21 Jan 2016

The great global slowdown: what’s next?

If you have a pension, or a string of ISAs, then you are watching – for the second time in a decade – your wealth destroyed. European stock markets are now 20 per cent off their peak in the middle of last year.

If you look at a long-term chart of the FTSE 100’s value, you can see how the rise of global finance turned capitalism into a lottery.


The long ramp of steadily rising wealth, reflecting the real performance of the UK’s biggest companies, is replaced in the 1990s by three mountainous peaks.

I’ve reported on companies, markets and economics throughout that entire time, and every day, during the upsurge of the stock market bubble, I’ve been bombarded with PR messages and quite scholarly economics claiming the same thing: “this time it’s real”.

But it never is. The three peaks, to an economic historian, have a very clear cause: the repeated decision by central banks to respond to economic slowdowns with a policy of cheap money.

But don’t let the apparent symmetry of the peaks fool you. This pattern of boom and bust is progressively destructive. The first peak destroyed the company pension system, whereby skilled workers and the salariat could expect to retire on around 2/3 their final salary.

The second peak destroyed the global banking system, hiked government debts to levels usually seen at the end of world wars and left the entire global economy on life support.

The third downturn is happening because the effectiveness of that life support is running out.

We dug ourselves out of the 2008 abyss, where people, companies and governments were looking at bankruptcy, with three forms of life support.

First, quantitative easing. China, USA, Britain, Japan and – after a 5 year delay caused by German resistance – the Eurozone have created a total of $12 trillion of money that did not previously exist. That turned investing into a one way bet and revived the price of everything on earth except wages.

Second, “emerging market growth”: China’s ability to stimulate its own economy, using state spending and cheap loans to consumers, also stimulated the rest of the developing world – hiking the price of food and raw materials and energy, called “commodities” in economics – and thus boosting the whole of the global south economy.

Third, we used “extend and pretend” tactics with banking and state finance: Greece is bankrupt? Bailout and impose austerity. When that makes it bankrupt some more, impose more austerity and give another bailout. States assumed the debts of banks. Trillions of dollars worth of loans that were not going to be repaid – so called “non-performing loans” were simply rolled over. Debts carried on rising. Since 2008 families, companies and governments have borrowed $57 trillion more than they had already borrowed.

The problem is, the kind of recovery you get like this is not a “normal” one. It’s real: real bridges get built, real talktime gets bought, real jobs – albeit a lot of low paid ones – get created. But it’s not sustainable.

A sustainable recovery would see debt written off or paid back, wages rise, productivity rise. Economies would re-balance. Austerity would come to an end. But none of this has happened.

And this third boom-bust cycle has turned at a moment where the global situation has become very worrying. At an investment conference I attended this week, delegates discussed: the possibility of a war between NATO and Russia, the possibility of state collapse in the Middle East (with Syria and Iraq and Afghanistan already partially collapsed), the possibility that the EU breaks up under the pressure of the next million refugees.

None of these things were possibilities in 2008. And we there’s another factor present now that was not present then. I remember during 2008/9 numerous discussions – with broadcasting bosses, politicians, economists – along the lines of: “why is there no unrest”? After the Occupy movement, the Arab Spring, the Turkish, Brazilian and Ukraine mass movements, nobody will be asking that this time.

Bear markets, fundamentally, are millions of middle class and a few tens of thousands of rich people, saying to themselves: the world is too risky for my money to be in the riskiest (and most profitable) form of investment. Better to move the money somewhere safe. Yet, after three boom-bust cycles in 15 years, the search for safety gets harder every time.

What’s turned the psychology down this time is the understanding that the China story of the past 15 years is essentially over, and doubts over the way the Chinese Communist Party will react to that.

The story of China’s transition towards becoming the largest economy in the world was – and still may be – an amazing one. Many people have always doubted the full extent of Chinese growth statistics, but it didn’t matter. China was growing, and if it slowed down the government had trillions of dollars of reserves to throw at the problem: it could order the banks to lend, it could order bridges to be built, and it was the only government on earth that faced no problems whatsoever with social unrest, and a totally unfree internet.

Now those who try to measure the real Chinese economy are very worried: official growth is down to 6.9 per cent. Beijing denies that numbers are being inflated, but some estimate that real growth may be as little as 2/3 of that and that it could go on falling because even as the Communist bureaucracy orders the stock market to stop falling, in a semi-market economy you cannot order businesses to make a profit, or consumers to go on spending. You can build new bridges, but you cannot order traffic to drive across them.

With the dollar rising, and China’s currency pegged to it, money is flowing out of China and – despite spending half a trillion of its reserves – the Communist Canutes of Beijing can’t stop that either.

Ultimately all the BRICs – China, India, Brazil etc – are running into the so-called “middle income trap”: the inability of countries on a journey from agriculture to modern industry and services to break through into developed-world status, because they lack the institutions to eradicate corruption, vested interests and other roadblocks to development, like the lack of a welfare state or slave labour conditions in factories.

A lot of people now expect China to significantly devalue its currency. Those who don’t have a very logical reason: it would signal the end of the Chinese project to modernise its economy. Without devaluing, China is trapped in a world of slowing growth and financial chaos.

A lot of people on social media are asking: what should governments do? And that’s partly the problem: there are things individual governments and central banks can do. China can devalue, America can inflate away its debt a little, the Eurozone can print more money and target it better, Germany can abandon its “black zero” policy (it will have to anyway because of the refugee crisis).

What we’re not seeing this time is the kind of co-ordinated political action of the kind Gordon Brown attempted at the G20 in London in September 2009. All national politicians are now looking over their shoulders to threats at home: Merkel to Pegida, the centrist politicians in the US to Bernie Sanders and Donald Trump, Hollande to the Front National.

And investors read the newspapers. They can sense the different atmosphere, the exhaustion of the political cycle in the USA and Germany, and that too is different to 2008.

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33 reader comments

  1. John King says:

    On a practical level, for somebody in the UK who has been saving hard since 2008 to attempt to escape the rental market (rent is 50% of my salary) via the purchasing a house with a mortgage, what guidance is there?

    I have not yet reached the £75K government protected savings limit and my cash is split between a bank and a building society.

    I would hate it if being shafted over the last six years by Osbourne’s artificial inflation of the housing market, keeping the bottom rung of the ladder completely out of my reach, I was then shafted again if he took all my savings away.

  2. Boffy says:

    Except it never was real wealth. It was only fictitious capital, and, in fact, the expansion of that fictitious wealth, by draining potential money-capital from being invested in real wealth producing productive-capital, has caused the growth of real wealth to be sluggish, and has caused a deflation of commodity prices, as the other side of the massive rise in asset prices.

    It is just as deluded to think that you have become wealthy because share prices or bond prices have bubbled up, as it is to think you have become wealthier because your house has a higher price due to a house price bubble. The latter delusion becomes apparent when you come to buy another equivalent house. It is even more apparent for those who come to move up the housing ladder, and who find that although their £100,000 house is now a £200,000 house, the £200,000 house they wanted to buy is now a £400,000 house, leaving them not £100,000 better off, but £100,000 worse off!

    Nor is the fall in stock and bond markets bad news for those with pensions. Pensions are paid out of the revenues produced by stock and bonds not from the capital gains. Indeed pension funds have to keep adding to the stock of bonds and shares they hold so as to generate those future revenues out of which future pensions are paid. A pension fund that tried to pay pensions by continually selling the stock of bonds and shares it held would soon go bust, because it would have no stock of assets from which to generate those revenues.

    But, the hyper inflation of asset prices over the last thirty years has meant that it has become more and more expensive to buy those shares and bonds, which is why the yields on those assets have continually fallen. To compensate, workers and employers needed to make larger contribution so that they could continue to buy the same quantity of bonds and shares, and thereby obtain the same amount of revenue. But, that would have meant huge rises in wages so as to make those additional contributions. Instead, wages fell or remained stagnant, and so over that period we have had massive black holes in pension schemes developed, because of inadequate contributions. Had wages risen to compensate for those additional costs of providing pensions – and the same is true about the rise in the costs of shelter, due to the bubble in house prices – then the real extent of inflation would have been apparent, and profits would have been much lower.

    Much lower bond and share prices now means that workers contributions into their pension funds will buy more bonds and shares, so that the revenues obtained will rise, making the ability pay pensions greater. The falls in share prices, are a reflection of rising global interest rates, despite all the liquidity being pumped in by central banks, and their futile attempts to dictate the price of money-capital. That also means there will be a corresponding fall in other asset prices such as land and property, which is equally great news for anyone wanting to buy or rent a house, or for anyone wanting to move up the housing ladder, because it means their money will go further.

    The destruction of these bubbles represents not a loss, but a significant increase in real wealth.

  3. Matthias Mazur says:

    Great Read, Paul, love your articles and economics shows on Ch4.

  4. Kay Carson says:

    The first peak destroyed the company pension system, whereby skilled workers and the salariat could expect to retire on around 2/3 their final salary. The second peak destroyed the global banking system, hiked government debts to levels usually seen at the end of world wars and left the entire global economy on life support.

    Thank you for pointing to the real and permanent destruction of social and economic systems created for the welfare of society but exploited for private gain: pension systems, banking that supports exchange and productive investment – currently the NHS in the UK. This destruction is not an inevitable misfortune it is the direct result of decisions and choices made by foolish governments and wreckless business leaders – I wonder whether they are reading this in Davos.

  5. Some tw@t says:

    Debt jubilee and/or corbyns peoples quantitative easing?

  6. colin payne says:

    My wife is a follower of Paul Mason on Twitter. “Read this article”, she said. I think Paul has highlighted the basic problems with the world slowdown, and some would say fatal collapse of the world trade and monetary system. The causes are multifaceted, and each component on its own has reached an unsustainable and unstable crisis point. Some of us are waiting for the inevitable implosion, where life will not be the same as it was, with chaos and anarchy ensuing. One can summarize the causes in terms of morality: individual and corporate greed; dishonest over-valuation of assets; inept governments failing to fairly regulate individuals and businesses; banks and financial institutions promoting debt based economies to the obscene level of deliberately creating ‘non-performing loans’ as Paul mentioned. There is little substance in many of the world’s assets; they are not real and tangible, but ‘money creating more money’ devices! I am a pensioner with finite saved resources, and I expect to be hurt, as I was before in 2008 from stock market losses, and from the subsequent debasement of the coinage (quantitative easing & devaluation)

  7. Mark Burkes says:

    There’s an awful lot wrong with our system and most of it can be placed at the foot of nonsensical Keynesian economics, idiotic governments and greedy market makers and traders. However, isn’t a large part of the reason that there are 3 huge lumps in the growth chart referred to just a result of faster electronic trading leading to faster bubbles ?

    I notice the median growth between 1990 and today’s base is about the same as it was for the previous half century…?

    I’m no friend of the banker but it was Brown and Darling that unconditionally bailed out our banks. Last time I checked they were soocialist meddlers of the first degree. So I don’t see a solution on that political horizon.

    1. Dave C says:

      “…most of it can be placed at the foot of nonsensical Keynesian economics”

      From the early ’80s, Keynes was replaced by Thatcherite,Reaganite + monetary policy good, fiscal policy bad + drip down + deregulation (especially banking) + ‘free’ markets + government budget surpluses always good, political economy. Generally referred to as NEO-LIBERALISM. Absolutely nothing to do with Keynes.

      During the Keynesian post-war period (up to the late ’70s) living standards rose for everybody, hundreds of thousands of houses were built annually by both Labour & Conservative governments.

      No doubt you believe that is was Labour (& Keynes) who caused the worldwide crash – nothing to do with those hard-working, tax-avoiding, money-laundering, money transferring investment bankers.

  8. Johnnydub says:

    Well there’s a whopper of a fib early in this article so I didn’t go any further.

    The end of defined benefit pension schemes was down to demographics. You can’t work for 30 years and then expect a 2/3 pension for another 30 years, at least not without huge increases in contribution’s.

    It’s why public sector strikes get so little sympathy from private sector workers. It has been estimated that a fireman’s pension would require 66% of salary to be paid as contribution’s in a private sector scheme.

  9. Razi Muhammad says:

    This is just a reflection of the larger problem. The gross social injustice in the world that has become a global village. The powerful countries, institutions and people decide for the entire world without allowing the marginalised people into decision making. United Nations has become a puppet of super powers and cannot get all the stockholders sit on the same tables. Governments of Israel, Saudi Arabia and Turkey now have become a burden to the proponents of the new world order. Only solution is the replacement of the current unjust system with a system that delivers justice to the marginalised world. The question is, do we have what it demands for this change.

  10. drrayjo says:

    What’s your bet on what comes next?

    A novel G20 pact?
    More fudge?
    Debt right offs all the way to the horizon?
    War and reconstruction?
    A.N Other?

  11. Lynn Jean says:

    I don’t doubt that the information you’re giving us in this article is legitimate; however, I’d like an explanation of the exaggeration of the graph. Why are the 5-year columns not all the same for the whole 30-year period?

  12. Pete dodwell says:

    Great article but annoyingly overdramatising the graph by compressing time during the booms. Can the point not be made without cheap tricks.

  13. Ash says:

    X axis on that graph has been heavily manipulated and is not linear. Why should I believe this blog when it pulls tricks like that?

  14. Lorcan Coyle says:

    Interesting how the axis shifts so later 5 year periods are much more compressed – fiddling with the chart to make a point?

  15. eddie says:

    HUH?! The last time we had “institutions to eradicate corruption, vested interests…” they called it a revolution.

  16. Steven Smith says:

    This chart is so skewed. Why is the 10 year “long ramp” 200% wider than 20 years of “peaks”? Your points are viable but the exaggerated chart is a distraction.

  17. Emmet says:

    There is one thing that national governments could do.
    They could make their tax systems fair and implement a Citizens’ Income policy that would put spending decisions in the hands of the poorest half of the electorate. As these are the people who require many necessities that they have previously been unable to afford they would spend this money. That would create economic growth. A well-constituted Citizens’ Income policy (one that paid a rebate on wages) would also raise productivity – the bugbear of all `advanced’ economies – and combat global warming. As it would also combat all social ills it would be a situation in which absolutely everyone would win. All it requires is to tell the superrich and the masters of the universe to wake from their reverie and find a socially useful role for themselves.

  18. Alexei Garan says:

    Austrian economists and libertarians have been pointing this out correctly since before the Great Depression and loudly predicting the 3 busted stock bubbles above. The last century is defined by the World obsession with what governments can do (not much) and so under a convenient and false Keynesian and neo-Keynesian guises, the story since 1900’s has been loose credit, malinvestment, overcapacity, bust, re-inflation and so on till now when the credit gun has no more bullets.

    Meanwhile, it is markets and individual entrepreneurs that are dragging Asia and Africa out of poverty and this has been true in Developed Economies too, but this organic entrepreneurial force has been saddled with more and more debt, tax, redistribution hence the recoveries are non-existent. So governments and those on their teats (e.g. Banks, pharma etc) everywhere must be rolled back let fail so the burdensome rubble is lightened for the people who will then know best what to do.

    This is plain as day to those that have not bought into socialism/keynesianism/statism addiction. And it explains the big events, which are not black swans – subprime, Greece, Brexit, China crash, lack of stock market liquidity and many other trends and events.

  19. Steven Blake mba says:

    Forgive me for asking but how can the whole world owe money and to whom (aliens?). We also owe more money than exists. Firstly it proves that bankers and stocks and shares are not a viable method of controlling finances and they contribute nothing to society. Secondly it proves that politicians should not be in charge of anything. Thirdly the Federal and state Banks should be precisely that, not in private ownership. And as an answer to the problem: all countries at the same time announce they will not pay their debts and they are written off. We must only owe a handful of people who are already wealthy, what are they going to do?

    Hows about a world currency, a universal wage paid to everyone, no benefit system, Taxes at 20% of earning above the universal wage. A flat rate of tax on businesses at 20% of turnover in that country. An 80% Tax on carbon fuels that is ring fenced and spent on renewables no VAT or other taxes. No money spent on wars, clean water made a priority for all people. Stocks and shares and trading on futures to be divorced from the financial system and to come under gambling legislation. A fair planet for everyone and they can live where ever they like as there will be no financial incentive to move!

  20. Joe Public says:

    You wrote
    Now those who try to measure the real Chinese economy are very worried: official growth is down to 6.9 per cent. Beijing denies that numbers are being inflated, but some estimate that real growth may be as little as 2/3 of that and that it could go on falling because even as the Communist bureaucracy orders the stock market to stop falling, in a semi-market economy you cannot order businesses to make a profit, or consumers to go on spending. You can build new bridges, but you cannot order traffic to drive across them. –
    surely traffic will want to find a bridge to shorten their journeys that seems a throw away remark

  21. Sean Ellis says:

    But this is three large boom/bust peaks on top of the continuing steady rise. It’s not a destruction of wealth at all.

  22. Carole says:

    This is a grim but, I think essentially accurate analysis.

    We have, since the 1950s been conditioned to believe in the myth of everlasting prosperity, continual economic growth and progress but we are now seeing it begin to evaporate. The next few decades will become tougher as time goes by because our political and financial institutions are a product of the myth and are welded to it.

    Globalisation has benefited the huge transnational corporations but now, as prosperity and growth falter, even those corporations will suffer. If consumerism struggles, and it will once people really feel the pinch, then what happens to everlasting growth based upon consumer demand?

    As climate change begins to play a bigger role in world affairs, and it will, regardless of any arguments over its cause, we will see more and more conflict over resources and more and more refugees and economic migration.

    We need leaders with vision, but all we have is petty nationalism, Poujadist demagoguery and a rising tide of authoritarianism and intolerance.

    I am not sure that we are properly equipped to deal with the many-headed problems we are facing in the 21st century.

  23. john says:

    Brilliant. A pity so few of the current commentators are capable of such clarity. And an understanding of Economic History for that matter.

  24. Andrew Dundas says:

    Just to correct your observation about ‘destroyed your pension’.
    It was Chancellor Nigel Lawson who ‘destroyed’ your pension by requiring company pensions to allow employees leaving their schemes to take an actuarially assessed sum into their future employer’s scheme or into a ‘personal pension’ fund.
    Before then, early leavers lost the value of any employer’s pension contributions. It was a way of penalising leavers and was disgraceful.
    But company superannuation funds were only viable if early leavers’ contributions were forfeit. Retirees gained but everyone else lost out. [including me!]
    It’s amazing that it took a decade for company schemes to realise that their pension schemes were simply uneconomic. But that’s what they were. For years, funds had been propped up by rising stock market valuations that hid the real cost of the employers’ contributions. That, and the changes to pension regulations that abolished equity investment strategies.

  25. NeilT says:

    PaulM Says:

    The three peaks, to an economic historian, have a very clear cause: the repeated decision by central banks to respond to economic slowdowns with a policy of cheap money.

    Sure, that dominance of monetary policy plus the absence of a coherent fiscal policy by Europe, the design of the euro and the conservative neo-liberal ideology that drives this chaos both in Europe and the US.

  26. Andrew Dundas says:

    I wonder what proportion of stocks were sold during these recent mark-downs in their offer prices?

    And I also wonder how much cash is being held back, pro tem?

  27. Carl Lee says:

    Sharp as always Paul but I remember you being doubtful on your 2008 trip across China for BBC Newsnight (I have used in teaching for years now) that then China could negoiate its way out of the crisis. It did, or at least kept the show on the road for another decade. Key issue is that Chinese growth rates have to fall because they are growing a much larger economy(its just maths 4% of a very big figure is greater in absolute terms than 10% of a much smaller figure – if they were rattling along at 9% + for another decade we’d have an ecological crisis not a financial one. Tell us about steady state economics and what a world can look like without being tied to wealth creation based of R>C and the constant exhortation for more.

  28. Robert Menzies says:

    So, apart from that, what is the good news ?

  29. David Taylor says:

    Absolutely spot on, Paul – as usual. This is going to be a fascinating century: it will beat the 20th (a hard act to follow) for sheer unbelievability and human folly.

    What’s more worrying right now is the lack of responses to this article decrying it as rubbish. Have we reached peak comment?

  30. Frank nugent says:

    Alway on the ball thanka

  31. Boffy says:

    @ Johnny Dub

    “The end of defined benefit pension schemes was down to demographics. You can’t work for 30 years and then expect a 2/3 pension for another 30 years, at least not without huge increases in contribution’s.”

    Really? Its a wonder then that we are not all still living in caves, and wearing animal skins, as the rise in labour productivity failed to bring any increase in total production and living standards! As productivity rises, the proportion of the labour performed by each worker, every minute of the day, required to meet their needs both now and in the future declines, or put another way, the proportion of the labour performed by all workers during their whole working life, required to produce all of the commodities they require for the whole of their biological life, continually declines. Yes, a rise in the biological life affects that, but not by anything like the continual rise in productivity that takes place.

    Rather than making larger contributions to cover a longer biological lifespan, or having to work longer, the rise in productivity has been so phenomenal since Old Age Pensions were introduced at the start of the last century, that it ought to be quite possible for workers to be currently retiring at 50!

  32. anon says:

    answer -action to stop it; now imminent

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