Now that the economy is heading south, worries are being increasingly expressed about the great unwinding, and one sees increasingly frantic attempts to rewrite the economic history of the past few years.
On the eve of the famous Black Friday, one of, or the busiest shopping day in the year, I'd like to point out a column written in the Financial Times, Europe's main English language business paper, which attempts to spin current worries about the economy on a grand scale. As the author, John Plender, explicitly writes about the "Anglo economies", I feel it is appropriate to incorporate that in my "Anglo Disease" series (see the links at the bottom for earlier instalments).
Note: the column linked to above is by Martin Wolf (the FT's chief economic editor) and is not the one I will comment below. It mostly notes that the US should expect a long period of lower than average growth (which, he states, may be worse than a sharp but short recession), and that overall growth will depend on the ability of other countries to boost their internal demand, a fairly uncontroversial statement. That column is interesting for the graphs it carries, and which show the size of the Great Loot I will discuss below, and which can be seen here.
So let's have a look at John Plender's column, The pitfalls of financial globalisation grow clearer, which was pointed out to me by Migeru over at the European Tribune.
Conventional wisdom has it that globalisation and the spread of deregulation have been an economic boon for the English-speaking countries. Having run down their manufacturing as a percentage of gross domestic product in the 1980s and 1990s, the US and the UK have been less vulnerable to Chinese competition in this cycle than the big economies of continental Europe. And with disproportionately large financial sectors, these two countries have also enjoyed a financial windfall from the rise of China and other emerging markets.
A first note: globalisation and deregulation are presented as exogenous factors that we all have to live with, and not as an ideological model that has been imposed on all by its initiators ... who happen to be the ruling elites of the US and the UK. Reagan anyone? Thatcher? Deregulation? Privatisation? The Big Bang?
All these policies were designed exclusively with the goals of investors in mind - ie a singleminded focus on return on capital and ever-increasing (and preferably untaxed) profits. They caused the growth of the financial sector everywhere, the dominance of economists and financial analysts in public discourse, the relentless focus on efficiency, "rightsizing", flexibility and profitability, and the corresponding squeeze of manufacturing and other similarly old-fashioned activities.
This is not something that came out of nowhere and that London and New York, in a stroke of good luck, just happened to capture. It was made to happen. Trying to ignore or deny that underlying purpose shows incompetence or wilful dissimulation on a grand scale.
New York and London have played a central and lucrative role in recycling the glut of savings in Asia and in the petro-economies. Much financial innovation in wholesale markets was spurred by this phenomenon.
Ah, again, the savings glut theory (much publicized by Ben Bernanke before he took over the Fed) - which claims that the US is consuming more than it produces because emerging countries are not consuming enough, ie that it is providing a valuable service to the global economy. The reality, of course, is the exact opposite: the US is consuming more than it produces because it can get away with it, by borrowing increasing amounts of money from other countries, and making them manufacture (or dig up) stuff in exchange for IOUs denominated in the US's own currency. And the widespread use of debt has been encouraged, let's never forget it, to hide to Americans (other than a very small minority) the reality of their stagnating incomes by allowing them to continue on buying stuff.
Oh sure, the countries exporting to the US are happy to piggyback on that trend, and have benefitted to some extent from the transfer of manufacturing activity and the buid up of their own economy (as long as the cost to the environment is ignored, anyway), and they are doing all they can to not rock the boat. But they certainly did not originate it.
At the same time equity markets have thrived as profits have risen to a record share of gross domestic product. Among other things this reflects the greater exposure of corporations to global market discipline and the benign disinflationary impact of millions of Asians coming into the global workforce.
"benign disinflationary impact" = lower wages for Western workers, fewer perks and less protection for their jobs. This is not a bug, it's a feature, and the very words used show that the goal is to hide what it means, and present the result (money going to profits rather than to workers) as a positive thing. Hey, profits are up and the stock markets are doing great - thus, says the subtext, the economy is doing just fine.
Again: "global market discipline" = the financial world imposing on other sectors the requirement for the kind of returns it manages to generate for itself by squeezing money today out of future activity. Manufacturing can only generate this by squeezing workers and other costs - which means polluting China rather than paying to follow our more stringent rules in the West.
Meanwhile, retail financial markets have hummed as cheap credit powered housing booms in the Anglo (and other) economies.
Again, this is an integral, vital part of the Anglo economic model: with wages squeezed, the only way to avoid those pesky voters to complain too loudly was to buy them off by offering them the possibility to continue on buying, via very real debt, underpinned to a large extent by (partly virtual) real estate appreciation. It was highly profitable for the financial world too: more business, and a general increase in the value of assets. When your livelihood depends on fees proportional to the value of things traded, it's all good.
But as the suddenly crisis-prone financial sectors of the US and UK now confront a second round of tightening in the inter-bank market, it is worth asking whether this financial bias could be too much of a good thing.
There is a risk of exaggerating the economic impact of the debacle in asset-backed paper markets in relation to large and diverse financial sectors.
Yeah, because it's not the whole model based on a gigantic one time squeeze of the middle classes that is flawed, it's just a few excesses here and there that can be corrected. Right. Dream on, John.
Yet systemic trouble in finance can have wider indirect consequences. With housing markets going into reverse in both countries, there is every likelihood that households will rebuild very low savings ratios. The consequences for demand could be nasty. With a much less diversified economy than the US and much greater debt as a percentage of household wealth, the UK looks the more vulnerable. Sterling has a looming problem.
Nothing to squeeze left. It was a feature, John, not a bug.
In the longer run there is a risk that financial activity will be damped by rising inflation. While Chinese demand continues to put pressure on energy and raw material prices, it is no longer exerting such downward pressure on the price of global labour.
Nothing to squeeze left. Even that wonderfully extensible resource, Chinese labor, is coming to the end of its practical use. And that tells us more than anything what "inflation" means: anything that may cut into profits, and what "growth" means: increasing profits. Anything that lets things seep away from profits - to pay for regulation, to pay for wages, to pay for resources, is inflation - and evil. Inflation is the enemy of the Anglo model - it's value not being captured and being wasted instead for useless purposes.
A more fundamental point is that China and other emerging market countries are unilaterally rolling back the high tide of liberalisation. Thanks to their rise, more of the world economy operates under mercantilist pegged exchange rate regimes.
This is such a disingenuous comment... the peg is precisely what allowed "inflation" to be avoided in the West, by keeping Chinese costs artificially low. In other circumstances, the investment boom in China, and its massive trade surplus should have caused its currency to appreciate, and its costs to increase. By preventing this, the Chinese authorities were fully complicit in the big squeeze and helped to make it last as long as it did.
The mercantilist exchange rate setting was, again, a feature, not a bug.
By investing their official reserves in developed world government debt, they reduce the cost of public sector borrowing, making a return of big government easier.
John, John, John. Did you not notice that it was the other way round? It's the combination of massive new spending by the Republican US government (spending focused on the militaro-industrial complex, and pork, ie going to friends, not to plebeians), tax cuts (again, going to the rich) and lower Fed rates that created the bubble that caused the imbalances that in turn made foreigners such huge creditors of the US, got them to buy up US securities and bring long term interest rates down. It was called a virtuous circle while it lasted, but it was really wealth capture on a grand scale, transferring future tax payments by Americans to today's wealthy. Whatever happens to today's wealth (more junk, bigger, farther off McMansions, more fuel-wasting FUVs), the future debt will remain - unless, of course, in Bush's final shafting of the world community, the dollar is left to crash, devaluing the claims on the US economy.
Either way, "big government" - the corrupt, wasteful, cronyism-prone, and ineffective kind favored by conservatives was at the heart of the loot - again, a feature, not a bug.
As co-conspirators with the US Federal Reserve in creating the credit bubble, the same countries have contributed to a boom and bust cycle in housing and finance which will lead to a political backlash, soon to be followed by cumbersome regulation.
Yeah, blame other countries (which, for the most part, were only trying to imitate the model endlessly peddled by US authorities and their trophy pundits). Fine. They are indeed complicit - a bit - for buying your scam.
And of course, when your scheme fails, as it is doing now (again, "bust" is a feature of "boom and bust"), go concern trolling about "cumbersome" regulation. When the adults have to come and clean up the mess, it is not called "cumbersome", it is called "saving your sorry irresponsible ass." But make no mistake, we can expect the whiny calls from never discreditable hacks and supporting pundits for more liberalisation as the previous attempt was "insufficient" and "not given time to prove itself".
Meanwhile, sovereign wealth funds are indirectly reversing the privatisation trend that began in the 1980s through a re-expansion of state ownership, but on a cross-border basis. That in turn will spawn an illiberal political reaction that will inhibit global capital flows.
Bwahahahaha. So the game should only be played by our kind of people, from New York and London, but not from elsewhere. Dirty foreigners can obviously not be trusted with so much money and should be prevented form doing things that might actually give them a say in how companies are run. Imagine that - people with money not focused only on short term profits! What a horrible crime.
Sadly, John, it is, again, a feature of the big loot, given how much of the wealth grab depends on borrowing money from, well, dirty foreigners, and handing them over financial assets - future claims on our economies. Did you really expect them not to want to be paid, or not to want to set terms when you comes asking for more?
Yes, the grand wealth capture plan was a one-time thing, and now the bill is due - both in the form of "inflation", and in the form of claims on our real wealth. Of course, the goal was always to let the plebes bear that burden, but your loot has been so effective that the plebes cannot really be squeezed anymore - and that leaves you to talk to Messrs Putin, Abdullah, Hu et al...
Almost makes me sorry...
On the face of it, continental Europe ought now to be better placed to cope. Yet this is no time for schadenfreude. Two German banks that dabbled in subprime structured products have had to be rescued. The dabbling arose from an urgent need to raise returns in an over-politicised, over-regulated, but under-profitable German banking system.
You bet it's time for schadenfreude. And it's going to be for quite a while. Sure, you've managed to corrupt a big chunk of our elites and our financial systems, given how you've taken them over or coopted them, but the loot has not been as extensive, nor as successful, and given how you try to keep all the financial fun concentrated in the City and Wall Street, the rest of Europe still had to focus on other, actually wealth creating activities. And these will remain even as the financial world crashes down.
With globalisation, no economic model provides protection from the excesses of someone else's model.
Excesses? what excesses? Are you admitting to anything, finally? Or are you just trying to get us to bail you out, once more? You've just picked our pockets ! Twice, given that you've also picked our future pockets already!
As conditions in the US mortgage market worsen next year, the waning ability of the US consumer to absorb the rest of the world's goods will hurt everybody, including continental Europeans.
Again, for the past 2 years at least, the real economic locomotive of the world has been Europe - because wages are still growing over here, and there was no need to create funny money to spend.
Oh sure, European stock markets will crash along with Wall Street. But housing prices are unlikely to crash in places like Germany where they have stagnated for the past decade, or in France where banks are kept lending standards mostly in check, or even in Spain where the very real housing boom was underpinned by the very real catching up of Spain's economy to the rest of Europe.
There is no question that smart, global finance has been a good thing.
Yeah, don't ask questions, it might be painful to hear the answers.
Without the recycling of capital, excess savings in Asia would have been profoundly deflationary. Yet from today's global vantage point, we have undoubtedly all had too much of this good thing. Whether it is ever possible to have just the right amount is another question.
Without the Anglo bubble, there would have been no need for the capture of Asian savings, and no hangover today.
Go into detox, John. Please.
Previous "Anglo Disease" content:
- Anglo Disease: Dollar Dump & Boom-n-Bust by Jerome a Paris on October 30th, 2007
- Anglo Disease: hangover in Manhattan by Migeru on October 15th, 2007
- Anglo Disease fever by Jerome a Paris on August 28th, 2007
- Anglo Disease - Fools and Bourses by ChrisCook on July 9th, 2007
- Anglo Disease watch (5) - just break the thermometer and all is well by Jerome a Paris on July 5th, 2007
- Anglo Disease watch (4) - No industry is vital - except finance by Jerome a Paris on July 4th, 2007
- The Anglo Disease (3) - an introduction for non-economists by Jerome a Paris on June 24th, 2007
- Anglo-Disease Sidelights (1): UK = Tax Haven by afew on June 22nd, 2007
- Anglo Disease (2) - Martin Wolf's take by Jerome a Paris on June 19th, 2007
- The Anglo Disease - Financiers worried about end of great bull run by Jerome a Paris on June 18th, 2007