? We may know the answer to that pretty soon, as the Bank of Japan is on course to own 50% of all JGBs (bonds) by the end of next year……..

    • I’m still researching what actually happens with treasuries, bonds etc inside the Reserve banks. I sent in a request to see if they really “spend” the money and so have to pay it back. In the US, generally a very transparent place, It could be one of two similar scenarios. First and what I believe is considered to be the case, the reserve accounts storing bonds[which is the public’s money] is left alone to earn its coupons every 6 months until maturity at which point the bond accounts are debited and then credited to checking accounts instead. Second, in a simple book keeping operation the numbers in bond accounts are debited to make it appear the government “borrowing” and spending is covered by them. So when due the numbers in those accounts are simply adjusted to the original sum, like what Bernanke did to bail out the GFC banks. In all cases no actual money is transferred or spent. Within government there is no actual money. It’s all just cyphers and available in any amount and at any time. When the numbers get out of the government accounts, by transferring the numbers into commercial banks, then it can become spendable money.

      So I would hazard that Japan’s bonds are just numerical operations and they, in Japan’s case, all belong to the Japanese public. The government can NEVER have a problem repaying them their money.

    • ejhr2015: “This debt problem regarding pensions burdening our children is complete nonsense for any Monetarily Sovereign government.”

      It isn’t the pensions that burden ‘our children’ it’s the debt obligation the government takes on that has to be serviced, capital repayment, interest etc.

      Since 1913, the UK economy has experienced something in the region of 9,000+% inflation. The house that was bought in 1950 for £1500.00 is exactly the same house that is selling for £1,450,000. I’d postulate that a large part of the blame for our de-industrialisation lies in the destruction of the value of sterling. Which leads to a variety of perverse incentives, most of which are counterproductive.

      I presume, as you mention Sovereign government, you mean that the government can simply print (old fashioned ) or add another couple of zeros before the decimal in the governments electronic balance sheet?

      I have heard that argument frequently, but I guess I’m stupid, as I still don’t understand why it’s a good idea. Perhaps with the indulgence of our host you’ll try to explain it to me one more time?

    • Have a read of what I just wrote above. I didn’t see your question in time. I would say the destruction of sterling, and every other currency is just the leverage the economy needs to cover interest on the debts. So if you buy a house for $x and pay $2x in interest over 20 years , then the numerical value of your house should cover $3x.. As you say it’s still the same house but the debt burden has allowed you to own the house outright.
      The problem comes when the economy is going backwards, which it is not good at.

  7. “An essentially stagnant global economy simply cannot go on accumulating ever more debt without the system toppling over….“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.”

    I really struggle to understand is why is this barely mentioned in the FT, The Economist etc? Why do the Central Bankers only make passing comment at the level of debt in the economy?

    I would really like to know what the economics community make of Tim’s assessment – and if he is wrong (which I doubt), why he is wrong.

    Instead, it just seems the issue is avoided entirely, whilst long sober articles explain at length how China’s economy is unbalanced and over-indebted.

    Pot and kettle spring to mind!

    • Not for me to answer this – I’d like to hear others’ views – but I suggest slashing rates to 0% means servicing debt is “no longer a problem” – i.e. we can kick it into the long grass.

      This of course ignores all the side-effects of ultra-cheap money, such as pension fund disasters. I can tell you (without going further) that I have at times made myself unpopular, shall we say, in significant quarters.

  8. In spite of record low interest rates global growth since 2008 has been well below historic norms – and that despite massive stimulus.

    There is no way in hell the central banks could have raised interest rates — nor can they now — without immediately killing BAU.

    The era of cheap oil is ending. There is no tomorrow. The central banks are absolutely correct in throwing everything at this to buy us another month … another year.

    What would be the purpose of raising rates? Do you think that would have made things better?

    Total collapse is imminent. The end of civilization is imminent. Extinction is imminent.

    The central bank policies are all that is between us and those outcomes

    • The alternative view – I simply mention it – is that rates would have been normalised if central banks had ignored Wall Street’s “give us cheap money” lobbying. The question then is what the scale of the damage would have been.

    • Let’s face — civilization is over. There was and is no other course of action – act big — or collapse.

      To suggest otherwise is to ignore the core problem – which is that we have run out of cheap to extract oil.

      This is not an extreme business cycle — this is not a looming Great Depression 2 – we are literally fighting for our lives.

      Half measures will not suffice. The central bankers know this and they are doing ‘whatever it takes’ to keep dying nag alive a bit longer

    • Yes. Surplus net energy per capita vs debt. Debt was the winning move for decades. Now we have to face the normalisation. The question is; can we extract surplus energy without the debt? The answer is obvious.

    • Thomas Malthus: ” There is no tomorrow.”

      Come on Tom, you’ve been banging that drum for 260 years, give it a rest.

    • Actually I got this line from Tim – he wrote this – and for some reason he has changed his tune.

      What happened Tim? I don’t think you are going to generate a lot of book sales by changing your position.

      THE PERFECT STORM (see p. 58 onwards)

      The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

      But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

      http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

    • I’ve not changed my views – all building evidence confirms them – but the operative term is “as we have known it”. The type of economy (and therefore society) that we have long become accustomed to is finished. The sheer abnormalities of today (ZIRP, massive debts, destruction of pension provision, popular backlash against incumbent elites, etc) all point in this direction. The question now, apart of the “when?” of the climateric, is what kind of economy replaces it…..

  9. Pingback: #78. The fragility of the “new abnormal” | The State We're In

  10. And today we see the treasury scratching it’s head as to why tax and particularly corporation tax receipts are down and borrowing up.

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