In response to an FT article by Martin Wolf on 25th October 2016, entitled ‘Sluggish global trade growth is here to stay’
"Is globalisation reversing? No, but it has lost dynamism, notably in the case of trade, the motor of global economic integration for decades. The question, however, is why trade’s growth has fallen. Is it because the world economy has slowed? Is it because of the exhaustion of certain opportunities? Or is it because of protectionism?" - Martin Wolf
Give me a four-letter word that rhymes with ‘sweat’…the FT won’t use the word just ‘yet’…except at times the one named ‘Tett’.
We have financed the tide of globalization with debt – leverage. It worked spectacularly well from the seventies until the turn of this century, especially in the 90s when the ‘casinoisation’ of the banking regulations under Clinton, Rubin and Summers, coupled with the financialisation of the economy by Wall Street, and the magic money tree in the Eccles building…gave birth to the myth of the great moderation. And then something totally predictable happened…the bubble burst…the wounds were papered over, with more debt…the banks were bailed out, with more debt…the zombies were kept afloat, with more debt…and the economy was refloated on a sea of yes you’ve guessed it…more debt.
Unfortunately, however, the marginal productivity of each dollar borrowed has been declining…rapidly. Gone is the time when $1 borrowed could produce $3 more GDP. Now, we are borrowing $3 to produce $1 GDP.
But don’t worry everyone…we have the IMF and the central bankers pretending to be in the economic stability business. The problem is that they’re not in the economic stability business, they’re in the financial perception stability business - and even that is not working any more…it will soon be time to pay the piper, and they know it.
Central Banks have never gotten their heads around the marginal productivity of debt. When it produces a contraction in GDP then the only tool that they have is the thing that is creating the problems – we are in a vicious cycle, being pedaled by academic hamsters that don’t even see the wheel they’re on.
This was inevitable; it was predicted by many outside economic fantasyland, and ignored by those inside. Taleb has referred to the folks inside the bubble as IYI – intellectual yet idiots. He wrote a very good piece on this recently, which readers can find at:
So, speaking personally, I’m not impressed with anything that comes out of the IMF on this subject. They are either in denial, or they just don’t get it. Someone else, who I believe does get this, someone even the Davos and Bilderberg crowd should be able to respect, wrote the following in these pages on September 25th:
"Perhaps we need look no further for the cause of the alarming slowdown in global growth than the insidious effects of easy-money policies. Two vicious circles are at work with a wounded financial system contributing to both. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt.
This explanation contrasts sharply with the hypothesis of a “savings glut”: little more than a tautology for slow demand growth. On the supply side, misallocations slow growth which again leads to monetary easing, more misallocation and still less growth. This explanation seems far more convincing than “secular stagnation” in an era of extraordinary technological advances"
William White – Intellectual, yet not an idiot.