4 July, 2020

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A New Normal In The Global Economy

By Kumar David

Prof. Kumar David

Prof. Kumar David

First it was called a sub-prime mortgage collapse, then a financial crisis, then a recession, but the third description great financial crisis (GFC) seems to have stuck. I called it the New Depression; New because it differs from the Great Depression of the 1930s and Depression because it would be prolonged; but the name did not catch on. The GFC has dragged on for seven years and shows no sign of ending, it spread in waves, starting in the US mortgage, banking and financial sectors in the autumn of 2008, crossing the Atlantic to Europe and peaking there in 2010 and now sweeping eastwards to China in 2015 where the downturn is more serious than people realise. The crisis swept east but the areas it ravaged on the way did not recover; the US struggles, raises its head and goes under again, Europe has been thrashing about on the floor for five years and even the future of the Euro is questioned. The Japanese economy has been miserable for a quarter of a century; the sick man of Asia gasping in the intensive care unit. Global capitalism has changed qualitatively, old structures are gone, a New Normal has taken root. The state of global capitalism today and the metamorphosis of its nature is the subject of this essay.

First a review of the prolonged and costly measures, adding to trillions of dollars, that have been tried and have failed to resuscitate the American, European and Japanese economies. It will be far too much to quote data for each case, so the summary below embraces all three in a composite fashion.

Survival of the losers: In theory, competition ensures that dud firms go to the wall and the best survive. Not so anymore, ‘too-big-to-fail’ theory, or political influence, loose money-policy and rock-bottom interest rates conspire to let dud firms and failed banks stagger on; a sick man on ten-year life support. The world’s government, corporate, financial and household debts add to $ 190 trillion; massive endemic indebtedness is a feature of the New Normal. Who is on the creditor side of all this debt; the world’s ultra rich ‘one percent’.

Quantitative Easing (QE): This is the injection of huge liquidity into the financial and corporate sectors in the hope of kick-starting growth. QE has been a failure everywhere notwithstanding $5 trillion injected in total including the initial bailout monies of about $2 trillion in 2008-9 in the US and UK. Industrial output and the real economy have refused to raise their heads; labour force participation (a better indicator than the unemployment rate) remains depressed. US GDP picks up in one quarter only to fall back in the next; there is no sustained picture. This is according to US, EU and Japanese official stats and IMF reports; I cannot reference them all or this piece will read like a research paper.

Where did all the QE money go? It was channelled by the Fed, ECB, BoJ and BoE into buying bank, mortgage-house and corporate debt (the last mainly in the early years – GE, GM and Chrysler bailouts in the US, Sharp in Japan). The largest portion was for buying bank bonds. Central Banks ‘buy’ pieces of paper called bonds from banks – that is lend at low interest in the expectation that these billions will be borrowed by investors and employed in economic activities. The endeavour has been unsuccessful since capitalists in production activity are reluctant to invest as they lack of confidence and do not borrow. Banks are loath to lend sans watertight guarantees having burnt their fingers in the GFC.

Much is borrowed by speculators in asset and financial markets. Leverage is when you have $10 million and use it as a lever to persuade a bank to lend $90 million to buy shares hoping to sell at $110 million, in say a month. You return $90 million plus interest to the bank and hey presto keep nearly $20 million, a gain of almost 100% in a month. The risk is if price drops say to $90 million, you are wiped out, if it drops to $80 million you are $10 million in debt. Risk-taking is the less pernicious side; the real problem is equity price inflation. When speculators chase assets (shares, property) stock-markets and property prices rocket up, not because performance of companies or the economy have improved but in expectation that this grand ponzi mania will go on for ever and prices rise without end. A similar but more complex phenomenon is at work in the case of financial sector asset bubbles.

In the worst case this ends in an almighty crash like the Tulip Mania of 1637, Mississippi Bubble 1720, Railway Mania 1840, the Roaring Twenties stock-market bubble that crashed in 1929, and most recently the 2008 GFC. An asset price bubble is now inflating the Dow, NASDAQ, Nikkei and FTSE alarmingly through there is no improvement in underlying companies; another algal bloom. But central banks, desperate to encourage growth, fear to end QE; they see no other way to promote economic activity despite repeated failure. Never ending QE seems a psychological aspect of the emerging New Normal.

Near-zero interest rates: This analysis of QE can be extended to other medications. Nominal interest rates of the dollar, Euro, Yen and Sterling have been hovering just above zero for seven years. When the rate of inflation is less than the nominal interest rate, the real interest rate is negative; you are paying the bank for ‘the privilege’ of keeping your money in an account. Short-term (less than one year) interest rates are set by central banks – loner term 10 year bond yields depend on market activities and cannot be set. The Fed, EU and BoJ have held short-term rates below 1% since the GFC since they are terrified that even a quarter percent rise will crash the economy. Fed chair Janet Yellen is under such pressure that she faints in public!

What’s the logic of near-zero interest rates? The stated objective is to encourage investors to borrow, invest in production, create employment and boost the economy. The unsaid reason is that raising interest rates will crash the stock-market asset bubble. Speculators who borrow to lever asset purchases will find it difficult to service speculative loans if interest rates rise. A downward spiral commences if a few big investors sell since the whole speculative herd follows. The New Normal includes permanent loose money and perpetual low interest rates. Capitalism in the intensive care unit has grabbed Janet Yellen and governors of other great central banks firmly by the short and curlies.

Near-zero interest rates denote slack demand for capital, depressed rates of surplus-value (profit) and sagging reproduction/accumulation to use classical terms, or slow reinvestment and growth if you prefer. These are symptomatic of global capitalism in poor health (except a few industries like digital and mobile communication devices and social media). This long-term growth sag underlies the New Normal.

The devolution crisis: Too much inflation is bad; we don’t want prices rising crazily do we? But did you know that deflation is worse? The ideal seems to be an inflation rate of 2% to 4% per year. There are reasons why moderate inflation is essential for capitalism. Devolution is unfeasible; nobody producing for profit will do so if current production cost exceeds the selling price when going to market. But there is a theoretically more fundamental reason. In a growing economy (capitalism cannot survive without expanding) current investment is recouped in future output and the time the lag may be many years for large investments. Hence the money supply will have to grow faster than the rate at which output grows making modest inflation a necessity of healthy capitalism.

The problem is that since the start of the GFC inflation has been very low (UK, Germany, USA) or negative. All “great” economists pontificated that QE will spur inflation; too much money chasing the same or a falling quantity of goods. In defiance of this logic prices have hardly risen, or in Japan they have on the whole been falling. If inflation is too high central banks can raise interest rates to suck money back into quiescent banks accounts and discourage investors because they spend now but their output comes on stream only later. It is crazy to increase interest rates in a deflationary atmosphere; this is another reason for retaining abnormal near-zero interest rates indefinitely. But keeping near-zero or negative real interest rates in perpetuity is also crazy; again this is the New Normal.

KDThe engorged dollar: Despite America’s monumental debt burden the US dollar is rising in value against all currencies; it is about 30% higher against the Euro, Sterling, Yen and Yuan from what it used to be two years ago. Prima facie this is absurd, loony; another aspect of the New Normal. The reason is that nobody has confidence in the global economy or in the other currencies, hence the flight to the currency of last resort, the dollar – economists are confused why gold and silver prices remain depressed. A consequence is that countries carrying dollar debts face unbearable repayment burdens if calculated in local currencies. The dollar is going up; if dollar interest rates also go up the burden worsens.

Resource and oil price plunge: The prices of primary materials (oil, copper, iron ore, bauxite etc) have fallen by alarming amounts creating crisis in raw materials exporting countries – Venezuela is nearly bankrupt; Brazil and Russia in deep trouble. The global economic slowdown underlies this trend but contraction of the Chinese economy drove the last nail into this coffin of depressed primary materials prices. Hardship in producing countries is another consequence of the New Normal.

The New Normal

Quantitative Easing and near-zero interest rates are an attempt to revive the economy by bastard-Keynesian methods – bastard because Keynes proposed massive public works and employment creation, today central banks pour money into banks and the capitalist “to spur growth”. The experience of the last seven years is that this approach has, in the main, failed. The alternative ‘Austrian Method’ of austerity, welfare cuts and ‘labour market reforms’, results in misery, social upheaval, political revolt and a drift to the left (Greece, Portugal and Spain) or to the fascist right (France). Both approaches have come to a dead-end.

KDFigure 1 reproduces a diagram I sketched five years ago to depict what I thought would be the unfolding of the GFC. The two core concepts are that global capitalism will thrash and struggle at the bottom of a trough for a long time, and second there would be no sustained recovery unlike after business cycle type recessions we read about in textbooks. This I said was a whole different ball game, like the Great Depression, from ordinary recessions. I won’t tell you that you can appreciate this long term sequence by leafing through Volumes 2 & 3 of Kapital because you won’t do it. So let that pass.

I have updated figure 1 to figure 2. The crucial change is the New Normal; a new global economic order that has come to stay and won’t go away. The US for example is on a short upturn but the Wobble-U thesis argues that the asset bubble will burst in a year or two and a sizable downturn follow. The realisation is dawning that global capitalism will not recover in the sense of returning to the pre-2008 norm and certainly not to the heady years of post-WW2 boom. Economists have to overcome the habit of asking “When will this crisis end; when will things get back to normal”; the old-normal is kaput, the order will not return, many leading thinkers say capitalism as we have known it for three centuries is gone. Hmm!

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Latest comments

  • 0
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    IF things the way, Kumar David expexts or wants to, Ro,an Kingdom would have lived for ever, Byzanthian kingdon would have lived for ever, Mesapothemita, Harappa, Ottoman, and there many civilizations that would have lived for ever.

    there are many things they don’t talk about the Capitalism and how it had failed.

    It takes time to understand it.

    Anyway, What ever they say North america is supposed to go through depression for 20 years until it settles even though it is not one like in 1930s.

    On the other hand, Even though china has hit with recession, only about 400 million people have good living conditions, another 600 million are their whose living conditions needed to be higher than where they are now.

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    Best is to erase all debt and start all over again, without the 1% holding onto the 99% of wealth in country competition, so any one country doesn’t get the better of the other.

    If China had done this at first, instead of copying US systems, in a blatant desire to wrench control away from the West, Capitalism would have then come to some decent balance.

    And China went on its merry Capitalist way without inventing anything (as compared to the West…….oil and its purposes, roads, rails, computers……never mind the history of how they used other countries to achieve this…….that’s the way it stands at present).

    China went out of its way to implement the historical Capitalistic system of the West, e.g. skyscrapers that took the West a 100 years to build, all done in 10 years…….not much lateral Indra’s-web-type thinking from the Chinese….just linier dumb. Capitalism in china was implemented without any context, other than for having the look of the West.

    As with Russia, did they do their Communism honorably? No, they forced and tortured their people to uphold the Communist oligarchy.

    Anyway, hope the West has learned its lesson by now, and doesn’t intimidate and annoy other countries by showing superiority.

    Vote for Bernie Sanders…..other countries will follow suit when the US$ achieves a more realistic level. When that debt goes away, countries will start building ground up, within realism (probably, as is hoped current UNP gov, is attempting to achieve at this time). It will be a Socialized Capitalism.

    Either Bernie Sanders or Donald Trump. World needs a magician. If that magician waves his hands (irrespective of political incorrectness that comes from his mouth), all aspiring Capitalistic King-Pins from around the world will pay tithe to the magician (such will be the deal). All will be saved.

  • 0
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    This is Greek to me !.

    • 0
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      Plato,

      Feigning ignorance will not let you get away with not paying your taxes.

  • 0
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    Indeed survival of US headed Imperial -capitalism system has lost of long years of exploitation of man by man that cannot recover for ever. Year 2008 was the turning point that human history has proved that system has gone to the dead end. Not that only US-Obama has magic tools to back to system in play leading role in coming era of Humankind.

    The man like UNP-Ranil.W… is peanut of politics is concern and that compare with Global capitalism. Capitalism can survival but her Global domination has been weaken and power of barging chips become more uncertainties around world by monopoly class position has undermined by newly emerging forces.

    In fact Capitalist political-economy and social system has been extended maxims by their mission in reality that has comes to the last stage years ! It does matter how power is being weaken by people struggle ,or that not mean that the class of monopoly in power at the center of state by Globally will never step down by his own free will. People of democrats in realized that Global economy is not ‘normal’ ,its become abnormal in ever sphere of life in Capitalism.

    Ongoing evaluation of human history by processing ending system that demand for New Socialist System to be replace old moribund capitalism.
    Marxist ideology is only guidance to future society.

    Indeed the Trotskyism of adventurist line of politics will intentionally served for US-Imperialism.

  • 0
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    D.Nimal.

    Your last sentence is a piece of Cheese cake.
    Brevity is the soul of Wit-Hamlet.
    Was Trotsky,a CIA agent?

  • 0
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    Ramona.

    Pl.see my response to D.Nimal.

    If [Thats a big If] I have Rs:One Million in a Bank,and I need to withdraw same in a jiffy,should I pay Rs:20,000 for that exercise?

    Plato,to be frank,has been ignorant on Finance,not being a Ganang Karaya!

    • 0
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      Plato,

      In USA, the maximum amount one can take out of the bank in 24 hours is $500 (about 50,000 LKR). So it sounds about correct, that 2% is charged for taking such a large amount from an ATM in a jiffy! However, Gosl should look into such jiffy deals, and find out if any illegality is involved. Bank fees must be paid, whenever there is a withdrawal of a large sum. It’s general knowledge and acceptance of basic taxing rules in the US, across the board, for rich and poor.

  • 0
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    China Yuwan in SDR basket-IMF ,that its represtaion comes to 10.56% more than Japanes yen in SRD currincies .
    This is great change after 1944 Bretton Wood aggremant came into being .
    Globl Fininacl power balance has slightly change, due to that by China become second world largest Economy.
    UNP of Ranil.W… and Ravi K… still attack China and on that an Investemnts from China.
    They(UNP) proved how are floolisness and pro-US policies served for US,but not for Sri lankan.

    Is that Ranil W… of UNP and his political thinking thank has understood simple facts of ground reality of globl economy?
    David and his political gang of Trostkist and UNP and orthodox political school of gang has to be enlightment by them self, without destroy our National growth and undermined development of sustsnsbility of capitalism….Sri lanka.
    And they blindly followed US and Indain agend by leaaers of UNP-Ranil, CBK and MS President of SL.The MS reading politicics not his own but by advice of UNP s.

    Dr Kumar David is by-products of US political streams. Its working for counter-Revoluation programmed that join had with UNP-headed new-colonial political power game, that is not for ‘good governaces and rule of law’,it goes with lawless land completely give up ongoing democracy in Sri lanka.

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