The social contract that has underpinned growth and political stability in the Western world since World War II has broken down. Houses, health care and higher education have become unaffordable to a majority of people, while the burden of unregulated monopolies, globalization and uncontrolled immigration has fallen disproportionately on the lower and middle classes.
Wrapped in political correctness, an increasingly out of touch Western elite continues catering to special interests and fails to grasp the urgency for change. Populist movements harnessing public anger appear unable to propose and implement effective solutions.
The last financial crisis was bad enough. But the next crisis will spread deeper and wider. And yet we stand economically, politically and most of all intellectually unprepared.
This is the story of how we have arrived at the brink of disaster and how we can move away from the win-lose policies of recent decades to restore much-needed balance.START READING →
KILLING US SOFTLY
Good old government money printing, fancily rebranded as Quantitative Easing, became the last decade’s answer to everything. It started appropriately, as a last ditch monetary attempt, a ‘whatever it takes’, to anesthetize us from the 2008 Financial crisis and the impending breakdown of the Euro. The underlying causes were never appropriately dealt with, and Western societies got hooked, as addicts always do. Unlimited liquidity pushed financial markets high and higher. Governments bought their own debt via their money-printing central banks. They lost any sense of fiscal restraint, let alone the will to reform. Self-congratulatory economists and central bankers continued to demonstrate a catastrophic lack of foresight. Content in their renewed prominence, they kept finding new excuse to postpone the “tapering,” that would steer monetary policy back towards a normal state. Covid is just the latest excuse. This time it could lead to a fatal overdose.
The balance sheets of major central banks have grown from from $4 trillion in 2009 to $24 trillion today. During the same period, consumer inflation has barely budged. The newly minted money simply moved from bonds to other financial assets, largely avoiding the ‘real’ economy. In the process, society at large has paid a heavy price, though the costs have been hidden a while.
Obviously, assets valuations have rocketed, and artificial wealth has been handed to the wealthiest. Inequality has reached levels not seen since the French Revolution. This has generated profound social tension that regularly careens, under various pretenses, into violence. The fairness of the market economy has been compromised and popular support for it has consequently declined.
All the money printing has created sky-high valuations, disrupting the normal market-price discovery process. In a well-functioning market system, the price signal lets people allocate resources effectively. Now, prices have little relation to reality, overwhelmed by the liquidity waves of the money printing tsunami.
Signs of misallocation are everywhere. Resources are no longer taken out of underperforming companies to be given to new, promising ones. Creative destruction has been replaced by acute financial sclerosis, with established monopolies, no longer facing potential new entrants, steadily abusing their positions. A quarter of large U.S. corporation are now “zombies”: They do not earn enough to cover the interest on their debt, which now collectively totals over $2 trillion. Bloomberg Quint In Japan, there are days when government bonds are not traded at all. Yet the country carries a record debt load of $8 trillion, about 250 percent of its GDP, but the central Bank of Japan carries the majority of it — up to 90% of some issues — on its own balance sheets. Bloomberg For the first time in history, some of the 10-year debt issued by “Club Med” countries in Southern Europe has carries a negative yield. The Corner Likewise, in mortgages in Scandinavian countries now sometimes come with negative, meaning people get paid to take them out. CNBC
These absurd prices carry a high cost. The massive and prolonged misallocation means that long term productivity growth has been fundamentally compromised. This has been masked by the monetary dopamine of artificial, unsustainable handouts. Without productivity growth, not only will we all be poorer, but there will be no economic wiggle room — no extra surplus — to rebalance inequalities and restore social cohesion. Both political support for the market economy, and the economic growth that creates the support have been compromised at the same time.
Covid has revealed the end game of quantitative easing. The real economy is suffering from simultaneous supply and demand shocks. Lockdowns have exacerbated the deepening divisions in Western societies, bringing them into sharp relief. The response of central banks — to, what else, print more money — has hidden the extent of the economic damage. But government handouts to all cannot hide forever that production has diminished, real wealth has decreased, and many of our companies with outdated business models or unrealistic growth projects, are bound for bankruptcy. QE and asset inflation can only delude us for so long.
It is time to face reality. Financial artifice and money printing are killing us, softly but surely, as drugs always do. We have to go back to market fundamentals. Creative destruction includes destruction. We should embrace economic restructuring and financial correction as mechanisms of better resource allocation. Government intervention in crisis, such as now, should be limited to temporary for poor workers, not permanent subsidies for wealthy investors. In the medium term, it should, whenever possible, involve investment in infrastructure, research and education.
Don’t hold your breath. Our political elites, numb to market discipline thanks to the narcotic of easy money, have lost sight of economics reality. They are unlikely to possess the necessary foresight, let alone the courage. Like the emperor of Constantinople who held forth on the sex of angels on the eve of the sack of the city, they are far more likely to continue to distract themselves and a select audience with trivialities. When push comes to shove, rather than lead, they will abdicate hard choices to “experts,” who will as always safely kick the can down the road, missing the wall now standing right in front of them.
For the time to act is short. Discontent is reaching unsustainable levels. Riots are becoming commonplace. Valuation bubbles from exponential money printing are about to explode, and could easily trigger a run on fiat currency — just look at the growing popularity of crypto- alternatives. The Western model of a market economy is at stake, and the odds do not look good. After all, no great money debasement ever ended well.
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