Economic Thoughts: Post-Traumatic Global Stress

You had to live through 2007-2009 to understand financial failure left many people around the world traumatized. Coming back was never going to be easy. And it hasn’t been. The second and third round of resulting traumatizing events are only now playing out. And there are many who still fear far worse to come. To the point of bordering on paranoia.


In such unpromising circumstances to sound a quiet word of encouragement may not seem particularly bright. Rather howl with the wolves, the louder the better. No kudos in attracting too much of the wrong attention. Yet there is really no need for such terrible desperation, provided not getting the short end of some stick (unemployment, bankruptcy, victimisation, premature retirement, early death). The world is actually doing quite well, thank you, that is the bit that hasn’t been sunk or holed. But not all quite see it that way.


The core of what went wrong is (financial) innovation. We discovered fire, and invented dynamite, too, didn’t we? Expect to get burned while trying things out. Always remember Madame Curie and her radiation death. Cruel but real.


We tend to want to bury the bankers alive, minus finger and toe nails, and a few other choice body parts, who did this to us. But we are an inventive specie, have overcome much of ugly nature (though not all – yet), and continue to transform our earthly existence. If frequently at great cost. Thinking thalidomide, nuclear bombs, and such like.


What at am I going on about?


Those of us who lived consciously through the 2000s decade may have once in a while picked up a whiff of something unhealthy. But such things always have good believable explanations, we kept doing what we were doing, just in bigger and bigger denominations, until trills were involved. When Lehman went bankrupt, the scales came off many eyes.


And left a desolate landscape. Overindebted, illiquid, fearful, bankrupted. America and Britain at the epicenter (calling it the Anglo-Saxon debt crisis), and this spilling far and wide, drawing in banks, companies, households worldwide.


If it had been left to its own demise, as in times past, mainly due to inadequate insight, effective policy tools or political will (mostly all three), what would have begun in late 2008 would have been another depression of 1930s, 1870s vintage, but of a truly global nature. Possibly worse than experienced then, because the world had become so much more integrated, intertwined, overleveraged, audacious and reckless.


A handful of individuals decided this wasn’t on. They acted with tools at their disposal, both monetary (creating liquidity on unprecedented scale and being lender of last resort) and fiscal (government spending, debt financed).


But something had been lost. That something is difficult to define. A certain vitality, making for healthy resource mobilization and risk taking as opposed to the unhealthy parts. When the dust settled on the financial crises, and their rescue aftermaths in the subsequent decade, we encounter a world ex-growth. As if the life force has been removed. Still existing but not noticeably advancing.


Not true in a technical sense, with more new crops of inventions every year enriching our lives. Yet these mostly not translated into faster progress in a physical sense, giving us accelerated investment spending, infrastructure creation, job hiring, known as faster growth.


Instead, growth slowed in the rich parts of the world. Japan has already lost most of its earlier growth dynamism since the early 1990s (a generation now), Europe has been adrift for twice the distance, grappling with constitutional challenges, and America has been slow recuperating in the post-Lehman aftermath.


The second round, the next clanger following up from the first, has been slowing global trade (exports). Instead of accelerated global integration (trade growing faster than world GDP), integration started to be undone, exports growing steadily slower than slowing global GDP growth, economies sourcing more at home over time. That doesn’t sound too ominous until its full reach comes into focus.


China, the great global growth engine of the three decades through 2008, had been an export-led story. It had leveraged off rich world demand to industrialise at great speed. With 20% of mankind involved, this was a massive quantum. And as with all success stories, like the financial innovation in the West laying us all low, the Chinese kept it up and took it to absurd lengths, to the extent that fixed investment and industrial exports dominated its economic mix and world markets. Until the world lost its dynamism, and China its growth markets.


Instead of coming back like before, the 2009-2010 recovery wasn’t normal. It was only a very slow recuperation as crisis damage (banks, property, labour, mindsets) had to be undone first. After which things never quite felt the same (yet). Something crucial was missing. Something essential. The coca-cola secret ingredient equivalent.


No use to mope. China had to reposition its development model, learn new tricks, even if a very old dog. No more export-led investment and infrastructure growth to pull the super-fast development growth. Instead of being outward-oriented, catching a piggyback ride off the richer more developed parts, it would have to turn inward.


It was big enough, continental-sized, with a population four-times America and ten-times Japan. These two had also in their early modern period been export-led but ere long had sought their main growth source inside themselves, having enough critical mass (economies of scale) to do so. America’s export today is only 16% of its GDP, and half of that with Canada & Mexico as part of Nafta (kind of inside the tent). America on this score makes its own luck. Like Japan. Unlike others with 50% or more dependency on export as share of GDP.


With China having reached critical mass too (GDP of $12 trill) it could try to make the switch from outward to inward dependency. From a global point of view, China should never have taken its outward approach to such extremes, given the cost of repositioning, especially when forced and in record time.


But for decades this export-led approach had been a successful development model. One doesn’t argue with such success. Instead, one tries to piggyback. As did many commodity producers and EM industrialisers. And these now in turn discovering, as third round clanger, that the world has changed. And now, like China, and many of the early leading nations before them, having to reinvent themselves.


This sounds so easy. Reinvent yourself. Go from an outward to an inward model. From industry and infrastructure investment to consumption goods & services. From a commodity producer (at first monoculture, than increasingly diversified) to an industry base and ultimately a services base. Like from being a poor to being a rich country.


China hasn’t objected too much to this reality, with critical mass in their favour. But there are many smaller EMs and high developed commodity producers who can’t or won’t so easily reposition. Instead, they drift, until some piece of luck comes their way again and favours them anew rather than make their own luck.


All this global recuperation, reinventing, repositioning and drifting aimlessly is being accompanied by an enormous amount of financial and structural pain. Increased unemployment, lost youth generation, dead capital, business bankruptcies, country debt defaults, devastated industries, cities, regions.


This creates a crisis atmosphere, which it is not. The world is being given a new makeover. There is much reform, reinvention.


There are also a few things going awry. Such as decoupling the Yuan from the Dollar. The latter is heading north (as the Fed normalises policy and lifts off), the former is  having to weaken (reflecting a weaker Chinese economy, much weaker Chinese exports, and many of its trade competitors having heavily depreciated their currencies, given them the advantage).


However, currency decoupling is never easy, especially if many have based their investments on a stable link. For these to reposition is costly, proceeds in jerky fashion, creates turbulence and yet more anxiety. Spillovers then make things worse worldwide as markets become more widely unnerved.


If this coincides with a Chinese plan coming unstuck, namely wanting to make its middle class households more richer quickly through equity investing, thus being able to support the switch to internal consumption more easily, the fat can be truly in the fire. And it was, last August, and again this January, with too many Chinese investment novices encountering disappointment, bear markets and how to lose your shirt in overleveraged style.


Messy, but not a crisis. Merely school fees for a system in transition, but due to size (a hundred million Chinese households losing their nerve) causing global spillovers, creating waves of anxiety and panic, even drawing in policy makers.


Russian GDP contracted by 3.7% in 2015. Brazil did worse. So around the world, also especially among African energy exporters. The monocultures worst hit, but many others struggling, too. Even South Africa going to only sub-zero growth of 1.3%, but this mainly due to its many internal shortcomings.


How further?


American and European recuperation is slowly progressing, and another few years will restore better resource balance, though their growth will likely remain relatively low. Japan has yet to prove it has escaped its long stagnation. China will probably successfully transform from an outward to an inward reliance focused on consumption. The rest of EM space and many commodity producers struggle, though some (like South Korea) will like China successfully re-engineer.


As to fourth and fifth-round global clangers, probably not. Everything has been drawn into this makeover that had it coming to them. There remain deep fears that the key central banks will lose the plot in turn, but I don’t think so, though there are no guarantees.


Central banking has become very inventive, every crisis inviting a response rather than letting a depression happen. In the process, things financial get transformed, as does risk.


It took nearly ten years, but the full reach of the trauma unleashed by events in the late 2000s is only now fully felt in the global periphery. The after-effects will likely linger for some years, especially in the (many) countries unwilling or unable to structurally adjust and reinvent themselves. Thus there are going to be recuperating and recovering parts of the world, and probably quite a bit of driftwood, with financial markets differentiating between them as to improving or deepening risks, and price according.


So where does SA fit into this new world order, and are we making things worse for ourselves through quaint political choices? We tend to take the world for granted, and act with impunity. Wrong on two counts.