The World in crisis and the cyclicality of history

Looking at the world there are many reasons to be optimistic. No war between the major powers has occurred for several decades. Global economic growth has raised the quality of living for millions of people, meanwhile major scientific discoveries continue to advance human understanding of our world. Furthermore, modern technology continues to enhance human productivity and with advances in modern telecommunications, global inter-connectivity is at an all time high.

Or so the optimists of the early 1900’s thought.

For individuals like President Truman and Sir Norman Angell, the famous British Labour MP, the world before 1914 had reached a new level of civilisation. The continuing advances of modern technology alongside a seemingly growing global endorsement of liberalism and democracy, would slowly convert the world and its citizens, and in so doing, consign war and global poverty into oblivion.

If all of this sounds oddly familiar, it should. Just as in the early 20th century the men of the hour trumpeted the success of mankind, so too do the modern heroes of the early 21st century. In the same tradition that Norman Angel followed, when he wrote his famous book “The Great Illusion”, arguing that war was rendered essentially impossible because of global integration, the 21st century has its own optimists. Whether it be Lawrence Summers recent piece, “The case for Global Optimism” or Steven Pinker’s work on declining violence, the optimists are out in force. Moreover, so are the idealists.

From Mark Zuckerberg to Jeff Bezos, Tim Cook, Elon Musk, Jack Ma and many more, the future appears bright and full of promise. Except they are wrong, all wrong. And the biggest problem is that no-one seems to have realised it.

Across the OECD, household, private and government debt is high, with weak economic growth across all the major economies. In China, despite unprecedented economic stimulus, the economy is rapidly decelerating. Climate change and high birth rates across the world’s poorest nations continue to drive increasing numbers of people to migrate from their homes, many travelling thousands of miles in search of a new life. Thus as the global economic engine groans and as new migrants seek the opportunity of a better life in the worlds more developed economies, a resurgence of nationalism, often coupled with xenophobia and racism is spreading.

But that is not all. Global fear and insecurity, economic weakness and popular anxiety are a breading ground for nations with a penchant for making their country great again. These leaders believe in cultural exceptionalism, they focus on the global balance of power and they view the world as a zero sum game. Moreover, such leaders are not confined to the developing world, and as time continues, their message is gaining traction globally.

But what is driving all of these issues? What is the problem?

Many would suggest that the world is facing a crisis of global economic demand. A slump in commodity prices, combined with nearly three consecutive years of stagnant or falling prices for manufactured goods, is threatening global growth, so the argument goes. Thus follows the inevitable argument of trade restrictions v.s. trade imbalances. To simplify the points, the debate circulates around whether the only way to improve the demand for a countries domestic goods is to introduce protectionist trade measures, or whether countries with “excess” levels of savings and large trade surpluses should be forced to spend more, thus allowing other nations with large trade and savings deficits to catch up. Such is the debate over China within the USA today. But the debate misses the core issue. While the US and China may fight over the issue of trade imbalances, the problem facing the world economy is much more simple:

The world is facing a crisis of inequality.

The World Bank and Asian Development Bank speak of the worlds’ success in reducing global poverty by 950 million people and thus achieving the Millennium Development Goals. But this figure hides all manner of sins. True, the number of people living on $1.90 a day has fallen by 950 million between 1990 and 2015, but if we move to $3.10 a day benchmark, then the poverty rate still stands at 35% of the world. More simply, the actual number of people in extreme poverty today, Paul Collier’s “Bottom Billion”, has not changed in over 20 years.

P1070774I need not re-hash the work of Thomas Piketty on inequality in the western world, or dwell a huge amount further on the fact that 400 americans are worth more than the remaining 50% of the country put together. Nor do I need to dwell on the estimated $21-32 trillion sitting in offshore tax havens by multinational companies and high net worth individuals. Rather, I want to explain why this inequality, if it isn’t tackled, is going to break the whole global system as we know it. And that is the biggest problem.

It is an old tenant of classical Keynesian economic, that as incomes rise, an individuals desire to save a proportion of their income will increase. While this sounds sensible, the reality has long been considered problematic. If those who are wealthier save an increasingly larger portion of their income than they spend, then global demand for goods will get relatively weaker as this proportion of people get richer. If demand does not grow as fast as income, the economy ends up with a large surplus of funds. But while this was a cause of great concern for classical economists, in the early half of the century this fear was alleviated through the work of Simon Kuznets. Kuznets demonstrated that as technology continued to develop, new demand would be created for new products, meanwhile an expansion government spending would also occur, thus collectively helping to offset a fall in demand. Thus with this discovery, economists relaxed and the fear of a global collapse in aggregate demand was averted.

Only, the essential questions were never truly explored: How would private demand for goods rise without a fall in savings? And how would government demand for goods offset a fall without absorbing the excess savings?

The answer, perhaps predictably, was debt.

The most revolutionary concepts in the global economy since the Peace of Westphalia in 1648 have been the creation of new means to raise money. Whether they be in the form of bonds, equity, derivative contracts and so on, finding new ways to help stimulate consumption has been the cornerstone of continuing economic growth. However, when analysing the power dynamics of debt, the one party that will always be better positioned is the party that has the capital. If you want evidence of this, I would advise looking at Greece’s position or that of Argentina.

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It is self evident that the use of debt allows people, who need to consume goods, to consume beyond their means whilst also allowing governments to spend beyond their tax base. In both cases, this can be sustainable, as long as the economy grows and the interest on the debt remains affordable. But what happens when people can no longer pay for the debt and perhaps even worse, what happens when there is no-one who wants to take on more debt?

Thus the crisis in the world today is not a crisis of demand, a crisis of leadership or a failure of free trade. The crisis today is that too much capital is held in the hands of too few people and organisations, who do not see sufficient opportunities to earn long term returns on their money through making investments in the real economy. If you want to understand why billions is being spent on über, amazon, facebook, airbnb, twitter, tesla, virgin galactic, whatsapp or any of the other global technology giants, it is because the worlds largest investors don’t see demand growing anywhere else. Moreover, demand growth is so weak in the real economy (i.e. commodities, manufacturing, agriculture, etc), that 100’s of billions is being invested in companies that have never made a profit, and by some forecasts may never make a profit.

Bubbles in technology, bubbles in real estate, stagnant, excess global production capacity and global unemployment (and underemployment), spell one thing: deflation. The sirens call of every major financial crisis is deflation. It is here in Europe and soon to be in the US as well. Speculative bubbles, deflation and currency crises are the hallmarks of the world’s largest recessions, but this time the central banks have no more levers and the governments have no more capacity to borrow.

In short, the world is standing on the edge of what may be the largest precipice in world economic history since the great depression. And on current trajectories, with current policies, there is nothing to stop it.

I need not elaborate on what a global economic crisis, greater than 2007-2010, would mean for the world at large. But a few points are worth mentioning. Firstly expect famines on a scale unheard of in history, as subsidies to the third world for food and agriculture collapse. Secondly expect mass unemployment, as countries fail to agree on how to reform the global economic system and protectionist trade measures return with a vengeance. Thirdly, expect a global uptick in violence. Whether from desperate authoritarian regimes, seeking to desperately shore up their legitimacy or from non-state actors capitalising on new power vacuums, the era of violence is near our doorstep. Above all, expect migration on a scale never seen in human history.

But is there another way? Is there a way to fix this economic system and to escape from this collapse into crisis?

Maybe there is….but will we be brave enough, and are we capable enough to make it happen?

The world’s demands have never been greater. Across developing and developed nations there are sufficient projects and investments that could absorb the worlds available capital many times over. The problem is that the capital needs to be channelled. Wealth that is hidden offshore must be repatriated and taxed. The financial services sector must become transparent so that corruption can be mitigated to the greatest degree imaginable. Leaders in business and politics must realise that facilitating corrupt behaviour is never an acceptable price and that any short term gains that may be won by accommodating “gangster capitalists” are illusory. In this role, the general public must vote for parties who really push these issues and they must exercise their influence over their pension providers who sit at company boards.

In the longer term the world needs to realise that we will not resolve our problems when we assume that one person is different to another. Yes, people may have different values and beliefs. Yes people may wish for a different world to the one that you want and yes, the western world as we know it, human rights and all, may never become truly universal in the way we hoped they would. But inequality is the poison in our global system which breads fear, insecurity, anger and resentment. If we do not deal with it now, we will be fighting the challenge for the remainder of our lifetimes.

This is our future. If we do not act now and put pressure on our leaders across the world to tackle inequality, then our system will fracture and collapse. One only needs to read the horrors of the early world wars or the great depression to realise that there in no price to high to avoid that fate.

This is our world. And we have to be the one’s who change it.

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