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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