Milan (AsiaNews) - The dawn of New Era might just be upon us but as Quantitative Easing (QE) tapers off, new mechanisms might be emerging that could lead to a new, even greater crisis.
The period 2007-2009, which began with the housing market crisis and continued with the financial collapse of non-primary mortgages and derivatives, forcing central banks to bail out the banks, reached its high point when Lehman Brothers went under in September 2008.
Although mass media, especially mainstream press and television, have tried to show that the world has turned the corner, the opposite is true. We are still in a crisis. Of course, the magic touch of world's central banks providing unlimited monetary supplies has certainly had its effect. Shares, bonds and securities have miraculously rebounded. Still, for others, all this is more of an illusion, if not an outright form of deception and fraud, as evinced by the manipulation of gold prices and the Libor interest-rate market. Indeed, this is worse than an illusion; it is a poisoned chalice, all shiny on the outside but, oh so deadly on the inside.
Printing money to save financial markets
Things are changing everywhere as can be seen by what is happening to the currencies of many emerging nations: Argentina, Turkey, Venezuela, Thailand, Ukraine, but also South Africa, Chile, Indonesia, India, Brazil, Taiwan, Malaysia and others. Even Mexico, whose economy has so far been one of the strongest among emerging nations, has seen its peso come under pressure. It appears that hot money is moving, fast.
Before going into the a litany of complaints about speculation and the rapacious greed of many financiers, smaller ones included, it is better to think this through to avoid blaming the wrong culprit, as low-brow moralists are wont to do. Speculation in fact does not always involve fraud or plots. Often enough, it is almost an automatic reaction and reflection of real underlying problems. Let us then, separate the wheat from the chaff. Witch-hunts so often lead to hate rather than solutions, and cast a shadow that makes things that more difficult to understand.
When the US central bank - a constitutional absurdity if there ever was one since the US Constitution formally bans such an institution - gradually began reducing money supply, buying fewer US Treasury securities, the first symptoms of "weakness" appeared immediately in emerging countries. Although based on nothing, the enormous financial liquidity released by central banks in the past few years did boost financial markets, bringing them to pre-Lehman levels. This is what Bernanke had in mind when he launched his QE. This is the mandate his associates, the big banks and financial groups who put him at the helm of the Fed, had in mind as well.
After riding the wave created by Alan Greenspan, Bernanke's predecessor, which included loans to those who could not pay them back, the banking fraternity successfully sought its own rescue at taxpayers' expense, and in so doing pushed up national debts and the dubious value of assets generated by money-printing central banks. Yet, despite ideological claims by the Obama administration that it was left leaning, ballooning public spending has led to a sharp increase in economic inequality. This is less of a paradox if we consider that only a small percentage of the population holds assets in securities listed on financial markets.
Outside of the financial sector, things are different. Five years after the Lehman debacle, the real economy is still sputtering, not only in Europe but in the United States as well, where economic recovery has been slow or stalled.
The same goes for Japan, where Prime Minister Abe has tried to jolt the economy through massive government spending and large deficits of almost 12 per cent of GDP, this in a country whose national debt has already reached the stratospheric level of 240 per cent of GDP.
And China is not too far behind. Like the US, Beijing in 2009 implemented its own huge Keynesian stimulus package through increased government spending. Obviously, China is different case because it continues to benefit from the same "help" it has enjoyed for more than two decades, namely record exports generated by a favourable exchange rate based on a currency artificially undervalued by 45 per cent in terms of purchasing power parity. Yet, in China, things appear shaky too. Its "shadow financial system" is a time bomb that is ticking away. Its economy is burdened by excess production capacity and a real estate bubble of overpriced ghost towns literally and figuratively built in the desert, all of which might foreshadow China's own "Lehman moment".
The end of the neo-Keynesian dream
Given the poor performance of the real economy, would it not have been more "courageous" (or more recklessly criminal) to have used more Keynesian fiscal stimulus and government spending? This is exactly what the two fearless, albeit blissful Keynesian Nobel laureates Paul Krugman and Joseph Stiglitz had initially proposed. Still, unprecedented financial resources have already been poured into the economy over the previous five years. Someone, it seems, is out of touch with reality. No one, not even valiant diehard Keynesians is hurling anathemas against austerity. Except perhaps for Ireland, it is hard to see where anyone actually implemented this mysterious austerity in recent years. At most, some common sense has been applied in public spending reviews. This is different from the kind of financial rigour that could have been implemented decades ago rather than make ordinary people believe that money grows on trees like in Pinocchio's Land of Toys.
The "tight" monetary policy the Fed just begun is just a break in an otherwise unstoppable race to print money. It is also an indirect admission that once it has achieved the goal of restoring share prices and, more generally, Western financial markets, it did not really know now what to do to jump-start the real economy. One lesson can be drawn from the past five years. However massive, Keynesian stimuli are ineffective if they are applied when levels of public expenditure and indebtedness are already high. Few have realised this and even fewer have publicly talked about it. This is a major ideological fiasco for it represents the utter failure of solutions based on high public spending. Leftist, albeit modern non-Marxist Keynesian economics, a radical form of state interventionism by any definition, has thus suffered a humiliating defeat.
In 1991, when the Soviet Union went under, so did Communism as an economic model. In 2008, the "Lehman moment" did not bring about the failure of liberalism (as some Communist troglodyte suggested), but that of "marketism," the ideology of the Chicago School, and "Quantitative Economics," the idolatry of rational expectations, the exaltation of the hyper-rationalist market, especially in financial and regulated markets, understood as the expression of a supreme and perfect synthesis of human behaviour as described by complicated mechanistic algorithms.
The year 2013 marked instead the failure of neo-Keynesian financial socialism. Today, as money supplies start to taper off, the Fed realises the failure of Keynesian economics in all its existing variations: the Obama-Krugman model, Japan's Abenomics, Germany's Soziale Marktwirtschaft (liked by Mario Monti, Mario Draghi and the Eurocrats) and last but not least China's own capitalist-style Communism. Given the situation, the Fed has decided to put a "gradual" break on money supply because Bernanke and his associates are anything but stupid. They know that if the presses continue churning out money, Weimar-style hyperinflation is just around the corner.
Countries that consume vs countries that produce
As we initially said, the Fed's pause for reflection (and lack of ideas) has brought to the fore problems inherent in emerging countries. So far, somehow, these countries benefitted from the unbalanced globalisation of the past 20 years. For the most part, the exports of minerals and farm products, and in some cases, consumer goods, were their driving force. The mechanism was roughly as follows: "Developed Nations", i.e. the older industrialised countries underwent de-industrialisation via so-called de-localisation, resulting in employment losses, especially among blue-collar workers. Case in point: manufacturing in the US fell to 12 per cent of GDP compared to just under 30 per cent in the 1950s. Many white-collar jobs, and not only those in the manufacturing sector, also left for emerging nations. Services that could be easily de-localised - software design, information technology (IT), as well as research and development, industrial design, and hosted PBX services - followed suit. Only locally based services, such as food services, personal services and more broadly services closely linked to consumers stayed in "Developed Nations".
This led to an incongruous situation that cannot be sustained in the long term. Indeed, one region of the world has built up structural trade deficits by consuming more than it produces, whilst output is concentrated in another part of the world. For example, in the United States about 70 per cent of GDP goes to consumption. By contrast, half if not more of world production in many key industrial sectors is concentrated in China.
The important thing to remember is that this situation is not the result of a gap in relative efficiency, but is rather the by-product of two powerful factors of distortion. On the one hand, there is a monopoly on the issuing of payment instruments, the US dollar, which is the sovereign US currency but also as the main currency for world trade. On the other hand, as we have said, the existing exchange rate undervalues China's currency. Hence, an artificial balance, which is actually an imbalance, defines the current state of affairs, one that is not based on its own intrinsic strength, but rather on political agreements in support of the current system of exchange.
Political and technological efficiencies
A second effect of this distortion is that production and economic growth are determined by political factors, not by greater efficiency in technology and allocation of resources like raw materials and labour.
For some, de-localisation has led to higher profits and greater profits for shareholders but not necessarily to greater efficiency. Whilst production efficiency is a technical benchmark, output is no more efficient just because it has been de-localised. Indeed, at a macro level the opposite is true. China is a case in point. A 1 per cent growth in GDP translates into a 3 or 4 per cent rise in energy consumption. As long as China - one of the two major distorting factors - relied on its own resources like labour and coal, the economic expansion that turned it into the world's factory could be pursued without concern not only for the environment but also for its repercussions on world markets. The same is not the case if resources, especially raw materials, come from abroad.
The decline in manufacturing in Developed Nations has been more than compensated by higher demand in newly industrialised nations, especially China. Indeed, China has become a major if not the major player in Africa, Australia and other resource-rich exporting nations. Likewise, the emerging nations currently in crisis are still growing despite prevailing trends.
Yet, despite the Fed flooding the markets with liquidity after the Lehman debacle, i.e. between the 1st quarter of 2009 and now, Western economies have never recovered even though financial markets bounced back, gaining 60 per cent more than they were before the crisis. However, after hitting new heights, the risks associated with shares also got very high, especially in view of the lessons of 2008.
With yields low because of low interests, hot money set its sights on securities issued by emerging nations, with investors choosing not to see the political and structural risks with economies heavily reliant on natural resources.
As Fed tapering gets underway, interest rates for primary securities, those "without risks", are bound to rise. Thus, it is no longer convenient for hot money to buy high-risk securities. The net result is a run on the currencies of emerging nations whose economies are based on the export of natural resources.
The first crisis of 2014 is thus primarily another ideological failure, that of "involuntary Keynesianism". Known under various labels, the former is embodied by expensive public spending policies that generate debt: Venezuela's social-indigenismo under Chavez/Maduro, Argentina's social-Peronism under Kirchener/Fernandez, South Africa's Black Economic Empowerment (BEE) under Nelson Mandela and so on. In these countries, demand is distorted involuntarily, as in a command economy, but by high-minded redistributive domestic policies that favour protected domestic sectors at the expense of those that are internationally competitive. Certain political factions or interest groups benefit from these politically driven policies, creating a de facto parasitical relationship with the economy. Hence, today's currency and market crises are not due to Fed tapering but are rooted instead in domestic factors.
A crisis in emerging economies could however trigger a chain reaction because for the past 50 years, i.e. since the Kennedy administration in the early 1960s, the world has lived according to the Keynesian illusion, believing that government spending can produce real economic growth, convinced that states can do what families and businesses cannot do, namely live above their means and take on debt that they can never repay. Since the last time a US administration had a balanced budget in 1959, the rest of the world has done the same.
Since then, things have accelerated. In the past two decades, especially the last five years, printing money to cover budget shortfalls has increased exponentially. We are now approaching a crash point, like in 1914 on the eve of the attempt on Archduke Franz Ferdinand's life in Sarajevo. However, it is hard to know where the firing shot will come from, whether it will be the collapse of the currencies of emerging countries, the subsequent difficulty of large US and European banks, the latest crisis in Japan, the implosion of China's banks and financial system, the meltdown of the euro or the of fall of Wall Street.