Today’s Dark Times – OpEd – Eurasia Review


As Jonathan Garner, Morgan Stanley’s chief emerging markets strategist, wrote recently – the recession debate is over, apparently we’re already there and tougher times lie ahead.

However, I am not sure that there was a substantive debate. For any good student of economics, the reasons for the current situation and the general future trend are quite clear and consistent with the fundamentals of economics. We can therefore also be sure that everything was all the clearer for those in charge of the FED.

For two years, Mr. Powell has assured us, first that there will be no inflation, then, when inflation arrives, that it will be transitory, and finally, after two consecutive quarters of falling GDP , that there will be no recession.

It’s hard to call all of this a “debate” because the FED and other central banks were just trying to give the markets “signals” that if anyone believed, now they don’t believe at all. The only thing managers and economists believe now is hard data: macroeconomic indicators and the actual response of the monetary regulator, coupled with government decisions. It is on this that economic agents base their expectations and preferences today, effectively ignoring the verbal interventions of regulators – and rightly so! It’s hard to trust the soothing words of someone calling black white, knowing it’s really black and being sure you know it too.

Again, I won’t dwell on the reasons for the state of the economy we have today. For almost three years, in fact since the beginning of the Covid-19 pandemic, like many of my colleagues, I have been saying in detail and in various ways, essentially this: huge increases in cash and bloated social spending are high inflation and a recession, among other extremely negative socio-political consequences in the longer term. Lockdowns, production and logistics imbalances, and labor market distortions have led to supply chain disruptions and labor supply issues that have only exacerbated the problems, without causing them at all!

But governments and monetary authorities were quick to turn the tide and point to broken supply chains as the root cause of real stagflation – rising inflation and a shrinking economy. A perfect way to negate the inevitable externalities of an unprecedented expansion of the distributive state mandate and de facto statism as a force majeure! Geopolitical instability in Eastern Europe has also become another “convenient” factor to explain inflationary pressures. Yet all of this is the natural, expected and natural behavior of any populist government, with elites who have felt the sweetness of unchecked fiscal redistribution.

So what is today’s reality and what could it be tomorrow? Reality is dark and there is no light tomorrow. What the FED and the government call a strong labor market, and what is in fact an absolutely pernicious imbalance in today’s economy, is a consequence of monetary expansion and the very crazy social spending that fuels now inflation, as well as still and incomplete supply chains, and geopolitical turmoil in commodity markets. As a result, consumer confidence and business sentiment are at extremely low levels, leading to reduced production and primitization of consumption, and generally a significant narrowing of planning horizons. And now, as was already evident two years ago, regulators are faced with an obvious gigantic problem: how to stop inflation and not kill the economy?

Solving this problem inevitably forces governments and monetary authorities to choose between two evils. And the authorities choose to extinguish inflation as the main existential political threat.

This choice is rational and correct, but it comes from the other side, from the wrong side. Maintaining the stability of the rate of price growth and its adequacy with the growth of production and consumption that it provides is the main task of the financial regulator in a free market economy. A regulator designed to respond to changes in the balance of supply and demand and to provide the financial system with the amount of liquidity the economy needs at a particular stage of the market cycle for efficient horizontal exchange of goods . Again: the regulator’s role is to react to a particular stage of the market cycle, not preemptively engage in cyclical smoothing or directly create a toxic economic incubator – which the US authorities and other advanced economies have done for the last 20 years.

Now the FED and the authorities simply have to deal with their own Frankenstein. Over two decades of distorting the market economy with economic expansionism, political elites are forced to put out the fire with gasoline, as I have said many times. Intense inflation for today’s government is no threat to balanced economic growth because balanced organic growth was out of the question for the past two decades the economy has existed virtually on public money . Now it is a political threat, it is the main reason for possible social discontent and, therefore, the stability of political elites.

On the one hand, inflation reduces the purchasing power of voters, and intense inflation reduces it sharply. On the other hand, inflation is a depressing factor for production, which leads to its reduction, economic stagnation and a decrease in the volume of labor employed. And that triggers social discontent on the other side.

What is most important for an expansionist state, injecting consumerism into its economy for decades and buying selective loyalty with populism: supporting the economy, i.e. “supply” , or appease the population, that is to say the “demand”? The first is long, painful and, above all, not very popular at the moment, that is to say politically unprofitable. The second is much easier, more familiar and, above all, politically advantageous today and in the short term tomorrow.

Consequently, after becoming aware of the threats and the alternatives, the government opted for monetary tightening with the aim of preserving the purchasing power of voters and in the hope of offsetting the recession by a further expansion of public expenditure and governmental order.

The UK is now trying to take a different, difficult but correct path, where the Conservative Party, like Margaret Thatcher in the early 1980s, took a completely unpopular decision today – raising rates and lowering taxes, with a compensatory increase in national income debt at the same time. Of course, as I said, this is a painful and difficult process, like any “withdrawal” after years of acute drug or alcohol addiction. As the great Friedrich von Hayek said, the party will end one day…

But if the state is to engage in direct redistribution or, as they call it, “aid” to economic agents, it must be first and foremost the producers, not the consumers! Otherwise, the state gives the fish instead of helping to find the rod.

By helping the “supply side”, the state rectifies economic processes and gives them the impetus for further organic growth, when consumption capacity and demand growth correspond to production capacity and the rate of production growth. As the state emerges from a deep crisis, it will be able to reduce public debt by reducing the budget deficit.

This is the trajectory that developed countries took in the 1980s and 1990s. In the early 1980s, against the backdrop of the Great Depression of the 1970s, the painful but correct decisions of Thatcher, Reagan and Kohl to reduce social spending and taxes, combined with tighter interest rates and higher public debt, have enabled advanced economies to emerge. of the “terrible 70s”. And it was precisely the consequences of the fact that the world’s major economies embarked on a path of healthy growth that made possible an era of the “golden 90s”, with stable inflation, spectacular economic growth and technological development, restrained public spending and zero-deficit budgets in a declining environment. national debts.

Today, however, nowhere in the world is this true except in Britain. On the contrary, in the United States, the administration of President Biden has increased public spending to exorbitant levels, increased taxes on “rich incomes” and corporate profits and written into the law the reduction of inflation . And it’s important that the administration and governments of other Western economies maintain voter loyalty without making tough decisions – populism rules the ball. The asset value problems of pension funds, insurers, banks and foundations will be solved by ad hoc bailouts. The consequences of the absolutely inevitable and already underway economic downturn will be offset by state order, partial nationalization and subsidization of inefficient agents, which governments have been doing for more than two decades. The state order will include, by the way, an expanded production of military products, given the geopolitical threats posed by aggressive or simply active authoritarian regimes, which have emerged and strengthened not without the participation of a conciliatory policy and “pragmatic” global cooperation of developed countries with resource autocracies, including, primarily, Russia and China.

I am far from making made-up correlations, but many nuances of the current economic and socio-political state are very reminiscent of the international economic and political situation of the 1930s. This applies to total Keynesianism and state expansionism in the economic policies of the major developed economies, principally the United States, and to the growing activity of authoritarian regimes and their aggressive “leaders”, and the conciliatory political vector of Western governments in cooperation with these autocracies in the status quo mode , and the quality of the “leaders” of the already developed countries themselves.

They say hard and difficult times produce strong leaders who are able to make painful but necessary decisions and who can convince people that they are right. No one seems to have any doubts about the “times” today. There is a problem with strong leaders. And the problem is not only that there are none in developed countries today.

The main problem is that there are “strong” leaders in these very active autocracies…. But that’s a different conversation.

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