In response to an FT article by Martin Wolf on 3rd January 2017, entitled 'The risks that threaten global growth’
"What is going to happen to the world economy this year? Much the most plausible answer is that it is going to grow. As I argued in a column published at this time last year, the most astonishing fact about the world economy is that it has grown in every year since the early 1950s. In 2017 it is virtually certain to grow again, possibly faster than in 2016, as Gavyn Davies has argued persuasively. So what might go wrong?..." - Martin Wolf
(I recommend you read the rest of the article)
This is a good breakdown of specific risks. However, whether these manifest in 2017, we face the systemic risk of a debt saturated economy that requires exponential credit growth to 'expand', and low interest rates to avert a ‘liquidation’ event – risk which is not being addressed by the tools currently being used.
The economy is not an equilibrium machine, and is not controllable with the Phillips curve, or the other ‘rational’ models that have dominated economic thought for three decades. Economies are complex dynamic systems, which are better understood through the tools of complexity theory and behavioural psychology. However ‘clever’ the dominant theories are, they do not resemble the real world of people, resources, and relationships, even in the slightest.
These misleading theories inevitably form the basis for debate. The arguments that subsequently play out are therefore centred on macroeconomic questions like the correct level for interest rates, fiscal stimulus, and taxation. The preoccupation with these factors disguises the underlying danger, the ‘elephant in the room’ so to speak – systemic risk. This pachyderm has been ignored for so long that it now resembles an enormous rhinoceros – shorter-sighted, more belligerent, with zero ability to differentiate ‘friend’ from ‘foe’. In summary: a beast much more likely to wreak havoc than the comparatively mild-mannered elephant. Meanwhile policymakers continue to blunder about, some in blissful ignorance; the majority, I suspect, in increasingly tortured denial.
To be clear: more or less spending and/or more or less taxation will not address systemic dangers. So what can we do to address this? Here are a number of suggestions:
1. Reinstate Glass-Steagall - put a wall between deposits and all forms of investment banking and speculation
2. Ban many of the derivatives, which are little more than side-bets that serve no societal function
3. Break up the big banks – complete the job that the financial crisis started before Bernanke and Paulson panicked and threw Main Street under the bus in order to save Wall Street
4. Having done 1 to 3, scrap the micro-management regulations, which were created in a foolish attempt to replace ‘consequences’ with ‘policing’. If you get the consequential framework right, you do not need the ‘control-freakery’. The paradigm needs to be: “If you go down, you go down - no more bailouts, no more moral hazard”
5. Abolish the Federal Reserve. Replace it with an organisation that reflects the Fed’s original mandate – a lender of last resort to deposit banks only - against sound commercial paper. No more manipulation of the short end of the curve. No more back-door monetisation of sovereign debt. The new organisation should be ‘owned’ by the people, and should be answerable to Congress – not the banks
6. Close all the revolving doors and ‘sweeteners’ that exist between the regulators and the banks (do the same with the Pentagon and the ‘defence’ industry)
7. Introduce term limits – abolish jobs for life
8. Reform gerrymandered boundaries
9. Clean up campaign finance
10. Restructure the debt. Return to mark-to-market
11. Reform the global monetary system. It is ultimately a curse to use a national currency as the basis for global reserves. A new global reserve is inevitable - the question is when. It will be created using a basket of currencies and possibly commodities. I believe the process should be overseen by a new ‘fair witness’ chosen by the G20, rather than the IMF, which is a highly political organisation with a track record of shady deals and ‘looking the other way’ whilst others do shady deals
12. We need an honest debate on how governments raise money in the debt markets. This is the mechanism through which the can is kicked down the road, and all sorts of problems are created ‘in the dark’. Here are some questions to consider:
(i) Why do we allow governments to mortgage our children’s future by issuing debt that will never be paid back, and making promises that will never be kept?
(ii) Why do we allow them to disguise insolvency through the mechanisms of financial repression and inflation?
(iii) Why do we allow governments to print whatever they need in order to facilitate the deceit at (i) and (ii), whilst simultaneously employing increasingly aggressive taxation, regulation and now confiscation policies against the citizens whose productivity is the only thing that gives the Ponzi scheme its facade of validity?
In sum, why are the wealth generators paying tribute to the state and the banking system? The tail is wagging the dog, and has been for a long time. We need to re-establish reality - wealth is generated by entrepreneurs, businesses, and employees who serve paying customers…not by any state or super-state and not by the banks. Government is a custodian not a generator, and banks are enablers, or should be – these groups should always be servants, not the master.
The existing paradigm is being challenged by market forces…but it needs to be challenged in open debate. I believe the shift we need is from: Government - ‘this is how much we’ll allow you to keep’…to: Citizenry - ‘this is how much we will allow you to print for expenditures agreed with us…no off-balance sheet subterfuge’
However…I do not believe the reforms at 1-11 will happen, nor will the questions at 12 be debated…until a crisis forces the issue. Why not?
a) We lack politicians, academics and journalists with the integrity and courage to put their careers on the line and say ‘enough’ – i.e. to face rejection from electorates who’ve been fed on false promises, and derision from colleagues blinded by hubris
b) There would be a backlash from powerful vested interests that like things the way they are: the banks, which would no longer call the shots on Capitol Hill; the ‘defence’ industry that feeds on the ‘war machine’; corporations that would no longer be able to frame their own laws & write their own regulations; and finally from the ‘intelligentsia’, the media & their corporatist owners - who are the loudest cheerleaders and apologists for the status quo
Do I believe that President Donald Trump will pursue these reforms? No, I do not. Would Hillary Clinton have done any of them? Not a chance in hell.
What I believe is that the systemic forces that central banks have been trying to suppress will eventually erupt through a sovereign debt crisis, which will manifest in the emerging markets or Europe. Capital will flee from bond markets to blue-chip stocks, the dollar and hard assets…this will create more economic distress than any of us have ever witnessed. When it becomes clear that it is ‘game over’ for the current system, the G20 will convene a ‘New Bretton Woods’.
The choice, if we still have one, is this: We continue pretending that we can kick the can down the road indefinitely…until we collapse…and when the dust settles, ask ourselves: ‘how could we ever have been so stupid?’…Or…we tackle the fundamentals, and we do it now.