Keith Rankin’s Chart for this Month: Crisis Postponed

Chart for this Month: Crisis Postponed

By Keith Rankin

Another financial crisis coming? Graphic by Keith Rankin.

There will almost certainly be another major financial crisis, just like there will be another big earthquake (or, as the Australians would instead say, another big bushfire). We can do much to improve our monitoring of systemic stresses, our awareness of critical-state dynamics, and our before-and-after mitigation processes. Wilful blindness is not a strategy that works well.

In the pre-World War 1 capitalist era, financial crises happened approximately every ten years. Some were worse than others, and they became increasingly global in reach. Melbourne’s massive financial crisis of 1893 was initiated by the financial failure of the Buenos Aires Water Supply and Drainage Company, and the ensuing bank crisis in London. But the economy of Victoria in general and Melbourne in particular was in a critical state then, and would have suffered a financial collapse in the 1890s regardless of those particular precipitating events.

The ‘Long Depression’ of the 1880s in New Zealand was triggered by the collapse of the City of Glasgow Bank in 1879; a collapse that was largely caused by that bank’s unsupervised exposure to rampant land speculation in Canterbury.

This month’s chart suggests that, while there is more than enough unspent income to fuel a financial crisis, the global financial system is not presently in a critical state. We still have learning time.

The chart shows global financial balances for the private (non-government) and government sectors from 1981 to 2017. As can be seen clearly, the normal state of the world is for the global private sector to run financial surpluses (ie spending less than its total revenue; this is the ‘private urge to save’), which means that the combined governments of the world must run accommodating deficits (ie spending more than their global total revenues). It’s a zero-sum system. The financial balances of all sectors combined add to zero. This means that the private sector persists in striving for substantial surpluses AND governments persistently seek to avoid deficits, then the capitalist economy finds itself in a state of collapse.

Capitalist collapse is avoided by governments accommodating the private urge to save (Japan’s government provides our best example of accommodating deficits), or by us having periodic private debt‑fuelled spending binges (which enable governments to collect more taxes and run surpluses for a while); binges which lead to acute financial crises within the private sector. Or by our addressing and countering the unsustainable accumulation of financial assets, thereby rendering financial crises unnecessary.

The chart shows three of these private-sector ‘binges’, in the mid-late-1980s, in the late 1990s, and in the mid-late 2000s. The chart shows a different pattern in the mid-late 2010s. The banks struggle to get private households and businesses to spend more, despite record-low interest rates.

Following the 2008 global financial crisis (GFC), the private sector responded to its insolvency by paying down large amounts of debt, and by taking on much less new debt. This private sector objective was partially accommodated by unusually high government deficits (‘fiscal stimulus’) – governments taking on new debt, and running down (or halting contributions to) sovereign wealth funds.

This objective and was somewhat thwarted, however; fiscal stimulus in most countries was never more than a partial accommodation to extreme private caution. The thwarting intensified in 2010 through government ‘fiscal consolidation’ programmes, otherwise known as ‘austerity’. The most egregious example of ‘thwarting’ was the European Union (EU) programme to balance government budgets in the Eurozone countries. Fortunately, governments in the emerging and developing economies were able to increase their deficits, helping the government sector to effectively offset private surpluses in the mid‑2010s.

We can get a sense, from the chart, that world private surpluses (especially those in excess of economic growth rates) represent fuel to be consumed during future crises. A dramatic fall in private balances represents the beginning of an acute financial crisis. In the 1987-92 period, the crisis happened in two parts; New Zealand and the United States (and others) mainly experienced the 1987 shock, while Australia, Japan and Scandinavia experienced their financial crises in 1991. In the 1997 financial crisis, east Asia was most affected, while the United States was little affected until late 2000. In 2008 the crisis was global, although Europe descended into its more chronic crisis around 2011.

The chart also tells us that an early-decade pattern of falling private balances has halted; debt-enabled spending looks unlikely to accelerate in 1919 or 1920. The next major crisis may not occur until the 1927-31 period. And a crisis then likely will be different in character to both the 2008-09 GFC, and the Great Depression of the early 1930s. There may be a critical mass of accumulated private surpluses to fuel the crisis of 2029 (the midpoint of 2027-31), a new ‘yuppie’ generation with little memory of the GFC, and an academic establishment no more equipped to anticipate a sudden change of circumstance than there was in 1928 or in 2007.

The chart shows only one form of dichotomous interconnection – that between private individuals/organisations and governments. There are other financial dichotomies that may prove to be equally as important in the twenty-first century, but generally are much harder to get data for. These include households versus businesses (before the GFC, business surpluses were accommodated by household deficits), advanced current account surplus economies versus developing deficit economies (data is plentiful in this case), young versus old (older persons’ financial surpluses are accommodated by younger persons’ deficits), and rich versus poor (richer persons’ [eg world’s wealthiest five percent] surpluses need to be accommodated by the deficits of the remaining 95 percent as well as the deficits of governments. The cessation of any of these present accommodations can be expected to precipitate financial consequences that we are unprepared for. Unknown unknowns; so long as we persist in a bubble of wilful ignorance.

As private surpluses accumulate (the blue columns in the chart), the tension builds. As the tension builds, accommodating sectors cannot (or, unwittingly, choose not) to play their necessary deficit roles. Debtors default, or otherwise stop spending in favour of debt ‘deleverage’. Asset values diminish as sellers of goods, services and assets struggle to find buyers. Deflation sets in. Real interest rates need to be negative to restore a semblance of balance, meaning that interest rates actually should be more negative than inflation rates. (Negative interest rates since 2014 have already substantially eased financial tensions in non‑Eurozone Switzerland, Sweden and Denmark.)

What can we do today to avert a crisis of liberal capitalism in about ten years’ time?

Governments can commit to long-run deficit targets of two‑three percent per annum. (This is contrary to the fiscal accord that all parties currently in the New Zealand Parliament have signed up to.) Younger people can continue to borrow, and purchase goods/services rather than assets, and then turn to bankruptcy as an accommodating mechanism. (The bankruptcies of persons without assets does represent a systemic rebalancing, albeit an unpalatable one.)

Or other new methods of containing the growth of income inequality (with a view to reducing inequality eventually to 1960s’ levels) – methods other than higher wages, which coexist with unsustainable economic growth – should be adopted. Such methods do exist. It is up to each of us to learn about them; to be willing to see. Don’t wait for the politicians, nor the entrenched political left or right. We, in civil society, need to reclaim our public equity.

MIL OSI – Source: Evening Report Arts and Media

Keith Rankin Analysis – Liberal Mercantilism and Economic Capitalism: an Introduction

Keith Rankin Analysis – Liberal Mercantilism and Economic Capitalism: an Introduction

Keith Rankin.

Most of us realise that there is something wrong with capitalism as we know it. We also accept that capitalism is here to stay; the only practicable alternatives are evolutions of capitalism, not from capitalism.

For most of its history we have experienced capitalism as processes of inequality and contradiction. Capitalism as we know it exhibits the growth dynamics of a runaway train for which both stopping and not-stopping spell present or future disaster. We opt for future disaster. Economic growth is understood as the process of making money at an accelerated rate.

This is primitive capitalism. And it is the manifestation of a ubiquitous mode of modern thought that I refer to as liberal mercantilism. The principal metaphor of liberal mercantilism is gold, which in turn is the principal metaphor for money. Liberal mercantilism is the belief that the economic purpose of life is to make money, that the amount of money each of us makes is a measure of our success in life, and that the amount of money a country makes is the measure of its success.

There are two main strands of liberal mercantilism; conservative liberal mercantilism (which, in the past few decades, has embraced both neoliberalism and neoconservatism) and progressive liberal mercantilism (which embraces both social democracy and socialism). Progressive liberal mercantilism is about making money, taxing it, and governmental spending of it; conservative liberal mercantilism is just about making money. Progressive liberal mercantilists argue that you have to make money before you can spend it. Conservative liberal mercantilists argue that you have to spend (invest) money in order to make money. Both emphasise making money, and economic growth..

Liberal mercantilism is underpinned by a primitive capitalism that only acknowledges private property rights, or public property rights (as in state capitalism; government ownership) that are equivalent to private property rights. Primitive capitalism has no public hemisphere. It’s analogous to a single-hemisphere brain.

Liberal mercantilism represents a wrong path; indeed a false path, much as Ptolemaic astronomy and alchemy have represented false paths in the history of science. In another sense, however, it is a real path, in that liberal mercantilism is truly the existential path that modern humanity is on, and uncritically so.

The alternative to liberal mercantilism is economic capitalism. Economics began as a project to rid capitalism of mercantilism, the crude belief that the economic purpose of countries was to operate ongoing trade surpluses. (Donald Trump is an unreconstructed mercantilist; in his way of thinking, countries wage trade wars, seeking victory through ongoing trade surpluses.)

Economics both succeeded and failed; in economics, wealth is utility (and the sources of utility), not money. Economics, though liberal in its origins, is not a part of liberal mercantilism. But most economists are, to a greater or lesser extent, infused with the liberal mercantilist belief system; especially those economists who, through specialising in finance, clearly equate wealth with money and monetary derivatives.

Capitalism – proper capitalism, full capitalism, economic capitalism – represents a balanced economic order that draws on both private and public property rights; that has private and public hemispheres that complement each other. Private income sources are both private equity (property) and labour; what individuals (and groups of individuals) own, and what they make and sell. Public income is sourced from public equity (the essence of capitalism’s inchoate public hemisphere); it may be retained by public organisations (governments) to be spent on collective goods and services, or distributed, principally as benefits (using the proper capitalistic meaning of that word), to individuals (as economic citizens).

Most ‘capitalists’ are not proper capitalists; they are liberal mercantilists. Most people who advocate for capitalism as we know it are primitive capitalists. And many people who run businesses are mercantilists, drawn in the main by wanting money as an accumulating store of wealth, and not simply by wanting the means to acquire the consumer services that represent the actual purpose of market economic activity.

In economic capitalism, money is a means, not an end. It is not wealth; rather it is a social technology; arguably our most important social technology. Money is important as a technology, not as wealth. Wealth is the services that give us utility; wealth is whatever has value because of the happiness that such wealth enables us to enjoy. The economic purpose of life is to survive and prosper, where ‘prosper’ means to attain the higher forms of happiness.

Capitalism must evolve. Embrace that evolution.

MIL OSI – Source: Evening Report Arts and Media