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World Economy Heading for Recession

2015 April 5

That seems most likely to me. China has been stalling out for some time, Japan’s “stimulus” didn’t work, Europe has been suffering under austerity for years (despite some minor good news), the other emerging economies are doing badly, the petro-states have been hammered by the drop in oil prices and now the US job market has fallen off a cliff after a few months of excellent results.

Those results were driven almost entirely by the drop in oil prices, but were unsustainable with most of the rest of the world economy in the doldrums.  Low oil prices should be generally good for everyone but oilarchies, but their effect is muted (in comparison to past decades) by the oligarchical and oligopolistic nature of our economy.  Put simply, there are too many barriers to entry for new businesses to arise and even lower oil prices don’t put enough money into ordinary people’s hands to create enough new demand for long enough.

In an economy where individual sectors tend to be controlled by a few companies, and where those companies are already awash with money, more money means little; those with pricing power will simply take it away and add it to the stockpiles of money they already aren’t using for anything productive.

The standard solution to the situation we’re in now would either be to implement very high corporate and individual marginal taxation (if private actors won’t spend, take the money from them) and/or to break up oligopolies and/or to heavily regulate them so that they aren’t sopping up all the excess cash in the economy.  (Why are app stores still allowed to take 30%, for instance?)

Since we refuse to do any of those things, and since we only print money to give to rich people and corporations (thus pooling money at the top, doing little for widespread demand), the western economy (which includes Japan) remains stagnant. You may get a few good months here and there, but that’s all you’re going to get.

Labor Force Participation Rate Graph

Labor Force Participation Rate Graph

Let’s discuss some individual countries and regions. First, take a look at the above labor force participation rate graph. It shows the number of people either looking for work or who have work.  Can you tell that there were a few good months?  That’s how good the American economy is after your few good months. It didn’t really improve much, it just went horizontal.

You need a few years of such job results to make a difference.  And that’s before we get to the fact that most of those jobs were low-paying and that all of the gains of the last economic cycle have gone to the top three to five percent of the population (depending on how you slice it).  And the top 1% has done better than 3%, the top .1% better than the top 1% and so on. This is your economy on unconventional monetary policy.

Japanese monetary base and inflation to early 2015

Japanese monetary base and inflation to early 2015

Ah, unconventional monetary policy. In Japan they call it “Abenomics.”  The idea was to get inflation going in the Japanese economy–get the Japanese to spend and bring Japan out of its 30 year slump. The chart to the right shows how well it has worked.

But don’t think that money has been “wasted!” Abenomics may have done nothing for ordinary people, but it’s helped a lot of rich people become richer. That money went somewhere. In Japan’s case, a ton of it will have gone overseas, with foreigners borrowing for low costs in Japan and then speculating with that money elsewhere for higher gains (or so they hope).

Unconventional monetary policy is, and always has been, about giving money to the rich, wealthy, and corporations. At first, it was about bailing them out after the financial collapse. Now, it’s just about giving them money, lots of money, in a way that the hoi-polloi can’t access.

This brings us to Europe and austerity. Austerity is a wonderful thing, if you’re rich. Public assets are put on the selling-block which you normally could never buy and they are put there for cheap. You get to own more of the economy, your relative wealth increases. While it’s true that one might be richer in a generally prosperous economy, you must remember, this isn’t about absolute wealth. It’s about relative wealth. Better to be somewhat poorer and able to lord it over everyone else, than be richer in a world where the peons don’t have to kowtow to your every whim or don’t have to live miserable, want-filled lives. If the price is a lot more poverty, that doesn’t affect you in any meaningful way.

Not all peons suffer, of course.  A lot of Germans do very well in the current regime.  As the South of Europe suffers under austerity, they’re doing great. The worse the southern economies are, the better for Germany, since it reduces the price of the Euro, increasing German exports. If everyone in the Euro area was doing well, Germans wouldn’t be doing nearly so well. If the price is suicides, widespread poverty, homelessness, and so on, that’s certainly a price Germans are willing for Italians, Spanish, Greeks and Portuguese to pay.

Meanwhile in Canada, there is a housing bubble which kept on going from the point where the US bubble collapsed. Better, inflated prices are guaranteed by the Federal government, so when the bubble bursts, it can cause maximum damage to public finances. With oil prices falling, and with Canada now a petro-state (as I noted almost a decade ago) due to deliberate government policy, those housing prices are looking less and less sustainable.

In the UK, we also have London’s housing bubble (which is to say, the majority of the actual economy of the UK, if you want to call a housing bubble and financial services an economy, which UK politicians do).  This shouldn’t be a surprise, since the UK hired Canada’s ex-central banker to come to the UK and do what he did to Canada: Blow a nice big bubble. The UK hardly has any other economy besides real estate and financial ponzi schemes, so we’ll see how that works out for them.

In general, understand this: The world bailed out bankers and brokers and traders  and they went back to doing what they were doing before. Blowing bubbles. There are CDOs out the wazoo, there are stock market bubbles, there are real-estate bubbles in various places (they just tend to be more localized now, but they’re still huge).

The economy will NEVER be good for everyone until this is changed, but that doesn’t precisely mean this is unsustainable. The elite’s had one fundamental realization and it was this:

“We can print as much money as we want and as long as we make sure it doesn’t get into ordinary people’s hands it won’t blow up the economy.”

Many people expected that unconventional monetary policy would cause general inflation. It hasn’t because the money stayed in the hands of a very few people and major corporations. It did cause massive inflation in the things rich people buy, but not general inflation.

So the rich, and the politicians and central bankers they own, aren’t worried about the various bubbles because they handled them in 2007 and 2008, and they’re sure they can handle them the same way if they burst again. These bubbles may never all burst at the same time again, because if they show signs of doing so, the elites can always just have the central banks print money and buy up assets before they even become distressed.

As long as there is no actual price discovery (and how can there be), there is no real threat to the only part of the economy that matters: The economy of the people with enough money buying up politicians.

Everyone is addicted to this game, even China, which has printed unbelievable amounts of money (more than Japan, America and Europe combined) and has used it to create vast amounts of unused and unusable housing and other boondoggles. China, granted, wants much of the benefits to get to ordinary people (because the Chinese are still willing to riot extremely violently and the Communist party’s leadership knows their lives are on the line), but they’re still playing the late-capitalist game of credit pumping, rather than the mercantilist game which built the Chinese economy. That makes sense, in a way. As China’s customer-economies stagnate, it becomes harder and harder to create widespread growth for the most populous country in the world through simple exports.

The correct strategy would be to start decoupling and move to a domestic market, and in a sense, the Chinese have tried that, but they’ve bungled it on boondoggles. Capitalism of the variety we do today is terrible at redistribution and redistribution is what the Chinese economy needs, in a huge way, in order to boost widespread demand.

So that, my friends, is your world economy on austerity and unconventional monetary policy.  As I predicted right after Obama put out his worthless “stimulus” program in early 2009, for most people, the economy will not recover for at least a generation. It will only recover then if the population is willing and able to rebel, peacefully or violently. If not, we are in for decades of stagnation and decline, exacerbated by the absolute certainty of catastrophic climate change.

And so it goes…


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18 Responses
  1. guest permalink
    April 5, 2015

    Obama put out his worthless “stimulus” program in early 2008
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    2008 was the election year. Inauguration was in January 2009, and worthless stimulus was in Feb, IIRC. In early 2008 the credit crunch of 2007 had not yet turned into the crisis and Obama’s TARP of Sept 2008 (that he lead the battle for in the Senate). In early 2008 he was mostly the “soaring rhetoric” *vomiting a little into my mouth* guy who seemingly came out of nowhere and was supposedly against the war in Iraq (only because he wasn’t even around during AUMF).

  2. mike permalink
    April 5, 2015

    boy, did I pick the wrong day to give up sniffing glyphosate!!!

  3. Robert permalink
    April 5, 2015

    I would be curious to see suicide figures for the USA since 2008.
    Keep up the good work Ian and I hope to be able to contribute soon.
    All the best,
    Robert

  4. Tom W Harris permalink
    April 5, 2015

    “Many people expected that unconventional monetary policy would cause general inflation. It hasn’t because the money stayed in the hands of a very few people and major corporations. It did cause massive inflation in the things rich people buy, but not general inflation.”

    Actually it has caused massive inflation in food and energy prices. But that’s not counted as “general inflation.” The only “general inflation” that concerns our overlords is wage inflation.

    It’s their economy. We just live in it.

  5. ffd permalink
    April 5, 2015

    Nice piece, Ian, but I thought we were already in a recession. It sure feels like a recession.

  6. Ian Welsh permalink
    April 5, 2015

    Yes, Guest, obviously I slipped a year. Thanks.

  7. Ian Welsh permalink
    April 5, 2015

    Unconventional monetary policy did not start until 2008 or 9, depending on how you count it. Energy prices were not increased by it (at least in absolute terms).

  8. Ian Welsh permalink
    April 5, 2015

    ffd: the developed world was already in depression. Within the depression, however, it was not in recession (with some localized exceptions.)

  9. April 6, 2015

    “It did cause massive inflation in the things rich people buy, but not general inflation…”

    But even the oligarchy can’t absorb massive inflation. Certainly not in the cost of toys.

    Note the current (repeated annually) struggle to “cut costs” in Formula One racing. Red Bull is rumored to be considering dropping out. Reason? hmm…

    Also see: the current squabble in America’s Cup racing, where a cost cutting faction wants to adopt the AC45 hull over the longer and more expensive AC72.

  10. Auburn Parks permalink
    April 6, 2015

    Dear Ian,

    In what universe can trading a $1000 T-bond for $1000 in checking deposits be considered ‘printing money & giving it to rich people’? Monetary policy does not involve creating net financial wealth as the Central bank is not allowed to give money to anyone for free, the Fed can only trade financial assets. Now a case can be made that QE1 involved buying worthless or at least heavily discounted MBSs at above market rates, but then we have to parse how many of those were sold by the private sector and how many by Fannie and Freddie etc. Either way, Nobody is any wealthier the day after the sell their TSY securities than the day before, so your characterization of monetary policy is fundamentally flawed. Only deficit spending done by Congress adds net finanical wealth to the private sector thus its the only really “money printing” the Govt does.

  11. Ian Welsh permalink
    April 6, 2015

    Dear Auburn,

    Money is also created by lending it. This is how almost ALL money in the economy is created, whether it is done by private banks (including the shadow banking system), or by central banks.

    Please find yourself a chart of M2, and match it against government deficit spending. Hey! The growth is magnitudes larger. (And M2 is not all the money out there, the Fed stopped calculating M3 for a reason.)

    Further, keeping central bank rates at historically low levels makes credit much cheaper for those who are able to access money at near prime. That isn’t you (well, maybe it is, if you’re rich), and it isn’t me: it’s people who already have tons of money or who are in a position in the financial system which gives access to such money.

    Unconventional monetary policy consists of… oh, never mind. Maybe I’ll do a post on it later. In the meantime, I will simply note, again, that in the real world, as opposed to Austrian economic theory, money is created (aka. printed, even if it’s just numbers in an electronic transfer) all the time, both by government and private actors.

  12. DMC permalink
    April 6, 2015

    Indeed. Just consider the amount of money created ex nihlo by the derivatives market. While the entirety of the value of the stocks traded on the NYSE is about $17-18 trillion, the estamtes for the value of outstanding derivatives of all types that I’ve seen range from $650 trillion to north of $1 quadrillion. Very little of that corresponds to any actual printed dollars. Its also worth noting that if Uncle Sam was getting even .1% of that money back per annum in the form of taxes, we wouldn’t be having any budgetary problems at all, even with the grotesquely skewed priorities Congress has had pretty much since the end of WWII.

  13. RJMeyers permalink
    April 6, 2015

    A bedtime story of the US ruling class and their brief period of hegemony:

    First, they found themselves in possession of most of the world’s undamaged production capacity and huge oil reserves following WWII.
    Then they learned they could use this oil and production to profit while still spreading the wealth around to buy off the masses (women and blacks excluded).
    Then the cheap domestic oil ran out, so they switched to foreign oil.
    Then the foreign oil owners organized, so they made strategic alliances to divide and conquer.
    Then the favored oil owners grew rich and tried to buy their country, so they made themselves richer to compete and keep control.
    Then they stopped spreading the wealth around and started incarcerating more of the masses to maintain order.
    Then they got more desperate and greedy and tried to squeeze higher profits out of their country by outsourcing production to cheaper places like Mexico, then China.
    Then they inflated a Silicon Valley tech bubble to try and re-establish actual growth.
    Then they invaded Iraq to score a new source of cheap oil.
    Then they pushed a housing/financial bubble to keep sucking in money and maintain their paper wealth.
    Then, in chronological order, the tech bubble popped, the invasion failed in its goal, and the financial bubble popped.
    Then they got more desperate and greedy and used their money and influence to have the government bail them out and give them free money to keep playing their ownership games.
    Then they learned that government bailouts could be used to build a financial balloon and achieve liftoff from the “real” economy, making their possessions so expensive that the masses could never afford them. They were finally secure in their balloon and would take it into space and live forever there!

    The future:
    Then they sailed too high. The air thinned and the balloon popped. As they had become more clever and cunning at games of control and domination, they had also become more ignorant and naive of everything else. They had mistaken their games for reality and in the process forgotten about science and history. And so they plummeted back to the ground.
    Then there was chaos.
    Then something new was begun.

  14. guest permalink
    April 6, 2015

    Actually it has caused massive inflation in food and energy prices. But that’s not counted as “general inflation.” The only “general inflation” that concerns our overlords is wage inflation.
    ~~~~~~~~~~~~~~~~~~~~~~~~~“
    I agree with the comment about wage inflation, Tom Harris. And certainly food is more expensive than it used to be, but I don’t know how much of that can be attributed to QE.
    But if anything, it seems like energy, in the short term, has not had a lot of inflation at all, so I really don’t follow that part of the comment at all. In fact, some argue that QE has sent all that excess cash, and all those pensions’ funding shortfalls, have sent investors in search of high yeild/high risk investment, resulting in part in the fracking boom, which although it is just a ponzi scheme that is blowing up in their faces now, did contribute significantly to the current oil glut and crashing prices, and unfolding bloodbath in the energy sector.

  15. RJMeyers permalink
    April 6, 2015

    Actually it has caused massive inflation in food and energy prices. But that’s not counted as “general inflation.” The only “general inflation” that concerns our overlords is wage inflation.
    ~~~~~~~~~~~~~~~~~~~~~~~~~“
    I agree with the comment about wage inflation, Tom Harris. And certainly food is more expensive than it used to be, but I don’t know how much of that can be attributed to QE.

    CPI-U for food has been pretty stable for the last few decades, with some turbulence up and down around 2008 for obvious reasons: http://data.bls.gov/generated_files/graphics/latest_numbers_CUSR0000SAF1_1947_2015_all_period_M02_pct_3mths.gif

    A closer look at recent history: http://data.bls.gov/generated_files/graphics/latest_numbers_CUSR0000SAF1_2005_2015_all_period_M02_pct_3mths.gif

    You can check out different time periods and the raw numbers here: http://data.bls.gov/timeseries/CUSR0000SAF1?output_view=pct_3mths

    The same thing but for energy is here: http://data.bls.gov/timeseries/CUSR0000SA0E?output_view=pct_3mths

  16. April 7, 2015

    A lot of Germans do very well in the current regime. As the South of Europe suffers under austerity, they’re doing great. The worse the southern economies are, the better for Germany, since it reduces the price of the Euro, increasing German exports.

    Is this really true?

    Only partly. The Germans run a surplus in Euros but a deficit on real goods and services. Having that deficit means German living standards are not what they should be. More simply, it doesn’t make any sense to swap 4 pigs for 3 equally valuable sheep year in and year out and take an IOU to make up the difference. There will end up being so many IOUs, after a time, that the sheep producers won’t be able to supply

    The German euro surplus isn’t good for their trading partners either who use the euro. Although its good for the UK and USA who don’t. It sucks euros out of their neighbour’s economies which piles them up with unpayable debts and they then fall foul of the Troika, sorry the Institutions, of the EU commission, the IMF and the ECB.

  17. karenjj2 permalink
    April 8, 2015

    re CPI exclusion of food inflation: obviously “economists” have not been in a grocery store or they would see that they are comparing today’s 8 oz “pound of coffee” with the 16 oz original.

    nor do they see the incredibly shrinking roll of toilet paper directly in front of their eyes in the 5″ holder. nor do they see the 5.5 oz can of tuna for $1.29+ that was .29 for 8 oz, etc.

    shrinkage is today’s inflation and usually labeled “new and improved.”

  18. Cvp permalink
    April 8, 2015

    Then the favored oil owners grew rich and tried to buy their country, so they made themselves richer to compete and keep control.

    Note that they could just as well have stopped that with capital controls, but that would have interfered with their own plans to buy up everyone else’s country.

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